Question

Balance Sheet of J and K who share profits in the ratio of 3 : 2 is as follows:
M joins the firm from 1st April, 2018 for a half share in the future profits. He is to pay ₹ 1,00,000 for goodwill and ₹ 3,00,000 for capital. Draft the journal entries and prepare Balance Sheet in each of the following cases:
(a) If M acquires his share of profit from the firm in the profit – sharing ratios of the partners.
(b) If M acquires his share of profits from the firm in equal proportions from the original partners.
(c) If M acquires his share of profit in the ratio of 3 : 1 from the original partners, ascertain the future profit-sharing ratio of the partners in each case.

Answer 1

The journal entries and the Balance Sheets are calculated below:

Explanation:

a. If M acquires his share of profit from the firm in the original ratio.

Calculation of New Profit Sharing Ratio

${\text { Old Ratio }(\mathrm{J} \text { and } \mathrm{K})=3: 2}$

M is admitted for 1/2 share of profit

Let combined sharing of all partners after admission of M be =1

Combined share of J and K after M's admission

$=1-M s share =1-\frac{1}{2}=\frac{1}{2}$

New Ratio = Old Ratio $\times$ Combined share of J and K

$\mathrm{J}^{\prime} s New Share =\frac{3}{5} \times \frac{1}{2}=\frac{3}{10}$

$\mathrm{K's} New Share =\frac{2}{5} \times \frac{1}{2}=\frac{2}{10}$

New Profit Sharing Ratio J, K and M

$=\frac{3}{10}: \frac{2}{10}: \frac{1}{2}=\frac{3: 2: 5}{10}=3: 2: 5$

1 . Distribution of Premium for Goodwill (in sacrificing ratio)

J's Share $=1,00,000 \times \frac{3}{5}=60,000$

$\mathrm{K}^{\prime} \mathrm{s} Share =1,00,000 \times \frac{2}{5}=40,000$

2 . Distribution of General Reserve (in old ratio)

J's Share $=1,00,000 \times \frac{3}{5}=60,000$

$\mathrm{K's} Share =1,00,000 \times \frac{2}{5}=40,000$

b. If M acquires his share of profit from the firm in equal proportions from the original partners.

Calculation of New profit sharing Ratio

Old Ratio $(\mathrm{J} \text { and } \mathrm{K})=3: 2$

M is admittrd for 1/2 share of Profit

J's Sacrificing Ratio

$=\frac{1}{2} \times \frac{3}{4}=\frac{3}{8}$

K's Sacrificing Ratio

$=\frac{1}{2} \times \frac{1}{4}=\frac{1}{8}$

New Ratio =Old Ratio- Sacrificing Ratio

J's New Share

$=\frac{3}{5}-\frac{3}{8}=\frac{9}{40}$

K's New Share

$=\frac{2}{5}-\frac{1}{8}=\frac{11}{40}$

New Profit Sharing Ratio J, K and M

$=\frac{9}{40}: \frac{11}{40}: \frac{1}{2}=\frac{9: 11: 20}{40}=9: 11: 20$

1 . Distribuion of Premium for Goodwill (In Sacrificing ratio)

J's Share

$=1,00,000 \times \frac{3}{4}=75,000$

K's share

$=1,00,000 \times \frac{1}{4}=25,000$

2 . Distribution of Reserve (in old ratio)

J's Share

$=1,00,000 \times \frac{3}{5}=60,000$

K's Share

$=1,00,000 \times \frac{2}{5}=40,000$