Question

A and B are partners sharing profits in the ratio of 5 : 3. They admit C into the firm for `3/10`th profit which he takes `2/10`th from A and `1/10`th from B and brings ₹ 1,50,000 as premium in Cash out of his share of ₹ 3,90,000. Goodwill account does not appear in the books of A and B. Give journal entries and the new ratio of A, B and C.

Hint: Premium for Goodwill A/c will be debited by ₹ 1,50,000 and Current Account of C will be debited by ₹ 2,40,000 and Capital Accounts of A and B will be credited by ₹ 2,60,000 and ₹ 1,30,000 respectively.

Answer 1

 Calculate the new profit-sharing ratio:

New ratio = Old ratio − Sacrificed ratio

A’s new share = `5/8 - 2/10`

= `(5 xx 5)/(8 xx 5) - (2 xx 4)/(10 xx 4)`

= `25/40 - 8/40`

= `17/40`

B’s new share = `3/8 - 1/10`

= `(3 xx 5)/(8 xx 5) - (1 xx 4)/(10 xx 4)`

= `15/40 - 4/40`

= `11/40`

C’s new share = `3/10`

= `(3 xx 4)/(10 xx 4) `

= `12/40`

New ratio of A, B, and C = `17/40 : 11/40 : 12/40` or 17 : 11 : 12

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		1,50,000
	To Premium for Goodwill A/c			1,50,000
	(Being premium brought in by C in cash)
	Premium for Goodwill A/c   ...Dr.		1,50,000
	C’s Current A/c   ...Dr.		2,40,000
	To A’s Capital A/c			2,60,000
	To B’s Capital A/c			1,30,000
	(Being goodwill adjusted for C; cash premium distributed and balance adjusted through C’s Current A/c)

Working Note:

Calculate C’s goodwill:

C’s total share of goodwill is ₹ 3,90,000. He brings ₹ 1,50,000 in cash, and the remaining amount is adjusted through his current account.

Cash brought in = 1,50,000

Amount not brought in = 3,90,000 − 1,50,000

= 2,40,000

The total premium of ₹ 3,90,000 is distributed among A and B in their sacrificing ratio of 2 : 1.

A’s share of premium = `3,90,000 xx 2/3`

= 2,60,000

B’s share of premium = `3,90,000 xx 1/3`

= 1,30,000