Question

A and B are partners sharing profits in the ratio of 3 : 1. C is admitted as a partner with `2/9`th share; A and B will in future get `4/9`th and `3/9`th share of profits. C pays ₹ 20,000 for goodwill. Pass the necessary journal entries.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		20,000
	To Premium for Goodwill A/c			20,000
	(Premium for goodwill brought in by C)
	Premium for Goodwill A/c   ...Dr.		20,000
	B’s Capital A/c   ...Dr.		7,500
	To A’s Capital A/c			27,500
	(Being premium for goodwill and B’s compensation for his gaining share transferred to A’s Capital A/c)

Working Notes:

Old Ratio of A and B = `3/4 : 1/4`

New Ratio of A, B and C = `4/9 : 3/9 : 2/9`

Calculate Sacrifice or Gain Ratio:

A = `3/4 - 4/9`

= `(3 xx 9)/(4 xx 9) - (4 xx 4)/(9 xx 4)`

= `27/36 - 16/36`

= `(27 - 16)/36`

= `11/36` (Sacnfice)

B = `1/4 - 3/9`

= `(1 xx 9)/(4 xx 9) - (3 xx 4)/(9 xx 4)`

= `9/36 - 12/36`

= `(9 - 12)/36`

= `3/36` (Gain)

C = `2/9`

= `(2 xx 4)/(9 xx 4)`

= `8/36` (Gain)

B has a negative sacrificing ratio, B is a gaining partner and must compensate the sacrificing partners for the goodwill gained.

Goodwill of the firm is calculated based on C’s share of profits `2/9` and his contribution towards goodwill ₹ 20,000.

Total Goodwill of the firm = `20,000 xx 9/2`

= ₹ 90,000

B’s share of goodwill = `90,000 xx 3/36`

= 7,500