Question

Lucy, Rahul and Sanjay are partners sharing profits and losses in the ratio of 1 : 2 : 3. Arun is admitted as a partner who brings in ₹ 20,000 as his capital for a `1/5`th share in the profit. Goodwill of the firm is to be valued at an average of the last three years’ profits, which were ₹ 25,000, ₹ 28,000 and ₹ 37,000 respectively. Arun is unable to bring in cash towards his share of the premium of goodwill.

Give the journal entries if goodwill already appears in the books at ₹ 24,000.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Lucy’s Capital A/c   ...Dr.		4,000
	Rahul’s Capital A/c   ...Dr.		8,000
	Sanjay’s Capital A/c   ...Dr.		12,000
	To Goodwill A/c			24,000
	(Existing goodwill written off among old partners in their old ratio)
	Bank A/c   ...Dr.		20,000
	To Arun’s Capital A/c			20,000
	(Capital brought in by Arun)
	Arun’s Capital A/c   ...Dr.		6,000
	To Lucy’s Capital A/c			1,000
	To Rahul’s Capital A/c			2,000
	To Sanjay’s Capital A/c			3,000
	(Arun’s share of goodwill credited to old partners in their sacrificing ratio)

Working Note:

Adjust for goodwill premium:

Calculate the firm’s goodwill based on the average of the last three years’ profits.

Average Profit = `(25,000 + 28,000 + 37,000)/3`

= `(90,000)/3`

= 30,000

Arun’s Share of Goodwill = `30,000 xx 1/5`

= 6,000

The sacrificing ratio is the same as the old profit-sharing ratio, 1 : 2 : 3, because no other information is provided.

Lucy’s share = `6,000 xx 1/6`

= 1,000

Rahul’s share = `6,000 xx 2/6`

= 2,000

Sanjay’s share = `6,000 xx 3/6`

= 3,000