Question

Mr. A commenced business with a capital of ₹ 2,50,000 on 1st April, 2013. During the five years ended 31st March, 2018, the following profits and losses were made:
31st March, 2014, Loss – ₹ 5,000
31st March, 2015, Profit – ​₹ 13,000
31st March, 2016, Profit – ​₹ 17,000
31st March, 2017, Profit – ₹ 20,000
31st March, 2018, Profit – ₹ 25,000
During this period he had drawn ₹ 40,000 for his personal use. On 1st April, 2018, he admitted B into partnership on the following terms:
B to bring for his half share in the business, capital equal to A’s Capital on 31st March, 2018 and to pay for the one-half share of goodwill of the business, on the basis of three times the average profit of the last five years. Prepare the statement showing what amount B should invest to become a partner and pass entries to record the transactions relating to admission.

Answer 1

Answer:

When a business is commenced, the inputs of owner are treated as a liability ( capital ) for business needs to return it to the owner. The journal entry for the same is. By Cash. To capital. The asset of business also increases in the form of cash.

Answer 2

Solution:

                                                Journal  

Particulars                                               Debit Rs.         Credit Rs.

Cash A/c                                 Dr.            50,000

Machinery A'c                        Dr.             70,000

To Premium for Goodwill A/c                                        1,20,000

(Being cash Rs.50,000 and Machinery Rs. 70,000 brought in by 0 for his share of Goodwill)

Premium for Goodwill A/c      Dr.             1,20,000

           To E's Capital Ac                                                  1,20,000

(Being G share of goodwill transferred to E's Capital Account)

F's Capital A/c                         Dr.             30,000

       To E's Capital Ac                                                       30,000

(Being F's share of gain in goodwill charged from his capital and transferred to E's capital)  

Working Notes:

1. Old Ratio E and F - 3 : 1

New Ratio E, F and G = 9:1:1

Sacrificing Ratio = Old Ratio - New Ratio  

Sacrificing Ratio = Old Ratio - New Ratio

E's = $\frac{3}{4} -\frac{1}{3}$ = $\frac{9-4}{12}$ = $\frac{5}{12}$ (Sacrifice)  

F's = $\frac{1}{4} -\frac{1}{3}$ = $\frac{3-4}{12}$ = $\frac{-1}{12}$ (Gain)

2.   $\frac{F's share of gain in Goodwill}{G's share of Goodwill}$ = 50,000 + 70,000= 1, 20,000  

Goodwill of the firm on the basis of G's share= 1,20,000 x $\frac{3}{1}$= 3,60,000

F's share of Goodwill= 3,60,000 x $\frac{1}{12}$ = 30,000