Question

A, B and C are partners sharing profits in 2 : 2 : 1. D was admitted with 1/5th share of profits and it was agreed that A would retain his original share. D brings his share of goodwill ₹ 1,20,000 in Cash. Following balances appeared in their books at this date:   ₹ ₹ Plant   3,00,000 Investments   2,00,000 Investment Fluctuation Reserve   20,000 Advertisement Suspense Account   60,000 Contingency Reserve   90,000 Capitals: А   4,00,000 B   3,00,000 C   2,00,000 Sundry Debtors 1,26,000   Less: Provision for Doubtful Debts 8,000 1,18,000 It was agreed that: Plant is overvalued by 25%. Market value of investments is ₹ 1,50,000. Bad-debts ₹ 6,000 be written off and provision for doubtful debts be maintained @ 10% on debtors.

You are required to choose the correct option:

In respect of goodwill:

विकल्प

• ₹ 1,20,000 will be credited to A, B and C in 2 : 2 : 1.

• ₹ 1,20,000 will be credited to B and C in 2 : 1.

• ₹ 24,000 will be credited to B and C in 2 : 1.

• ₹ 1,20,000 will be credited to A, B and C in 6 : 4 : 2.

Answer 1

₹ 1,20,000 will be credited to B and C in 2 : 1.

Explanation:

1. Understand the Rule for Premium for Goodwill

When a new partner brings their share of goodwill in cash, it is distributed only among the sacrificing partners in their Sacrificing Ratio.

2. Calculate Sacrificing Shares

Old Ratio (A : B : C): `2 : 2 : 1 ("or"  2/5, 2/5, 1/5)`

D's Share: `1/5`

Condition: Partner A retains his original share, meaning A's new share is still `2/5`. Therefore, A makes no sacrifice (Sacrifice = 0).

Since A's share is unchanged and D takes a `1/5` share, this `1/5` share is entirely surrendered by B and C. They give it up in their old relative ratio of 2 : 1.

Let's verify by calculating the individual sacrifices (Old share − New share):

Remaining share for B and C: 1 − (A's share + D's share) = 1 − `(2/5 + 1/5) = 2/5`

B's New Share: `2/5 xx 2/3 = 4/15`

C's New Share: `2/5 xx 1/3 = 2/15`

B's Sacrifice: `2/5 - 4/15 = (6 - 4)/15 = 2/15`

C's Sacrifice: `1/5 - 2/15 = (3 - 2)/15 = 1/15`

The Sacrificing Ratio between B and C is 2 : 1.