Question

A and B are partners sharing profits in the ratio of 5 : 3. C was admitted for `1/4`th share in profits. C acquires this share as `3/16` from A and `1/4`th of his share from B. C brings in ₹ 1,00,000 as his capital.

At the time of C’s admission:

1. The firm’s goodwill was valued at ₹ 2,40,000.
2. General Reserve was ₹ 40,000.
3. Profit on revaluation of assets and liabilities was ₹ 24,000.

Before any adjustments were made, the Capitals of A and B were ₹ 1,20,000 and ₹ 70,000, respectively.

It is decided that after C’s admission, the Capitals of A and B be adjusted on the basis of C’s Capital, any excess or shortfall to be adjusted by withdrawing or bringing in Cash by the old partners. You are required to pass necessary journal entries on C’s admission.

Hint: Sacrificing Ratio 3 : 1; New Ratio 7 : 5 : 4

Answer 1

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr,		1,00,000
	To C’s Capital A/c			1,00,000
	(Capital brought in by C)
	General Reserve A/c   ...Dr.		40,000
	To A’s Capital A/c			25,000
	To B’s Capital A/c			15,000
	(General reserve transferred to old partners in old ratio)
	Revaluation A/c   ...Dr.		24,000
	To A’s Capital A/c			15,000
	To B’s Capital A/c			9,000
	(Profit on revaluation transferred to old partners in old ratio)
	C’s Capital A/c   ...Dr.		60,000
	To A’s Capital A/c			45,000
	To B’s Capital A/c			15,000
	(C’s share of goodwill adjusted through his capital account and credited to sacrificing partners)
	A’s Capital A/c   ...Dr.		30,000
	To Bank A/c			30,000
	(Excess capital withdrawn by A)
	Bank A/c   ...Dr.		16,000
	To B’s Capital A/c			16,000
	(Shortfall in capital brought in by B)

Working Note:

1. Calculation of Adjusted Capitals of Partners A and B:

Adjusted Capital of A = A’s Capital + Share in General Reserve + Share in revaluation profit + Share in premium for Goodwill

= `1,20,000 + 40,000 xx 5/8 + 24,000 xx 5/8 + (2,40,000 xx 1/4) xx 3/4`

= `1,20,000 + 25,000 + 15,000 + 45,000`

= 2,05,000

Adjusted Capital of B = B’s Capital + Share in General Reserve + Share in revaluation profit + Share in premium for Goodwill

= `70,000 + 40,000 xx 3/8 + 24,000 xx 3/8 + (2,40,000 xx 1/4) xx 1/4`

= `70,000 + 15,000 + 9,000 + 15,000`

= 1,09,000

2. Calculation of Partners A and B in the new firm:

Total Capital in new Firm = `"C’s Capital"/"C’s Share in Profit"`

= 1,00,000 × 4

= 4,00,000

A and B would maintain their Capital in a new Profit Sharing Ratio.

A’s Capital in new Firm = `4,00,000 xx 7/16`

= 1,75,000

B’s Capital in new Firm = `4,00,000 xx 5/16`

= 1,25,000

3. Calculation of the new Profit Sharing Ratio of A, B, and C:

Old Ratio of A and B =  5 : 3

C admitted for `1/4`th share of which he receives `3/16` from A and `1/4`th of his share from B

A’s new share = `5/8 - 3/16`

=`(5 xx 2)/(8 xx 2) - 3/16`

= `10/16 - 3/16`

= `(10 - 3)/16`

= `7/16`

B’s new share = `3/8 - 1/4 xx 1/4`

= `(3 xx 2)/(8 xx 2) - 1/16`

= `6/16 - 1/16`

= `(6 - 1)/16`

= `5/16`

C’s new share = `1/4`

= `(1 xx 4)/(4 xx 4)`

= `4/16`

New Profit Sharing Ratio of A, B, and C =  `7/16 : 5/16 : 4/16` or 7 : 5 : 4

4. Calculation of Sacrificing Ratio of A and B:

Sacrificing Ratio = Old Ratio − New Ratio

A = `5/8 - 7/16`

= `(5 xx 2)/(8 xx 2) - 7/16`

= `10/16 - 7/16`

= `(10 - 7)/16`

= `3/16`

B = `3/8 - 5/16`

= `(3 xx 2)/(8 xx 2) - 5/16`

= `6/16 - 5/16`

= `(6 - 5)/16`

= `1/16`

Sacrificing Ratio of A and B = `3/16 : 1/16` or 3 : 1

5. Calculation of Partner’s Share in Goodwill of the Firm:

Goodwill of the Firm = 2,40,000

C’s Premium for Goodwill = `2,40,000 xx 1/4`

= 60,000

A and B would share it in their Sacrificing Ratio

A’s Share = `60,000 xx 3/4`

= 45,000

B’s Share = `60,000 xx 1/4`

= 15,000