Question

L and M were partners in a firm sharing profits in 4 : 3 ratio. They admitted O as a new partner. The new profit sharing ratio of L, M and O will be 3 : 3 : 4. O brought ₹ 2,00,000 for his capital. The goodwill of the firm on O's admission was valued at ₹ 70,000. O brought his share of goodwill in cash. Calculate sacrificing ratio of L and M and pass necessary journal entries for the above transactions on O's admission.

Answer 1

1. Sacrificing Ratio of L and M

Sacrificing Share = Old Share − New Share

L's Sacrifice = `4/7 - 3/10 = (40 - 21)/70 = 19/70`

M's Sacrifice = `3/7 - 3/10 = (30 - 21)/70 = 9/70`

The sacrificing ratio of L and M is 19 : 9.

2. O's Share of Goodwill

Total Firm Goodwill = ₹ 70,000

O's Profit Share = `4/10`

O's Share of Goodwill = `70,000 xx 4/10 = 28,000`

3. Distribution of Goodwill

O's premium for goodwill (₹ 28,000) is distributed in the 19 : 9 sacrificing ratio:

L's Share = `28,000 xx 19/28 = 19,000`

M's Share = `28,000 xx 9/28 = 9,000`

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Bank/Cash A/c   ...Dr.		2,28,000
	To O's Capital A/c			2,00,000
	To Premium for Goodwill A/c			28,000
	(Being capital and premium for goodwill brought in by O)
2.	Premium for Goodwill A/c   ...Dr.		28,000
	To L's Capital A/c			19,000
	To M's Capital A/c			9,000
	(Being premium for goodwill distributed between L and M in their sacrificing ratio of 19 : 9)