Question

On the admission of Rao, goodwill of Murty and Shah is valued at ₹ 30,000. Rao is to get 1/4th share of profits. Previously Murty and Shah shared profits in the ratio of 3 : 2. Rao is unable to bring amount of goodwill. Give Journal entries in the books of Murty and Shah when:
(a) there is no Goodwill Account and
(b) Goodwill appears in the books at ₹ 10,000.

Answer 1

WN1: Calculation of Rao’s share of Goodwill
Rao's share of Goodwill = 30,000 x `1/4` = Rs. 7,500.

WN2: Adjustment of Rao’s share of Goodwill
Murty will get = 7,500 x `3/5` = Rs. 4,500

shah will get = 7,500 x `2/5` = Rs. 3,000

(a) Where there is no Goodwill Account

Journal
Date	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
	Rao’s Capital A/c	Dr.		7,500
	To Murty’s Capital A/c				4,500
	To Shah’s Capital A/c				3,000
	(Rao’s share of goodwill charged from his capital account and distributed between Murty and Shah in sacrificing ratio i.e., 3:2)

(b) Goodwill appears at Rs 10,000

Journal
Date	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
	Murty’s Capital A/c	Dr.		6,000
	Shah’s Capital A/c	Dr.		4,000
	To Goodwill A/c				10,000
	(Goodwill written-off at the time of Rao’s admission in old ratio)
	Rao’s Capital A/c	Dr.		7,500
	To Murty’s Capital A/c				4,500
	To Shah’s Capital A/c				3,000
	(Rao’s share of goodwill charged from his Capital Account and distributed between Murty and Shah in sacrificing ratio i.e., 3:2)