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Journal Entries: (A) When the Amount of Goodwill is Retained in the Business. (B) When the Amount of Goodwill is Fully Withdrawn.

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Question

Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5 : 3. They admitted Ghosh as a new partner for 1/5th share of profits. Ghosh is to bring in ₹ 20,000 as capital and ₹ 4,000 as his share of goodwill premium. Give the necessary Journal entries:
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is withdrawn.
(d) When goodwill is paid privately.

Journal Entry
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Solution

Journal Entries

S.No.

Particulars

L.F.

Debit Amount Rs

Credit Amount Rs

Case (a)

       
 

Cash A/c

Dr.

 

24,000

 
 

To Ghosh's Capital A/c

     

20,000

 

To Premium for Goodwill A/c

     

4,000

 

(Capital and Goodwill his share broughtby Ghosh)

       
           
 

Premium for Godwill A/c

Dr.

 

4,000

 
 

To Verma's Capital A/c

     

2,500

 

To Sharma's Capital A/c

     

1,500

 

(Goodwill brought by Ghosh credited to Old Partnersin Sacrificing ratio)

     
         
Case (b)

Cash A/c

Dr.

 

24,000

 
 

To Ghosh Capital A/c

     

20,000

 

To Premium for Goodwill A/c

     

4,000

 

(Capital and Goodwill brought by Ghosh for (1/5)share of profit)

       
         
 

Premium for Goodwill A/c

Dr.

 

4,000

 
 

To Verma's Capital A/c

     

2,500

 

To Sharma's Capital A/c

     

1,500

 

(Goodwill brought by Ghosh credited in Old Partner in Sacrificing Ratio)

     
         
 

Verma's Capital A/c

Dr.

 

2,500

 
 

Sharma's Capital A/c

Dr.

 

1,500

 
 

To Cash A/c

     

4,000

 

(Amount of Premium for Goodwill withdrawn byOld Partners)

     
         
Case (c)

Cash A/c

Dr.

 

24,000

 
 

To Ghosh's Capital A/c

     

20,000

 

To Premium for Goodwill A/c

     

4,000

  (Capital and Goodwill brought by Ghosh for (1/5)share of profit)        
         
 

Premium for Goodwill A/c

Dr.

 

4,000

 
 

To Verma's Capital A/c

     

2,500

 

To Sharma's Capital A/c

     

1,500

 

(Premium for Goodwill credited to Old Partner's Capital Account in sacrificing ratio)

     
         
 

Verma's Capital A/c

Dr.

 

1,250

 
 

Sharma's Capital A/c

   

750

 
 

To Cash A/c

     

2,000

 

(Half of the amount of premium for goodwill withdrawn by Old partners)

     
         
Case (d) No entry: Goodwill was not brought into firm      
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Chapter 4: Admission of a Partner - Exercises [Page 91]

APPEARS IN

TS Grewal Accountancy Double Entry Book Keeping Volume 1 and 2 [English] Class 12
Chapter 4 Admission of a Partner
Exercises | Q 47 | Page 91

RELATED QUESTIONS

State any three circumstances other than (i) admission of a new partner; (ii) retirement of a partner and (iii) death of a partner, when need for valuation of goodwill of a firm may arise.


Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. Vaibhav's share of profit in the year of his death was to be calculated on the basis of the average profit of last five years. The average profit of last five years was Rs. 75,000.

Pass necessary journal entries in the books of the firm on Vaibhav's death.


Joshi, Pandey and Agarwal were partners in a firm sharing profits in the ratio of 2:2:1. On 31.3.2014, their Balance Sheet was as follows:

Liabilities

Amount

Rs

Assets

Amount

Rs

Creditors

Bills Payable

Agarwal's Loan

Capitals

   Joshi     2,10,000

  Pandey   2,04,000

51,000

36,000

84,000

 

 

4,14,000

Cash

Debtors

Bills payable

Furniture

Machinery

Agarwal’s Capital

24,000

39,000

27,000

81,000

3,75,000

39,000

  5,85,000   5,85,000

On 31.12.2014, Agarwal died. The partnership deed provided for the following to the executors of the deceased partner:

(a) His share in the goodwill of the firm, calculated on the basis of three year's purchase of the average profits of the last four years. The profits of the last four years were Rs 2,70,000; Rs 3,00,000; Rs 5,40,000 and Rs 8,10,000 respectively.
(b) His share in the profits of the firm till the date of his death, calculated on the basis of the average profits of the last four years.
(c) Interest @12% per annum on the credit balance, if any, in his Capital account.
(d) Interest on his loan @12% per annum.

Prepare Agarwal's Capital Account to be presented to his executors.


Hemant and Nishant were partners in the firm sharing profits in the ratio of 3:2. Their capitals were Rs 1,60,000 and Rs 1,00,000 respectively. They admitted Somesh on 1st April 2013 as a new partner for 1/5 share in the future profits. Somesh brought Rs 1,20,000 as his capital. Calculate the value of goodwill of the firm and record necessary journal entries for the above transactions on Somesh's admission.


How does the nature of business affect the value of goodwill of a firm? 


What is a Goodwill?

 


State 'True' or 'False'
The goodwill brought in by a new partner is shared by the old partners.


Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?


Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs 1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary Journal entries.


Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in the profits of the firm. Ajay brings ₹ 5,00,000 as his share of capital. The value of the total assets of the firm was ₹ 15,00,000 and outside liabilities were valued at ₹ 5,00,000 on that date. Give the necessary Journal entry to record goodwill at the time of Ajay's admission. Also show your workings.


