Question

Assertion (A): X and Y were partners sharing profits in 2 : 1. Goodwill appeared in the books at ₹ 1,20,000. They admit Z as a new partner for `1/5` th share, which he acquired from X and Y in 3 : 2. Goodwill appearing in the books is not written off and was carried forward to the new Balance Sheet.

Reason (R): Goodwill existing in the books is purchased goodwill and hence, is not written off.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are true, but (R) is not the correct explanation of (A).

• Both (A) and (R) are true, and (R) is a correct explanation of (A).

• Both (A) and (R) are false.

• (A) is true, but (R) is false.

Answer 1

Both (A) and (R) are false.

Explanation:

Both the Assertion and the Reason are incorrect according to standard accounting principles for partnerships. Assertion (A) is false because existing goodwill appearing in the books must be written off entirely against the old partners’ capital accounts in their old profit-sharing ratio at the time of a new partner’s admission; it cannot be simply carried forward. Reason (R) is false because even “purchased goodwill” is an intangible asset that must adhere to accounting standards (like AS 26), which do not permit it to be carried forward indefinitely without write-off or amortization, especially not during a firm’s reconstitution.