Question

anshul and parul are partner share profits in the ratio3:2

Pass an adjustment Jour
25. Anshul and Parul are partners sharing profits in the ratio of 3:2. They admit Payal as
share in profits on 1st April 2020. Payal brings 5,00,000 as capital and her share of goo
It was agreed to value goodwill at three years' purchase of average profit of last four ye
Profits for the last four years ended 31st March, were:
2017
4,00,000
2018
5,00,000
2019
6,00,000
2020
7,00,000
Additional Information:
1. Closing stock for the year ended 31st March, 2019 was overvalued by 50,000
2 1,00,000 should be charged annually to cover management cost.
Pass necessary Journal entries on Payal's admission.​

Answer 1

Answer:

Sacrificing ratio 3:2.

Explanation:

New partner share of goodwill it should be valued at old partners sacrificing ratio.

Answer 2

GIVEN :  Payals Capital is 5,00,000 ; Profit for last four year is 4,00,000 ; 5,00,000; 6,00,000 ; 7,00,000

TO FIND : Goodwill brought by payal and to pass necessary entries

SOLUTION :

• According to the question goodwill have to be calculated by average profit method.
• To calculate goodwill  by this method we need normal profit.
• Normal profit means profit which is free from any adjustments.
• So, firstly we claculate normal profit.

Normal Profit for the year 2017 = 4,00,000 -   1,00,000 (Managemnet Cost )                              

                                                    = 3,00,000

Normal Profit for the year 2018 = 4,00,000

Normal Profit for the year 2019 = 6,00,000 - 1,50,000 ( this includes                                                 stock which is overvalued )                    

                                                       = 4,50,000

Normal Profit for the year 2020 = 6,50,000 ( this will include previous year overvalued stock )

Average  Profit = $\frac{Total Profit of all the four years}{Number of years }$

                          = $\frac{18,00,000}{4}$

                           = 4,50,000

Goodwill = Average Profit × Number of year purchased

               = 4,50,000 × 3

               = 13,50,000

• As for how much share payal is admitted this is not given so we have assumed that she is admiited for 1/4 share and new ratio will be calculated on the same basis
• As whenever new partner is admitted in this ratio sacrificing ratio is same as old ratio.

Goodwill brought up by Payal =   13,50,000 × $\frac{1}{4}$

                                                   = 3,37,500

Anshuls share in goodwill = 3,37,500 × $\frac{3}{5}$

                                            =  2,02,500

Paruls share in goodwill = 3,37,500 × $\frac{2}{5}$

                                        = 1,35,000

Journal Entries

Cash A/C DR 8,37,500

            To Payals Capital A/C 5,00,000

            To Premium for goodwill A/C 3,37,500

( Being cash brought in by payal as capital and premium )

Premium for godwill A/C DR 3,37,500

                             To Anshuls Capital A/C 2,02,500

                             To Paruls Capital A/C 1,35,000

( Being premium distributed among partners )