A and B carrying on business as partners used to share profits and
losses thus; A 4/7ths and B 3/7ths, and goodwill appeared in the books of the firm at
2,80,000 when C was admitted as a partner having 1/7th share in profits and losses.
C was asked to pay a premium of 375,000 for goodwill, and the profit-sharing ratio as
between A and B remained unchanged.
Show entries in the journal of the firm.
Answers
Explanation:
(i) Calculation of new profit sharing ratio:
A's old share= 3/5
B's old share= 2/5
C is admitted for 1/8th share.
Remaining share= 1-[1/8]
= 7/8
A's new share= 3/5 * 7/8 = 21/40
B's new share= 2/5 * 7/8 = 14/40
C's share= 1/8 * 5/5= 5/40
New profit sharing ratio= 21:14:5
(ii) JOURNAL
1. Cash a/c... Dr. 20880
To C's Capital a/c 15000
To Premium for Goodwill a/c 5880
(Being capital and premium for goodwill brought in by C)
2. Premium for Goodwill a/c... Dr. 5880
To A's Capital a/c 3528
To B's Capital a/c 2352
(Being premium for goodwill distributed among the partners in the ratio of 3:2)
PARTNER'S CAPITAL A/C
Dr. Cr.
Particulars A B C Particulars A B C
By Balance b/d 51450 36750 Nil
By Cash a/c Nil Nil 15000
To Balance c/d 54978 39102 15000 By Premium for Goodwill a/c 3528 2352 Nil
Total 54978 39102 15000 Total 54978 39102 15000
(iii) BALANCE SHEET
( after admission of C)
Liabilities Amount
(in Rs.) Assets Amount
(in Rs.)
Cash (1500+20880) 22380
Capital
- A
- B
- C
54978
39102
15000 Debtors 19500
Creditors 11800 Stock 28000
Furniture 2500
Machinery 48500
Total 120880 Total 120880
Working Note:
1. Calculation of goodwill:
Average profit= [21000+24000+25560]/3
= 23520
Goodwill= 23520 * 2
= 47040
2. C's share of Goodwill= 47040 * 1/8
= 5880
Distribution among partners:
A's share= 5880 * 3/5= 3528
B's share= 5880 * 2/5= 2352