A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in profits. C will bring in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at Rs, 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?
Solution
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Journal Entries |
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Date |
Particulars |
L.F. |
Debit Amount Rs |
Credit Amount Rs |
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Cash A/c |
Dr. |
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35,000 |
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To C's Capital A/c |
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30,000 |
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To Premium for Goodwill A/c |
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5,000 |
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(Amount of Capital and Share of Goodwill brought by C) |
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Premium for Goodwill A/c |
Dr. |
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5,000 |
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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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3,000 |
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(C's Share of Goodwill credited to A and B in 2:3, Sacrificing Ratio) |
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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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3,000 |
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To Cash A/c |
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5,000 |
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(Share of Goodwill withdrawn by Old Partners) |
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Sacrificing Ratio = Old Ratio − New Ratio
A = `3/5 - 2/4`
= ` [ 12 - 10]/20 = 2/20`
B = `2/5 - 1/4`
= ` [ 8 - 5]/20 = 3/20`
Sacrificing Ratio = A : B
= `2/20 : 3/20`
= ` 2 : 3`
Goodwill of the firm = Rs 20,000
C’s share of Goodwill = 20,000 x `1/4` = Rs. 5,000
A will receive = 5,000 x `2/5` = Rs. 2,000
Or 20,000 x `2/20` = 2,000
B will receive = 5,000 x `3/5` = 3,000
Or 20,000 x `3/20` = 3,000.
