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Question
A and B are partners in a business sharing profits and losses in the ratio of 1/3rd and 2/3rd. On 1st April, 2019, their capitals were ₹ 8,000 and ₹ 10,000 respectively. On that date, they admit C in partnership and give him 1/4th share in the future profits. C brings ₹ 8,000 as his capital and ₹ 6,000 as goodwill. The amount of goodwill is withdrawn by the old partners in cash. Draft the journal entries and show the Capital Accounts of all the Partners. Calculate proportion in which partners would share profits and losses in future.
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Solution
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Journal |
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Date |
Particulars |
L.F. |
Debit Amount (₹) |
Credit Amount (₹) |
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2019 |
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April 1 |
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To C’s Capital A/c |
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8,000 |
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To Premium for Goodwill A/c |
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6,000 |
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(C brought capital and his share of goodwill) |
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April 1 |
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To A’s Capital A/c |
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2,000 |
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To B’s Capital A/c |
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4,000 |
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(C’s share of goodwill distributed between |
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A’s Capital A/c |
Dr. |
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2,000 |
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B’s Capital A/c |
Dr. |
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4,000 |
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To Cash A/c |
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6,000 |
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(Amount of goodwill withdrawn by A and B) |
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Partners’ Capital Accounts |
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Dr. |
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Cr. |
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Particulars |
A |
B |
C |
Particulars |
A |
B |
C |
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Cash |
2,000 |
4,000 |
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Balance b/d |
8,000 |
10,000 |
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Cash |
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8,000 |
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Premium for Goodwill |
2,000 |
4,000 |
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Balance c/d |
8,000 |
10,000 |
8,000 |
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10,000 |
14,000 |
8,000 |
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10,000 |
14,000 |
8,000 |
Calculation of New (Future) Ratio
Old Ratio = A : B
= `1/3 : 2/3`
C is admitted for `1/4` share of profit
Let combined share of all partners after C’s admission be = 1
Combined share of A and B after C’s admission = 1 − C’s share
= `1 - 1/4`
= `3/4`
New Ratio = Old Ratio x Combined Share of A and B in the new firm
A's = `1/3 xx 3/4 = 3/12`
B's = `2/3 xx 3/4 = 6/12`
New Profit Sharing Ratio = A : B : C
= `3/12 : 6/12 : 1/4`
= `[ 3 : 6 : 3]/12`
= 1 : 2 : 1
Distribution of Premium for Goodwill
A will get = Rs. 6,000 x `1/3` = Rs. 2,000
B will get = Rs.6,000 x `2/3` = Rs. 4,000
