At the time of Reconstitution, Goodwill already appearing in books of accounts is distributed among partners in_______.
At the time of Reconstitution, Goodwill already appearing in books of accounts is distributed among partners in_______.
Solution
When goodwill is already recorded in the books at the time of reconstitution, it represents the value that was earned and built by the existing partners during their partnership under the old arrangement.
At reconstitution, this existing goodwill must be written off from the books. The write-off is treated as a loss and is distributed among the partners in their old profit sharing ratio because they were the ones who had originally brought in or created this goodwill value.
Journal Entry for writing off existing goodwill:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| All Partners' Capital A/cs (Old Ratio) | XXX | |
| To Goodwill A/c | XXX | |
| (Being existing goodwill written off) |
The logic is straightforward: The old partners earned this goodwill together in their old sharing pattern, so when the partnership structure changes, this old goodwill benefit should be reversed from their capital accounts in the same old ratio in which they had contributed to building it.
After writing off the old goodwill, any new goodwill adjustment (if required due to change in profit sharing ratio) is handled separately through gaining ratio and sacrificing ratio.
Correct Option: 1 (Old profit sharing ratio)
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