When a new partner is admitted into a partnership and goodwill is recognized, which statement best describes the correct accounting treatment?

• A. The partnership does not recognize goodwill.
• B. Goodwill is recognized and the old partners' capital accounts are adjusted, with the new partner's share allocated according to the agreed ratio.
• C. The new partner's share of goodwill is charged to revenue.
• D. The accounting for goodwill is not affected by the admission of a new partner.

Answer: (B)

Recognizing goodwill on admission reflects the increased value of the business. Goodwill is an asset, so you record it at the agreed amount. To reflect this in the partnership, the old partners’ capital accounts are increased by their share of the goodwill in the old profit‑sharing ratio. This raises the overall partnership capital by the goodwill amount. The new partner then contributes cash equal to their share of the total capital after this valuation, and their capital account is credited with that amount. In this way, ownership interests are set according to the agreement, and the partnership’s total capital grows by the goodwill plus the new cash brought in.