Kabir and Farid Are Partners in a Firm Sharing Profits in the Ratio of 3:1 on 1-4-2019 They Admitted Manik into Partnership for 1/4th Share in the Profits of the Firm. - Accountancy

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Journal Entry

Kabir and Farid are partners in firm sharing profits in the ratio of 3: 1 on 1-4-2019 they admitted Manik into partnership for 1/4th share in the profits of the firm. Manik brought his share of goodwill premium in cash. Goodwill of the firm was valued on the basis of 2 years purchase of the last three years' average profits. The profits of last three years were:

2016-17 ₹ 90,000
2017-18 ₹ 1,30,000
2018-19 ₹ 86,000

During the year 2018-19, there was a loss of ₹ 20,000 due to fire which was not accounted for while calculating the profit. Calculate the value of goodwill and pass the necessary journal entries to the treatment of goodwill.

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Solution

In the books of Kabir and Farid 
Journal 

Date Particulars   L.F. Debit Amount (₹) Credit Amount (₹)

2019 

 

 

 

 

 

Apr.01

Premium for Goodwill A/c

Dr. 51,000  

 

 

 

To Kabir’s Capital A/c

    38,250

To Farid’s Capital A/c

    12,750

(Being share of goodwill credited to the existing partners in 3: 1)

     

 

Working Notes:   
Average Profit for the last three years = `(90,000 + 1,30,000 + 86,000)/3`
= ₹ 1,02,000
Goodwill of the firm = Average Profits of the last three years × Number of Years’ Purchase
= ₹ (1,02,000 × 2) = ₹ 2,04,000
Manik’s share of goodwil = ₹ (2,04,000 × ¼) = ₹ 51,000
Sacrificing Ratio among the partners will be same as old ratio = 3 : 1

Note: Loss due to fire has not been accounted for thus; the profits for the year 2018-19 are normal profits only.

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