Question

Mohan, Naresh and Om were in partnership sharing profits and losses in the ratio of 10 : 4 : 1. On 1st April, 2021 their capitals were ₹ 3,00,000; ₹ 1,50,000 and ₹ 50,000 respectively. On this date they admit Piyush as a new partner and the new profit sharing ratio is agreed at 5 : 4 : 4 : 2. The following terms were also agreed upon:

1. Piyush will bring in ₹ 40,000 as his capital.
2. He will also bring in his share of goodwill in cash. Goodwill is to be valued on the basis of capitalisation at 10% of the average profits of the last three years. Profits of the last three years were:
   

   	₹
   Year ended 31st March 2019	48,000
   Year ended 31st March 2020	75,000
   Year ended 31st March 2021	72,000

3. The new partner is entitled to an annual salary of ₹ 7,500 in addition to his share of profit. Om personally guaranteed that Piyush’s share of profit shall not be less than ₹ 30,000.

Profits for the year ended 31st March 2022 amounted to ₹ 2,10,000 before charging Piyush’s salary.

Prepare necessary entries at the time of admission of the new partner and show the distribution of profits for the year ended 31st March, 2022.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2021
April 1	Bank A/c   ...Dr.		60,000
	To Piyush’s Capital A/c			40,000
	To Premium for Goodwill A/c			20,000
	(Being capital and premium for goodwill brought in by Piyush)
Apr 1	Premium for Goodwill A/c   ...Dr.		20,000
	Om’s Capital A/c   ...Dr.		30,000
	To Mohan’s Capital A/c			50,000
	(Being Premium for goodwill brought in by Piyush credited to Mohan along with `3/15`th of goodwill to be contributed by Om due to gain in his profit sharing ratio)

Working Note:

Average Profit for 3 years = `(48,000 + 75,000 + 72,000)/3`

= `(1,95,000)/3`

= ₹ 65,000

Goodwill = `(65,000 xx 100)/10`

= `6,50,000`

Total Capital of Old Partners = 3,00,000 + 1,50,000 + 50,000

= 5,00,000

Goodwill of the Firm = 6,50,000 − 5,00,000

= 1,50,000

Gaining Ratio = Old ratio − New ratio

Mohan = `10/15 - 5/15`

= `5/15` (Sacrifice)

Naresh = `4/15 - 4/15`

= 0

Om = `1/15 - 4/15`

= `3/15` (Gain)

Piyush = `2/15` (Gain)

Piyush’s Share in Goodwill = `1,50,000 xx 2/15`

₹ 20,000

Profit before salary = 2,10,000

Salary to Piyush = 7,500

= 2,10,000 − 7,500

= 2,02,500

Now share in the new ratio 5 : 4 : 4 : 2.

Mohan = `2,02,500 xx 5/15`

= 67,500

Naresh = `2,02,500 xx 4/15`

= 54,000

Om = `2,02,500 xx 4/15`

= 54,000

Piyush = `2,02,500 xx 2/15`

= 27,000

Now add salary to Piyush: ₹ 27,000 + ₹ 7,500

= ₹ 34,500

Om had guaranteed Piyush a minimum profit of ₹ 30,000. As Piyush’s calculated share is less than this guarantee, Om covers the ₹ 3,000 difference.

The final distribution of profits:

Mohan = `2,02,500 xx 5/15`

= 67,500

Naresh = `2,02,500 xx 4/15`

= 54,000

Om = `2,02,500 xx 4/15`

= 54,000

= 54,000 − 3,000

= 51,000

Piyush = `2,02,500 xx 2/15`

= 27,000

= 27,000 + 3,000

= 30,000