Question

P, Q and R share profits in the ratio of 5 : 3 : 2. S was admitted into partnership. S brings in ₹ 30,000 as his capital. S is entitled for `1/5`th share in profits which he acquires equally from P, Q and R. Goodwill of the firm is to be valued at three years’ purchase of the last four years’ average profits. The profits of the last four years’ are ₹ 32,000, ₹ 38,000, ₹ 35,000 and ₹ 31,000, respectively. S cannot bring goodwill in cash. Goodwill already appears in the books at ₹ 50,000. Give journal entries.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		30,000
	To S’s Capital A/c			30,000
	(Being capital brought in by S)
	P’s Capital A/c   ...Dr.		25,000
	Q’s Capital A/c   ...Dr.		15,000
	R’s Capital A/c   ...Dr.		10,000
	To Goodwill A/c			50,000
	(Being existing goodwill written off in the old ratio of 5 : 3 : 2)
	S’s Current A/c   ...Dr.		20,400
	To P’s Capital A/c			6,800
	To Q’s Capital A/c			6,800
	To R’s Capital A/c			6,800
	(Being S’s share of goodwill adjusted through current account and credited to sacrificing partners in their sacrificing ratio of 1 : 1 : 1)

Working Note:

Calculate the Firm’s goodwill:

Average Profit = `(32,000 + 38,000 + 35,000 + 31,000)/4`

= `(1,36,000)/4`

= 1,02,000

S’s Share of Goodwill = Firm’s Goodwill × S’s Profit Share

= `1,02,000 xx 1/5`

= 20,400

Calculate the sacrificing ratio:

S acquires his `1/5`th share equally from P, Q, and R.

Each partner’s sacrifice = `1/5 xx 1/3`

= `1/15`

Sacrificing Ratio of P, Q, and R = `1/15 : 1/15 : 1/15` or 1 : 1 : 1