Question

A, B and C were partners in a firm sharing profits in the ratio of 2 : 1 : 1. The value of the total assets of the firm was ₹ 8,00,000 and outside liabilities were valued at ₹ 1,20,000 as at that date. On 1st April, 2024 they admitted D as a new partner. D brought ₹ 2,00,000 for his capital and the necessary amount for his share of the goodwill premium. The new profit-sharing ratio between A, B, C and D will be 1 : 2 : 1 : 1.

Pass necessary journal entries for the above transactions in the books of the firm on D’s admission.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		2,00,000
	To D’s Capital A/c			2,00,000
	(Capital brought in by D)
	Bank A/c   ...Dr.		24,000
	To Premium for Goodwill A/c			24,000
	(Amount of goodwill premium brought in by D)
	Premium for Goodwill A/c   ...Dr.		24,000
	B’s Capital A/c		18,000
	To A’s Capital A/c			36,000
	To C’s Capital A/c			6,000
	(Being premium for goodwill distributed to sacrificing partners A and C and adjusted with gaining partner B)

Working Note:

Total Capital of Old Firm = 8,00,000 − 1,20,000

= ₹ 6,80,000

Calculate the total capital of the new firm (before goodwill):

Total Capital = Old partners’ capital + New partner’s capital

= 6,80,000 + 2,00,000

= 8,80,000

Calculate the total implied value of the firm based on D’s capital:

D’s share of profit = `1/5`

D’s capital = 2,00,000

Implied Total Value = D’s Capital × cross × Reciprocal of D’s share

Implied Total Value = `2,00,000 xx 5/1`

= 10,00,000

Calculate the hidden goodwill:

Hidden Goodwill = Implied Total Value − Total Capital of New Firm

= 10,00,000 − ₹8,80,000

= 1,20,000

Calculate D’s share of goodwill:

D’s Share of Goodwill = `1,20,000 xx 1/5`

= `24,000`

Calculation of sacrificing ratio:

A’s Sacrifice = `2/4 - 1/5`

= `(2 xx 5)/(4 xx 5) - (1 xx 4)/(5 xx 4)`

= `10/20 - 4/20`

= `(10 - 4)/20`

= `6/20` (Sacrifice)

B’s Sacrifice = `1/4 - 2/5`

= `(1 xx 5)/(4 xx 5) - (2 xx 4)/(5 xx 4)`

= `5/20 - 8/20`

= `(5 - 8)/20`

= `(-3)/20` (Gain)

C’s Sacrifice = `1/4 - 1/5`

= `(1 xx 5)/(4 xx 5) - (1 xx 4)/(5 xx 4)`

= `5/20 - 4/20`

= `(5 - 4)/20`

= `1/20` (Sacrifice)

The sacrificing ratio is 6 : 1 (A : C), with B being a gaining partner.

Calculate the goodwill adjustment for each partner:

The total goodwill of the firm is ₹ 1,20,000.

B’s gain in goodwill = `1,20,000 xx 3/20`

= 18,000

A’s sacrifice in goodwill = `1,20,000 xx 6/20`

= 36,000

C’s sacrifice in goodwill = `1,20,000 xx 1/20`

= 6,000

Total compensation to sacrificing partners = D’s share + B’s share

= ₹ 24,000 + ₹ 18,000

= ₹ 42,000

This is the same as the total sacrifice of A and C = ₹ 36,000 + ₹ 6,000.

= 42,000