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Question
A and B are partners sharing profits in the ratio of 2 : 1. They admit C for a `1/4`th share in profits. C brings in ₹ 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 the above arrangement.
Hints:
- Goodwill of ₹ 18,000 written off by A and B in 2 : 1.
- Goodwill of ₹ 8,000 brought in cash by C will be credited to the Premium for Goodwill A/c.
- Premium for Goodwill A/c will be debited by ₹ 8,000 and C’s Current A/c will be debited by ₹ 2,000 and the Capital Accounts of A and B will be credited in 2 : 1.
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Solution
| Journal Entries | ||||
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| A’s Capital A/c ...Dr. | 12,000 | |||
| B’s Capital A/c ...Dr. | 6,000 | |||
| To Goodwill A/c | 18,000 | |||
| (Existing goodwill written off among old partners in their old ratio) | ||||
| Bank A/c ...Dr. | 38,000 | |||
| To C’s Capital A/c | 30,000 | |||
| To Premium for Goodwill A/c | 8,000 | |||
| (Capital and premium for goodwill brought in by C) | ||||
| Premium for Goodwill A/c ...Dr. | 8,000 | |||
| C’s Capital A/c ...Dr. | 2,000 | |||
| To A’s Capital A/c | 6,667 | |||
| To B’s Capital A/c | 3,333 | |||
| (C’s share of goodwill distributed between A and B in Sacrificing Ratio) |
||||
Working Notes:
Write off existing goodwill:
A’s share = `18,000 xx 2/3`
= 12,000
B’s share = `18,000 xx 1/3`
= 6,000
Distribution of C’s share of Goodwill:
A’s share = `10,000 xx 2/3`
= 6,667
B’s share = `10,000 xx 1/3`
= 3,333
RELATED QUESTIONS
State any three circumstances other than (i) admission of a new partner; (ii) retirement of a partner and (iii) death of a partner, when need for valuation of goodwill of a firm may arise.
Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. Vaibhav's share of profit in the year of his death was to be calculated on the basis of the average profit of last five years. The average profit of last five years was Rs. 75,000.
Pass necessary journal entries in the books of the firm on Vaibhav's death.
Kumar, Gupta and Kavita were partners in the firm sharing profits and losses equally. The firm was engaged in the storage and distribution of canned juice and its godowns were located at three different places in the city. Each godown was being managed individually by Kumar, Gupta and Kavita. Because of increase in business activities at the godown managed by Gupta, he had devoted more time. Gupta demanded that his share in the profits of the firm be increased, to which Kumar and Kavita agreed. The new profit sharing ratio was agreed to be 1: 2: 1. For this purpose, the goodwill of the firm was valued at two years purchase of the average profits of last five years. The profits of the last five years were as follows :
| Years |
Profit Rs |
|
| I | 4,00,000 | |
| II | 4,80,000 | |
| II | 7,33,000 | |
| IV | Loss | 33,000 |
| V | 2,20,000 |
You are required to:
1) Calculate the goodwill of the firm
2) Pass necessary Journal Entry for the treatment of goodwill on the change in profit sharing ratio of Kumar, Gupta and Kavita.
Joshi, Pandey and Agarwal were partners in a firm sharing profits in the ratio of 2:2:1. On 31.3.2014, their Balance Sheet was as follows:
| Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Creditors Bills Payable Agarwal's Loan Capitals Joshi 2,10,000 Pandey 2,04,000 |
51,000 36,000 84,000
4,14,000 |
Cash Debtors Bills payable Furniture Machinery Agarwal’s Capital |
24,000 39,000 27,000 81,000 3,75,000 39,000 |
| 5,85,000 | 5,85,000 |
On 31.12.2014, Agarwal died. The partnership deed provided for the following to the executors of the deceased partner:
(a) His share in the goodwill of the firm, calculated on the basis of three year's purchase of the average profits of the last four years. The profits of the last four years were Rs 2,70,000; Rs 3,00,000; Rs 5,40,000 and Rs 8,10,000 respectively.
(b) His share in the profits of the firm till the date of his death, calculated on the basis of the average profits of the last four years.
(c) Interest @12% per annum on the credit balance, if any, in his Capital account.
(d) Interest on his loan @12% per annum.
Prepare Agarwal's Capital Account to be presented to his executors.
State 'True' or 'False'
When goodwill is paid privately, no entry in the books of account is required.
State 'True' or 'False'
The goodwill brought in by the new partner is shared by all partners.
State 'True' or 'False'
The new partner must pay his share of goodwill in cash only.
