Question

Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in the profits of the firm. Ajay brings ₹ 5,00,000 as his share of capital. The value of the total assets of the firm was ₹ 15,00,000 and outside liabilities were valued at ₹ 5,00,000 on that date. Give necessary journal entry to record goodwill at the time of Ajay’s admission. Also show your workings.

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  

Particular                                                   Debit Rs.       Credit Rs.

Ajay's Capital A/c                     Dr.            2,00,000

     To Asin's Capital A/c                                                1,00,000

     To Shreya's Capital A/c                                            1,00,000

(Being Ajay's share of goodwill distributed among the old partners in their sacrificing ratio 1:1)  

Working No:

Calculation of Goodwill brought in by Ajay

Value of firm's goodwill = Capitalised value of firm - Net worth of the new firm = 25,00,000 - 15,00,000 = 10,00,000  

Ajay's share of goodwill = 10,00,000 x $\frac{1}{5}$ = 2, 00,000

Capitalised value of the firm = Share of Ajay's capital Reciprocal of Ajay's share =5,00,000 x $\frac{5}{1}$  = 25, 00,000

Net worth of the new firm = Total assets - Outside liabilities + Ajay's capital = 15,00,000 - 5,00,000 + 5,00,000 =  15,00,000