Question

Mohan and Sohan were partners in a firm sharing profits and losses in the ratio of 3 : 2. They admitted Ram for 1/4th share on 1st April, 2018. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profit of last 4 years which were ₹ 50,000 for 2014-15, ₹ 60,000 for 2015-16, ₹ 90,000 for 2016-17 and ₹ 70,000 for 2017-18. Ram did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram’s admission when:
(a) Goodwill appears in the books at ₹ 2,02,500.
(b) Goodwill appears in the books at ₹ 2,500.
(c) Goodwill appears in the books at ₹ 2,02,000.

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.)

(a) Mohan's Capital A/c              Dr.           1,21,500

   Sohan's Capital A/c                Dr.            81,000

          To Goodwill A/c                                                         2,02,500

(Being old goodwill written-off in old ratio)

   Ram's Capital A/c                   Dr.          50,625

      To Mohan's Capital A/c                                                     30,375

      To Sohan's Capital A/c                                                    20,250

(Being premium not brought debited to Ram and credited to sacrificing partners)

(b)   Mohan's Capital A/c              Dr.        1,500

      Sohan's Capital A/c               Dr.        1,000

              To Goodwill A/c                                                            2,500

(Being old goodwill written-off in old ratio)  

        Ram's Capital A/c                Dr.         50,625

            To Mohan's Capital A/c                                                 30,375

            To Sohan's Capital A/c                                                  20,250

(Being premium not brought debited to Ram and credited to sacrificing partners)

(c)       Mohan's Capital A/c           Dr.        1,23,000

          Sohan's Capital A/c            Dr.         82,000

                   To Goodwill A/c                                                   2,02,500

(Being old goodwill written-off in old ratio)

          Ram's Capital A/c               Dr.          50,625

                To Mohan's Capital A/c                                          30,375

                 To Sohan's Capital A/c                                          20,250

(Being premium not brought debited to Ram and credited to sacrificing partners)  

Working Notes: WN1 :

Calculation of Goodwill Goodwill - Average Profits x Number of Years' Purchase

Average Profits =   $\frac{Total Profits}{Number of Years}$

                          =  $\frac{50,000+ 60,000 + 90, 000+ 70,000}{4}$      

                          = $\frac{2,70, 000}{4}$ = 67,500

Goodwill = 67,500 x 3 = 2,02,500

Ram's share - 2,02,500 x $\frac{1}{4}$ = 50, 625

Note: Since no it is given about the share of sacrifice, it is assumed that the old partners are sacrificing in their old profit sharing ratio.