State True or False with reason.
When goodwill is written off, goodwill amount is debited.
Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs 1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary Journal entries.
Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash ?
Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5 : 3. They admitted Ghosh as a new partner for 1/5th share of profits. Ghosh is to bring in ₹ 20,000 as capital and ₹ 4,000 as his share of goodwill premium. Give the necessary Journal entries:
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
(d) When goodwill is paid privately.
Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in the profits of the firm. Ajay brings ₹ 5,00,000 as his share of capital. The value of the total assets of the firm was ₹ 15,00,000 and outside liabilities were valued at ₹ 5,00,000 on that date. Give the necessary Journal entry to record goodwill at the time of Ajay's admission. Also show your workings.
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.
A and B are partners in a firm with capital of ₹ 60,000 and ₹ 1,20,000 respectively. They decide to admit C into the partnership for 1/4th share in the future profits. C is to bring in a sum of ₹ 70,000 as his capital. Calculate amount of goodwill.
Anil and Sunil are partners in a firm with fixed capitals of ₹ 3,20,000 and ₹ 2,40,000 respectively. They admitted Charu as a new partner for 1/4th share in the profits of the firm on 1st April, 2012. Charu brought ₹ 3,20,000 as her share of capital.
Calculate value of goodwill and record necessary Journal entries.
A and B are partners sharing profits in the ratio of 3 : 2. Their books show goodwill at ₹ 2,000. C is admitted as partner for 1/4th share of profits and brings in ₹ 10,000 as his capital but is not able to bring in cash for his share of goodwill ₹ 3,000. Draft Journal entries.
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.
Anu and Bhagwan were partners in a firm sharing profits in the ratio of 3 : 1. Goodwill appeared in the books at ₹ 4,40,000. Raja was admitted to the partnership. The new profit-sharing ratio among Anu, Bhagwan and Raja was 2 : 2 : 1. Raja brought ₹ 1,00,000 for his capital and necessary cash for his goodwill premium. Goodwill of the firm was valued at ₹ 2,50,000. Record necessary Journal entries in the books of the firm for the above transactions.
M and J are partners in a firm sharing profits in the ratio of 3 : 2. They admit R as a new partner. The new profit-sharing ratio between M, J and R will be 5 : 3 : 2. R brought in ₹ 25,000 for his share of premium for goodwill. Pass necessary Journal entries for the treatment of goodwill.
Vinay and Naman are partners sharing profits in the ratio of 4 : 1. Their capitals were ₹ 90,000 and ₹ 70,000 respectively. They admitted Prateek for 1/3 share in the profits. Prateek brought ₹ 1,00,000 as his capital. Calculate the value of firm's goodwill.
Keith, Bina, and Veena were partners in firm sharing profits and losses equally. Their balance sheet as on 31-3-2019 was as follows:
|
Balance Sheet of Keith, Bina, and Veena as on 31-3-2019 |
||||
| Liabilities |
Amount (₹) |
Amount (₹) |
Assets | Amount (₹) |
| Capitals: |
|
3,25,000 |
Plant and Machinery | 2,40,000 |
| Keith | 1,50,000 | Stock | 60,000 | |
| Bina | 1,00,000 | Sundry debtors | 35,000 | |
| Veena |
75,000 |
Cash at bank | 50,000 | |
| General Reserve |
|
30,000 |
||
| Sundry creditors |
|
30,000 |
||
| 3,85,000 | 3,85,000 | |||
Veena died on 30th June 2019. According to the partnership deed, the executors of the deceased partner were entitled to :
- Balance in the capital account
- Salary till the date of death @ ₹ 25,000 per annum.
- Share of goodwill calculated on the basis of twice the average profits of the past three years.
- Share of profit from the closure of the last accounting year till the date of death on the basis of the average of three completed years profits before death.
- Profits for 2016-17, 2017-18 and 2018-19 were ₹ 1,20,000, ₹ 90,000 and ₹ 1,50,000 respectively.
Veena withdrew ₹ 15,000 on 1st June 2019 for paying her daughter’s school fees.
Prepare Veena’s capital account to be rendered to her executors.
Find the Odd one.
Why is a new partner admitted?
What is the super profit method of calculation of goodwill?
____________ profit is excess of actual profits over normal profits.
When there is no Goodwill Account in the books and goodwill is raised, ____________ account will be debited.
