Question

TREATMENT OF GOODWILL 20. (Journal Entries for Goodwill) A, B and C are partners in a firm sharing profits and losses in the ratio of 3: 2: 1. C retires from the firm and A and B decide to continue the business of the firm and share profits and losses in the old ratio. Goodwill of the firm is valued at 12,000. What will be the entries in the books of the firm. [Ans. Debit A and B with 1,200 and 800 respectively). is not to be Raised) L, M and O are partners, sharing profits and losses in 779 Claulate M's share in​

Answer 1

Answer:

(i) Calculation of new profit sharing ratio:

A's old share= 3/5

B's old share= 2/5

C is admitted for 1/8th share.

Remaining share= 1-[1/8]

                            = 7/8

A's new share= 3/5 * 7/8 = 21/40

B's new share= 2/5 * 7/8 = 14/40

C's share= 1/8 * 5/5= 5/40

New profit sharing ratio= 21:14:5

(ii)                                       JOURNAL

1. Cash a/c...                                                Dr.            20880

           To C's Capital a/c                                                        15000

           To Premium for Goodwill a/c                                      5880

(Being capital and premium for goodwill brought in by C)

2. Premium for Goodwill a/c...                   Dr.            5880

           To A's Capital a/c                                                     3528

           To B's Capital a/c                                                     2352

(Being premium for goodwill distributed among the partners in the ratio of 3:2)    

                                             PARTNER'S CAPITAL A/C

Dr.                                                                                                                          Cr.

 Particulars ABCParticularsABC     By Balance b/d51450 36750 Nil     By Cash a/c Nil Nil15000 To Balance c/d549783910215000 By Premium for Goodwill a/c 35282352Nil  Total  549783910215000 Total549783910215000(iii)                                            BALANCE SHEET

                                          ( after admission of C)

 

 Liabilities Amount

(in Rs.) Assets Amount

(in Rs.)   Cash (1500+20880) 22380 Capital

   - A

   - B

   - C 

54978

39102

15000 Debtors 19500 Creditors 11800 Stock 28000

  Furniture 2500   Machinery 48500 Total  120880 Total120880

Working Note:

1. Calculation of goodwill:

Average profit= [21000+24000+25560]/3 

                        = 23520

Goodwill= 23520 * 2

               = 47040

2. C's share of Goodwill= 47040 * 1/8

                                        = 5880

Distribution among partners:

A's share= 5880 * 3/5= 3528

B's share= 5880 * 2/5= 2352

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