Question

A, B and C are partners sharing profits and losses in the ratio of 6 : 3 : 1. Their respective capitals are A ₹ 5,00,000; B ₹ 4,00,000 and C ₹ 2,00,000. They decide to admit D into partnership and the new profit-sharing ratio is agreed at 3 : 3 : 3 : 1.

D brings ₹ 1,50,000 as his capital and his share of goodwill in cash. At the time of D's admission:

1. The firm had a Workmen Compensation Reserve of ₹ 1,00,000 against which there was a claim of ₹ 1,20,000.
2. Advertisement The Suspense A/c (Dr.) balance appeared in their books at ₹ 30,000.
3. Contingency Reserve appeared at ₹ 60,000.

You are required to prepare necessary journal entries.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		1,75,000
	To D’s Capital A/c			1,50,000
	To Goodwill Premium A/c			25,000
	(D’s capital and share of goodwill brought in cash)
	Goodwill Premium A/c   ...Dr.		25,000
	C’s Capital A/c   ...Dr.		50,000
	To A’s Capital A/c			75,000
	(D’s share of goodwill credited to A and C’s gaining share debited to his capital A/c)
	Workmen Compensation Reserve A/c   ...Dr.		1,00,000
	Revaluation A/c   ...Dr.		20,000
	To Liability for Workmen Compensation Claim A/c			1,20,000
	(Claim for Workmen Compensation recorded)
	A’s Capital A/c   ...Dr.		18,000
	B’s Capital A/c   ...Dr.		9,000
	C’s Capital A/c   ...Dr.		3,000
	To Advertisement Suspense A/c			30,000
	(Advertisement suspense account written off)
	Contingency Reserve A/c   ...Dr.		60,000
	To A’s Capital A/c			36,000
	To B’s Capital A/c			18,000
	To C’s Capital A/c			6,000
	(Contingency reserve distributed to old partners)

Working Notes:

Sacrificing/Gaining Ratio:

Sacrificing/Gaining Share = Old Share − New Share

A’s Sacrifice = `6/10 - 3/10`

= `3/10` (Sacrifice)

B’s Sacrifice = `3/10 - 3/10`

= 0

C’s Sacrifice = `1/10 - 3/10`

= `-2/10` (Sacrifice)

D’s Gaining share is `1/10`

Hidden Goodwill Calculation:

Total Capital of the new firm based on D’s share = `1,50,000 xx 10/1`

= 15,00,000

Actual Total Capital = 5,00,000 + 4,00,000 + 2,00,000 + 1,50,000

= 12,50,000

Hidden Goodwill = 15,00,000 − 12,50,000

= 2,50,000

Goodwill Adjustments:

D’s share of goodwill = `2,50,000 xx 1/10`

= 25,000

C’s share of gain = `2,50,000 xx 2/10`

= 50,000

A’s share of sacrifice = `2,50,000 xx 3/10`

= 75,000