Question

A and B, carrying on business in partnership and sharing profits and losses in the ratio of 3 : 2, require a partner, when their Balance Sheet stood as:
They admit C into partnership and give him 1/8th share in the future profits on the following terms:
(a) Goodwill of the firm be valued at twice the average of the last three years profits which amounted to ₹ 21,000; ₹ 24,000 and ₹ 25,560.
(b) C is to bring in cash for the amount of his share of goodwill.
(c) C is to bring in cash ₹ 15,000 as his capital.
Pass journal entries recording these transactions, draw out the Balance Sheet of the new firm and state new profit-sharing ratio.

Answer 1

Journal entries of the transactions is given below

Explanation:

Given,

A and B sharing profits and losses in the ratio of 3 : 2

They admit C into partnership and give him 1/8th share in the future profits following the given three guidelines

Calculation of Capital Account

$\begin{aligned}&\text { Credit A's Capital } \mathrm{A} / \mathrm{c}=(4,000+2,000) \times \frac{3}{4}=4,500\\\\&\text { Credit B's Capital } \mathrm{A} / \mathrm{c}=(4,000+2,000) \times \frac{1}{4}=1,500\end{aligned}$

Thus, an amount of Rs. 4000 and Rs. 2000 has been debited from the General Reserve A/c  and the Revaluation A/c respectively. This has been credited to the A's Capital A/c and the B's Capital A/c of an amount of Rs. 4500 and Rs. 1500 respectively.

This is being the profit on Revaluation and General Reserve distributed between A and B in old ratio.