Question

Asha and Aditi are partners in a firm sharing profits and losses in the ratio of 3 : 2. They admit Raghav as a partner for `1/4`th share in the profits of the firm. Raghav brings ₹ 6,00,000 as his capital and his share of goodwill in cash. Goodwill of the firm is to be valued at two years’ purchase of average profits of the last four years.
The profits of the firm during the last four years are given below:

Year	Profit ₹
2013 − 14	3,50,000
2014 − 15	4,75,000
2015 − 16	6,70,000
2016 − 17	7,45,000

The following additional information is given:

1. To cover management cost an annual charge of ₹ 56,250 should be made for the purpose of valuation of goodwill.
2. The closing stock for the year ended 31.3.2017 was overvalued by ₹ 15,000.

Pass necessary journal entries on Raghav’s admission showing the working notes clearly.

Hints:

A management cost of ₹ 56,250 will be deducted from each year’s profit.

Overvaluation of Closing Stock will be deducted from the profit of 2016-17.

Answer 1

Calculation of Adjusted Profits
Particulars	2014 − 15 (₹)	2014 − 15 (₹)	2015 − 16 (₹)	2016 − 17 (₹)
Profits	3,50,000	4,75,000	6,70,000	7,45,000
Less: Annual Charge	56,250	56,250	56,250	56,250
Less: Overvaluation of Closing Stock (31 March 2017)				15,000
	2,93,750	4,18,750	6,13,750	6,73,750

 

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		8,50,000
	To Raghav’s Capital A/c			6,00,000
	To Premium for Goodwill A/c			2,50,000
	(The amount of capital and goodwill/premium brought in cash)
	Premium for Goodwill A/c   ...Dr.		2,50,000
	To Asha’s Capital A/c			1,50,000
	To Aditi’s Capital A/c			1,00,000
	(Goodwill/premium credited to old partners in their sacrificing ratio, i.e., 3 : 2)

Working Note:

Average Profit = `(2,93,750 + 4,18,750 + 6,13,750 + 6,73,750)/4`

Average Profit = `(20,00,000)/4`

5,00,000

Goodwill  = Average Profit × No. of years purchase

= 5,00,000 × 2

= 10,00,000

Raghav’s Share of Goodwill = `10,00,000 xx 1/4`

= 2,50,000