Question

Following is the Balance Sheet of A and B who are sharing profits in the ratio of 2 : 3.

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Trade Payables		2,60,000	Goodwill		50,000
Outstanding Expenses		40,000	Plant & Machinery		5,20,000
Capitals:		12,00,000	Stock		4,60,000
A	5,00,000		Debtors		3,80,000
B	7,00,000		Bank Balance		66,000
			Deferred Revenue Expenditure		24,000
		15,00,000			15,00,000

C is admitted into partnership on the following terms:

1. A gives `1/4` th of his share and B gives `1/5`th of his share to C.
2. Goodwill is agreed to be valued at 2.5 year’s purchase of the average normal profit of the past three years, which were:
   

   2022	Profit	₹ 40,000 (including profit on sale of assets ₹ 50,000)
   2023	Loss	₹ 90,000 (including loss by fire ₹ 2,00,000)
   2024	Profit	₹ 2,00,000 (including insurance claim received ₹ 60,000)

3. C does not bring his share of goodwill in Cash.
4. C brings in capital proportionate to his share of profit in the firm.

Pass necessary journal entries. Also calculate the new profit-sharing ratio.

Hint: C’s Current A/c will be debited by his share of goodwill, ₹ 44,000 and Capital Accounts of A and B will be credited in their sacrificing ratio i.e., 5 : 6.

Answer 1

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	A’s Capital A/c   ...Dr.		29,600
	B’s Capital A/c   ...Dr.		44,400
	To Goodwill A/c			50,000
	To Deferred Revenue Exp. A/c			24,000
	(Being existing goodwill and deferred revenue expenditure written off in old ratio)
	C’s Current A/c		44,000
	To A’s Capital A/c			20,000
	To B’s Capital A/c			24,000
	(Being C’s share of goodwill adjusted through his current account)
	Bank A/c		3,30,000
	To C’s Capital A/c			3,30,000
	(Being C’s capital brought in proportionate to his share of profit)

Shares Sacrificed by Old Partners:

A’s sacrifice = `2/5 xx 1/4`

= `2/20`

B’s sacrifice = `3/5 xx 1/5`

= `3/25`

Sacrificing Ratio:

Sacrificing Ratio = `2/20 : 3/25`

Find a common denominator:

`2/20 = (2 xx 5)/(20 xx 5)`

= `10/100`

`3/25 = (3 xx 4)/(25 xx 4)`

= `12/100`

Sacrificing Ratio = 10 : 12

New Shares of Partners:

A’s new share = `2/5 - 10/100`

= `(2 xx 20)/(5 xx 20) - 10/100`

= `40/100 - 10/100`

= `(40 - 10)/100`

= `30/100`

B’s new share = `3/5 - 12/100`

= `(3 xx 20)/(5 xx 20) - 12/100`

= `60/100 - 12/100`

= `(60 - 12)/100`

= `48/100`

C’s new share = A’s sacrifice + B’s sacrifice

= `10/100 + 12/100`

= `(10 + 12)/100`

= `22/100`

New Profit-Sharing Ratio of A, B, and C = `30/100 : 48/100 : 22/100` or 15 : 24 : 11