Question

A and B are partners sharing profits in the ratio of 3 : 2. They admit C into partnership; C pays a premium of ₹ 60,000 for a `1/4`th share of profit. The new ratio is 3 : 3 : 2. Goodwill account appears in the books at ₹ 2,00,000. Give the necessary Journal entries.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	A’s Capital A/c   ...Dr.		1,20,000
	B’s Capital A/c   ...Dr.		80,000
	To Goodwill A/c			2,00,000
	(Existing goodwill written off in old ratio)
	Bank A/c   ...Dr.		60,000
	To Premium for Goodwill A/c			60,000
	(Premium for goodwill brought in by C)
	Premium for Goodwill A/c   ...Dr.		60,000
	To A’s Capital A/c			54,000
	To B’s Capital A/c			6,000
	(Premium for goodwill distributed to sacrificing partners)

Working Note:

Write off existing goodwill:

The old goodwill of ₹ 2,00,000, which already appears in the books, is written off among the old partners A and B in their old profit-sharing ratio of 3 : 2.

A’s share = `2,00,000 xx 3/5`

= 1,20,000

B’s share = `2,00,000 xx 2/5`

= 80,000

Calculation of Sacrificing Ratio:

A’s sacrifice = `3/5 - 3/8`

= `(3 xx 8)/(5 xx 8) - (3 xx 5)/(8 xx 5)`

= `24/40 - 15/40`

= `(24 - 15)/40`

= `9/40`

B’s sacrifice = `2/5 - 3/8`

= `(2 xx 8)/(5 xx 8) - (3 xx 5)/(8 xx 5)`

= `16/40 - 15/40`

= `(16 - 15)/40`

= `1/40`

The sacrificing ratio of A and B = `9/40 : 1/40` or 9 : 1

Distribute goodwill premium to sacrificing partners

C pays a premium of ₹ 60,000 for his share of profit.

The premium for goodwill is distributed to the old partners in their sacrificing ratio.

A’s share of premium = `60,000 xx 9/10`

= 54,000

B’s share of premium = `60,000 xx 1/10`

= 6,000