Question

A and B are partners sharing profits in the ratio of 2 : 1. They admit C for 1/4th share in profits. C brings ₹ 30,000 for his capital and ₹ 8,000 out of his share of ₹ 10,000 for goodwill. Before admission goodwill appeared in books at ₹ 18,000. Give Journal entries to give effect to above arrangement.

Hint: 

1. Goodwill of ₹ 18,000 written off by A and B in 2 : 1.
2. Goodwill of ₹ 8,000 brought in cash by C will be credited to Premium for Goodwill A/c.
3. Premium for Goodwill A/c will be debited by ₹ 8,000 and C's Current A/c will be debited by ₹ 2,000 and Capital Accounts of A and B will be credited in 2 : 1.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	A's Capital A/c   ...Dr.		12,000
	B's Capital A/c   ...Dr.		6,000
	To Goodwill A/c			18,000
	(Being existing book value of goodwill written off among old partners in their old profit-sharing ratio of 2 : 1)
2.	Bank/Cash A/c   ...Dr.		38,000
	To C's Capital A/c			30,000
	To Premium for Goodwill A/c			8,000
	(Being capital and partial premium for goodwill brought in cash by C)
3.	Premium for Goodwill A/c   ...Dr.		8,000
	C's Current A/c   ...Dr.		2,000
	To A's Capital A/c			6,667
	To B's Capital A/c			3,333
	(Being full goodwill share adjusted through premium cash and current account, credited to old partners in their sacrificing ratio of 2 : 1)

Working note:

1. Sacrificing Ratio

Because the incoming partner (C) is admitted for a 1/4th share without any custom takeover conditions specified for the remaining share, A and B continue to sacrifice in their original profit proportion.

Sacrificing Ratio of A and B = 2 : 1

2. Writing Off Existing Book Goodwill

The old book goodwill of ₹ 18,000 must be written off completely between A and B in their old profit-sharing ratio (2 : 1):

A's Share to write off = `18,000 xx 2/3 = 12,000`

B's Share to write off = `18,000 xx 1/3 = 6,000`

3. Total Distribution of C's Goodwill (₹ 10,000)

A's Share received = `10,000 xx 2/3 = 6,667`

B's Share received = `10,000 xx 1/3 = 3,333`