Question

Mr. A commenced business with a capital of ₹ 2,50,000 on 1st April, 2013. During the five years ended 31st March, 2018, the following profits and losses were made:
31st March, 2014−Loss ₹ 5,000
31st March, 2015−Profit ​₹ 13,000
31st March, 2016−Profit ₹ 17,000
31st March, 2017−Profit ​₹ 20,000
31st March, 2018−Profit ₹ 25,000
During this period he had drawn ₹ 40,000 for his personal use. On 1st April, 2018, he admitted B into partnership on the following terms:
B to bring for his half share in the business, capital equal to A's Capital on 31st March, 2018 and to pay for the one-half share of goodwill of the business, on the basis of three times the average profit of the last five years. Prepare the statement showing what amount B should invest to become a partner and pass entries to record the transactions relating to admission.

Answer 1

Capital as on April 01, 2013	2, 50,000
Less: Loss in 2014	(5,000)
Add: Profit in 2015	13,000
Add: Profit in 2016	17,000
Add: Profit in 2017	20,000
Add: Profit in 2018	25,000
	3,20,000
Less: Drawings	(40,000)
A’ Capital as on March 31, 2018	2,80,000

Calculation of Goodwill :
Average Profit = `[- 5,000 + 13,000 + 17,000 + 20,000 + 25,000]/5`
= Rs. 14,000

Goodwill of the Firm = Average Profit x Number of Years purchase
= 14,000 x 3
= Rs. 42,000

B's share of Goodwill = 42,000 x `1/2` = Rs. 21,000.

B's Capital = A's Capital as on March 31, 2016 = Rs. 2,80,000

Journal
Date 2018	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
April 1	Cash A/c	Dr.		3,01,000
	To B’s Capital A/c				2,80,000
	To Premium for Goodwill A/c				21,000
	(B brought capital and goodwill)
April 1	Premium for Goodwill A/c	Dr.		21,000
	To A’s Capital A/c				21,000
	(B’s share of goodwill transferred to A’s Capital Account)