Question

Kabir and Farid are partners in a firm sharing profits in the ratio of 3 : 1 on 1-4-2019 they admitted Manik into partnership for `1/4`th share in the profits of the firm. Manik brought his share of goodwill premium in cash. Goodwill of the firm was valued on the basis of 2 years’ purchase of the last three years’ average profits. The profits of the last three years were:

	₹
2016-17	90,000
2017-18	1,30,000
2018-19	86,000

During the year 2018-19, there was a loss of ₹ 20,000 due to fire, which was not accounted for while calculating the profit. Calculate the value of goodwill and pass the necessary journal entries for the treatment of goodwill.

Hint: Loss due to fire of ₹ 20,000 will be ignored since it has not been considered while calculating the profit.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2019
April 1	Premium for Goodwill A/c   ...Dr.		51,000
	To Kabir’s Capital A/c			38,250
	To Farid’s Capital A/c			12,750
	(Premium for goodwill brought by malik distribution between sacrificing partners)

Calculation of Goodwill:

Average profit = `((90,000 + 1,30,000 + 86,000))/3`

= `(3,06,000)/3`

= ₹ 1,02,000

Farid’s goodwill = 1,02,000 × 2

= ₹ 2,04,000

Malik’s share in goodwill = `2,04,000 xx 1/4`

= ₹ 51,000