Question

A, B and C are in partnership sharing profits and losses in the ratio of 5 : 4 : 1 respectively. Two new partners D and E are admitted. The profits are now to be shared in the ratio of 3 : 4 : 2 : 2 : 1 respectively. D is to pay ₹ 90,000 for his share of Goodwill but E has insufficient cash to pay for Goodwill. Both the new partners introduced ₹ 1,20,000 each as their capital. You are required to pass necessary journal entries.

Answer 1

Answer:

Profit sharing refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies these plans typically amount to allocation of shares to employees.

Answer 2

Solution:

                                                      Journal  

Particulars                                                       Debit Rs.       Credit Rs.

Bank A c                                             Dr.        3,30,000

    To D's Capital A/c                                                              1,20,000

    To E's Capital A/c                                                               1,20,000

    To Premium for Goodwill A/c                                             90,000

(Being capital and goodwill brought in cash)

C's Capital A/c                                   Dr.          36,000

E's Capital A/c                                    Dr.          45,000

Premium for goodwill A/c                  Dr.         90,000

        To A's Capital A/c                                                          1,35,000

        To B's Capital A/c                                                            36,000

(Being goodwill adjusted)  

Working Notes:

1. Calculation of Sacrificing Ratio

Old ratio (A: B: C) = 5: 4: 1

New ratio (A: B: C: D: E) = 3: 4: 2: 2: 1

A's Share=  $\frac{5}{10} - \frac{3}{12}$ = $\frac{30}{60} - \frac{15}{60}$ = $\frac{15}{60}$ ( Sacrifice )

B's Share=  $\frac{4}{10} - \frac{4}{12}$ = $\frac{24}{60} - \frac{20}{60}$ = $\frac{4}{60}$ ( Sacrifice )

C's Share= $\frac{1}{10} - \frac{2}{12}$ = $\frac{6}{60} - \frac{10}{60}$ = $-\frac{4}{60}$ ( Gain )

2. Adjustment of Goodwill  

D's share in goodwill ( $\frac{2}{12}$ th share) = 90,000

Total goodwill of the firm = 90,000 x $\frac{12}{2}$ = 5, 40,000

C's Goodwill = 5, 40, 000 x $\frac{4}{60}$  = 36 000

E' s Goodwill = 5,40,000 x  $\frac{1}{12}$ = 45,000