Cake and Muffin are partners sharing profits and losses in the ratio of 5: 4. On 1st April 2016, they admit Cookie as a new partner 1/4 share in the profits of the firm and the new ratio agreed upon is 3 : 2 : 1.Goodwill, at the time of Cookie's admission, is to be valued on the basis of capitalisation of the average profits of the last three years. Profits for the last three years were:
On 1st April 2016, the firm had assets of ₹8,00,000. Its creditors amounted ₹3,60,000.
The firm had a Reserve Fund of ₹40,000 while Partners' Capital Account showed a
balance of ₹4,00,000.
The normal rate of return expected form this class of business is 13%.
Cookie brings in ₹2,00,000 for her capital but is unable to bring in cash for her share
of goodwill.
You are required to: i. Calculate Cookie's share of Goodwill in the firm (Show your workings clearly).
ii. Pass Journal entries at the time of Cookie's admission.
Answers
Answered by
1
A's old ratio= 2/7
B's old ratio= 5/7
C is admitted for 1/4th share.
Remaining share= 1-[1/4]
= 3/4
A's new share= 3/4 * 2/7
= 6/28
B's new share= 3/4 * 5/7
= 15/28
New Profit sharing ratio of partners= 6:15:7
(ii) Distribution of Goodwill:
A's share= 2/7 * 14000
= 4000
B's share= 5/7 * 14000
= 10000
Similar questions