Suresh, Ramesh and Tushar were partners of a firm sharing profits in the ratio of 6:5:4. Ramesh retired and his capital after making adjustments on account of reserves, revaluation of assets and reassessment of liabilities stood at ₹ 2,50,400. Suresh and Tushar agreed to pay him ₹ 2,90,000 in full settlement of his claim. Pass necessary journal entry for the treatment of goodwill. Show workings clearly.
Madhav, Madhusudan and Mukund were partners in Jaganath Associates. They decided to dissolve the firm on 31st March 2021. Pass necessary journal entries for the following transactions after various assets (other than cash) and third-party liabilities have been transferred to realization account:
- Old machine fully written off was sold for ₹ 42,000 while a payment of ₹ 6,000 is made to bank for a bill discounted being dishonoured.
- Madhusudan accepted an unrecorded asset of ₹80,000 at ₹75,000 and the balance through cheque, against the payment of his loan to the firm of ₹1,00,000.
- Stock of book value of ₹30,000 was taken by Madhav, Madhusudan and Mukund in their profit sharing ratio.
- The firm had paid realization expenses amounting to ₹5,000 on behalf of Mukund.
- There was a vehicle loan of ₹ 2,00,000 which was paid by surrender of asset to the bank at an agreed value of ₹ 1,40,000 and the shortfall was met from firm’s bank account.
When the new partner is admitted goodwill can be treated in how many ways?
What would be the journal entry for revaluation of an increase in the value of an asset?
What would be the journal entry for revaluation of an increase in the value of a liability?
Jaya, Kirti, Ekta and Shewta are partners in the firm sharing profits and losses in the ratio of 2:1:2:1. On Jaya's retirement, the goodwill of the firm is valued at Rs. 36,000. Kirti, Ekta and Shewta decided to share future profits equally. What will be the necessary journal entry for the treatment of goodwill without opening a 'Goodwill Account'.
If goodwill is not brought in cash by the new partner, it should be debited to his ______ Account.
Excess value of Purchase Consideration over Net Assets at the time of purchase of business is credited to:
Analyse the case given below and answer the question that follow:
Alia, Karan and Shilpa were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Goodwill appeared in their books at the value of ₹ 60,000. Karan decided to retire from the firm. On the date of his retirement, goodwill of the firm was valued at ₹ 2,40,000. The new profit sharing ratio decided among Alia and Shilpa was 2 : 3. Give the answer to the question given below:
What amount of goodwill will be transferred to Karan's Capital account?
Mohit and Govind were partners in a firm with a ratio of 1:2. They admitted Ravi for 1/5th share in profits. He brought ₹2,50,000 for capital but could not bring goodwill. The goodwill of the firm was valued at ₹3,00,000. What Journal Entry will be passed for the treatment of goodwill?
Fill in the blank.
______ = `("Total Profit")/("Number of Years")`
Aayush and Aarushi are partners sharing profits and losses in the ratio of 3 : 2. They admitted Naveen into partnership for 1/4th share. Goodwill of the firm was to be valued at three years' purchase of super profits. Average net profit of the firm was ₹ 20,000. Capital investment in the business was ₹ 50,000 and Normal Rate of Return was 10%. Calculate the amount of Goodwill premium brought by Naveen.
Manas and Mili are partners in a firm sharing profits in the ratio of 3 : 2. Anita is admitted as a new partner for `1/4`th share in future profits. Capitals of Manas and Mili were ₹ 3,00,000 and ₹ 1,50,000 respectively. Anita brought ₹ 2,00,000 as her capital. The value of goodwill of the firm on Anita's admission.
Find out super profit, if capital employed is ₹ 4,00,000, normal rate of return is 12% and average profit is ₹ 60,000.
On 1st April, 2020, Anish started a business with a capital of ₹ 3,00,000.
During the three years ending 31st March, 2023, the results of his business were:
| Year | (₹) | |
| 2020-21 | Loss | 20,000 |
| 2021-22 | Profit | 34,000 |
| 2022-23 | Profit | 46,000 |
From the year 2020-21 to the year 2022-23, Anish withdrew ₹ 30,000 from the firm for his personal use.
On 1st April, 2023, he admitted Danish into partnership on the following terms:
- Goodwill of the firm to be valued at two years’ purchase of the average profits of the last three years.
- Danish to have a `1/4` share in the future profits.
- Danish’s capital is to be equal to `1/4` of Anish’s capital determined on 1st April, 2023, after the goodwill compensation has been taken into account.
You are required to give:
- The formula to calculate goodwill by the Average Profit Method.
- The value of self-generated goodwill of the firm.
- Danish’s capital contribution.
