Question

X and Y are partners with capitals of ₹ 50,000 each. They admit Z as a partner for 1/4th share in the profits of the firm. Z brings in ₹ 80,000 as his share of capital. The Profit and Loss Account showed a credit balance of ₹ 40,000 as on date of admission of Z.
Give necessary journal entries to record the goodwill.

Answer 1

Total Capital of the firm on the basis of Z's admission = ₹ 80,000 × `4/1` = ₹ 3,20,000

Actual capital of all the partners = X's capital + Y’s Capital + Z’s Capital + Undistributed Profit

= ₹ 50,000 + ₹ 50,000 + ₹ 80,000 + ₹ 40,000

= ₹ 2,20,000

Goodwill = Total Capital of the firm -  Actual Capital of the firm

= ₹ 3,20,000 - ₹ 2,20,000

= ₹ 1,00,000

Z’s share of goodwill = ₹ 1,00,000 × `1/4` = ₹ 25,000

W.N. Calculation of Sacrificing Ratio:

Old Ratio = 1: 1 or `1/2: 1/2`

Z's share = `1/4`

Let total profit = 1

Remaining Profit = `1/1 - 1/4 = (4 - 1)/4  = 3/4`

New Ratio = Old Ratio × Remaining Profit 

X = `1/2 xx 3/4 = 3/8`

Y = `1/2 xx 3/4 = 3/8`

Z = `1/4 or 2/8`

New Ratio = `3/8: 3/8: 2/8` or 3: 3: 2

Sacrifice Ratio = Old Ratio - New Ratio

X = `1/2 - 3/8 = (4 - 3)/8 = 1/8`

Y = `1/2 - 3/8 = (4 - 3)/8 = 1/8`

Sacrifice Ratio = `1/8: 1/8 or 1: 1.`

Journal Entries
Date	Particular	L.F.	Amt (₹)	Amt (₹)
1.	Cash/Bank a/c          Dr.		80,000
	To Z's Capital a/c			80,000
	(Being capital brought in by Z)
2.	Z's Capital a/c          Dr.		25,000
	To X's Capital a/c			12,500
	To Y's Capital a/c			12,500
	(Being Z's share of goodwill distributed among the partners in the ratio of 1: 1)