Question

A and B are partners sharing profits and losses in the ratio of 3 : 2 respectively. Goodwill appears in their books at ₹ 3,00,000. They admit C into partnership. C paying a premium of ₹ 1,00,000 for one-fourth share of the profits while A and B as between themselves sharing profits and losses as before.

Give Journal entries to record the above arrangement in the books of the firm.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	A's Capital A/c   ...Dr.		1,80,000
	B's Capital A/c   ...Dr.		1,20,000
	To Goodwill A/c			3,00,000
	(Being the existing book value of goodwill written off among old partners in their old profit-sharing ratio of 3 : 2)
2.	Bank/Cash A/c   ...Dr.		1,00,000
	To Premium for Goodwill A/c			1,00,000
	(Being premium for goodwill brought in cash by C)
3.	Premium for Goodwill A/c   ...Dr.		1,00,000
	To A's Capital A/c			60,000
	To B's Capital A/c			40,000
	(Being premium for goodwill distributed between A and B in their sacrificing ratio of 3 : 2)

Working note:

1. Sacrificing Ratio

The problem states that A and B will continue to share profits and losses between themselves in their original proportion (3 : 2). Whenever a new partner is admitted for a specific share (1/4th) and the old partners maintain their relative ratio, the Sacrificing Ratio remains identical to the Old Profit Sharing Ratio, which is 3 : 2.

2. Writing Off Existing Goodwill

A's Share to write off = `3,00,000 xx 3/5 = 1,80,000`

B's Share to write off = `3,00,000 xx 2/5 = 1,20,000`

3. Distribution of New Goodwill Premium

C brings in ₹ 1,00,000 as a premium for goodwill, which is distributed between A and B in their sacrificing ratio (3 : 2):

A's Share received = `1,00,000 xx 3/5 = 60,000`

B's Share received = `1,00,000 xx 2/5 = 40,000`