A and B are partners in a firm with capital of ₹ 60,000 and ₹ 1,20,000 respectively. They decide to admit C into the partnership for 1/4th share in the future profits. C is to bring in a sum of ₹ 70,000 as his capital. Calculate amount of goodwill.


A and B are partners sharing profits in the ratio of 3 : 2. Their books show goodwill at ₹ 2,000. C is admitted as partner for 1/4th share of profits and brings in ₹ 10,000 as his capital but is not able to bring in cash for his share of goodwill ₹ 3,000. Draft Journal entries.


Write a word/phrase/term which can substitute the following statement.

Reputation of business measured in terms of money.


State True or False with reason.

A new partner always bring his share of goodwill in cash.


What is the super profit method of calculation of goodwill?


Goodwill given in the old balance sheet will be:


____________ profit is excess of actual profits over normal profits.


Amount of old goodwill already appearing in the books will be written off:


When there is no Goodwill Account in the books and goodwill is raised, ____________ account will be debited.


Madhav, Madhusudan and Mukund were partners in Jaganath Associates. They decided to dissolve the firm on 31st March 2021. Pass necessary journal entries for the following transactions after various assets (other than cash) and third-party liabilities have been transferred to realization account:

  1. Old machine fully written off was sold for ₹ 42,000 while a payment of ₹ 6,000 is made to bank for a bill discounted being dishonoured.
  2. Madhusudan accepted an unrecorded asset of ₹80,000 at ₹75,000 and the balance through cheque, against the payment of his loan to the firm of ₹1,00,000.
  3. Stock of book value of ₹30,000 was taken by Madhav, Madhusudan and Mukund in their profit sharing ratio.
  4. The firm had paid realization expenses amounting to ₹5,000 on behalf of Mukund.
  5. There was a vehicle loan of ₹ 2,00,000 which was paid by surrender of asset to the bank at an agreed value of ₹ 1,40,000 and the shortfall was met from firm’s bank account.

When the new partner is admitted goodwill can be treated in how many ways?


Which method is followed when the new partner does not bring in his share of goodwill in cash.


Hem and Nern are partners in firm sharing profits in the ratio of 3:2. Their capitals were Rs. 80,000 and Rs. 50,000 respectively. They admitted Sam on Jan. 1 2019 as a new partner for 1/5 share in the future profits. Sam brought Rs. 60,000 as his capital. Calculate the value of goodwill of the firm.


What would be the journal entry for if goodwill is raised at full value and retained in books?


Jaya, Kirti, Ekta and Shewta are partners in the firm sharing profits and losses in the ratio of 2:1:2:1. On Jaya's retirement, the goodwill of the firm is valued at Rs. 36,000. Kirti, Ekta and Shewta decided to share future profits equally. What will be the necessary journal entry for the treatment of goodwill without opening a 'Goodwill Account'.


Excess value of Purchase Consideration over Net Assets at the time of purchase of business is credited to:


When the incoming partner brings his share of premium for goodwill in cash, it is adjusted by crediting to ______.


When the value of goodwill is not specified at the time of admission of a partner is called ______.


Profit for 2015, 2016 & 2017 is ₹ 10,000, ₹ 15,000 & ₹ 25,000. Calculate average profit.


Fill in the blank.

______  =  `("Total Profit")/("Number of Years")`


A and B were partners in a firm sharing profits equally. Their capitals were : A ₹ 1,20,000 and B ₹ 80,000. The annual rate of interest is 20%. The profits of the firm for the last three years were ₹ 34,000; ₹ 38,000 and ₹ 30,000. They admitted C as a new partner. On C's admission the goodwill of the firm was valued at 2 years purchase of the super profits.

Calculate the value of goodwill of the firm on C's admission. 


Aayush and Aarushi are partners sharing profits and losses in the ratio of 3 : 2. They admitted Naveen into partnership for 1/4th share. Goodwill of the firm was to be valued at three years' purchase of super profits. Average net profit of the firm was ₹ 20,000. Capital investment in the business was ₹ 50,000 and Normal Rate of Return was 10%. Calculate the amount of Goodwill premium brought by Naveen. 


Nita and Samar are partners in a firm sharing profits in the ratio of 3 : 2. Their fixed capitals were ₹ 90,000 and ₹ 2,10,000 respectively. They admitted Mitali on April 1, 2022 as a new partner for 1/5th share in future profits. Mitali brought ₹ 1,50,000 as her capital. The value of goodwill of the firm of Mitali's admission was ______.


Complete the following Table:

? = `"Total Profit"/"Number of Years"`

On 1st April, 2020, Anish started a business with a capital of ₹ 3,00,000.
During the three years ending 31st March, 2023, the results of his business were:

Year   (₹)
2020-21 Loss 20,000
2021-22 Profit 34,000
2022-23 Profit 46,000

From the year 2020-21 to the year 2022-23, Anish withdrew ₹ 30,000 from the firm for his personal use.
On 1st April, 2023, he admitted Danish into partnership on the following terms:

  1. Goodwill of the firm to be valued at two years’ purchase of the average profits of the last three years.
  2. Danish to have a `1/4` share in the future profits.
  3. Danish’s capital is to be equal to `1/4` of Anish’s capital determined on 1st April, 2023, after the goodwill compensation has been taken into account.

You are required to give:

  1. The formula to calculate goodwill by the Average Profit Method.
  2. The value of self-generated goodwill of the firm.
  3. Danish’s capital contribution.

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