Question

On the admission of Rao, it was agreed that the goodwill of Murty and Shah should be valued at ₹ 30,000. Rao is to get 1/4th share of profits. Previously Murty and Shah shared profits in the ratio of 3 : 2. Rao cannot bring in any cash. Give journal entries in the books of Murty and Shah when:
(a) there is no Goodwill Account and
(b) Goodwill appears in the books at ₹ 10,000.

Answer 1

Answer:

A journal entry is the act of keeping or making records of any transactions either Economic or non economic. Transactions are listed in an accounting journal that shows a company's debit and credit balances. The journal entry can consist of several recordings, each of which is either a debit or a credit

Answer 2

Solution:

                                                   Journal  

Particulars                                                      Debit Rs.       Credit Rs.

Rao's Capital A/c                              Dr.          7.500

   To Murty's Capital A/c                                                          4,500

     To Shah's Capital A/c                                                         3,000

(Being Rao's share of goodwill charged from his capital account and distributed between Murty and Shah in sacrificing ratio i.e. 3:2)  

B) When Goodwill appears at 10,000  

                                                    Journal  

Particulars                                                       Debit Rs.        Credit Rs.

Murty's Capital A/c                    Dr.                   6,000

Shah's Capital A/c                     Dr.                   4,000

     To Goodwill A/c                                                                 10,000

(Being goodwill written-off at the time of Rao's admission in old ratio)

Rao's Capital A/c                        Dr.                7,500

    To Murty's Capital A/c                                                         4,500  

    To Shah's Capital A/c                                                          3,000  

(Being Rao's share of goodwill charged from his capital Account and distributed between Murty and Shah in sacrificing ratio i.e..3:2)  

Working Notes:

1. Calculation of Rao's share of Goodwill

Rao's Share of Goodwill = 30,000 x $\frac{1}{4}$ =7 500  

2. Adjustment of Rao's share of Goodwill

Murty's Capital A/c = 7,500 x $\frac{3}{5}$ = 4, 500

Shah's Capital A/c = 7,500 x $\frac{2}{5}$ = 3,000