Question

L, M and N are partners sharing profits in the ratio of 3 : 2 : 1. They admit O into partnership. O brings in cash ₹ 4,50,000 as capital and ₹ 1,50,000 as goodwill for `1/5`th share of profits. Pass journal entries and find out new profit sharing ratios when:

1. Goodwill is retained in the firm;
2. goodwill is withdrawn by old partners.

Answer 1

a.

Journal Entries
Date	Prticulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		6,00,000
	To O’s Capital A/c			4,50,000
	To Premium for Goodwill A/c			1,50,000
	(Being cash brought in by O for capital and goodwill)
	Premium for Goodwill A/c   ...Dr.		1,50,000
	To L’s Capital A/c			75,000
	To M’s Capital A/c			50,000
	To N’s Capital A/c			25,000
	(Being goodwill distributed to old partners in their sacrificing ratio 3 : 2 : 1)

b.

Journal Entries
Date	Prticulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		6,00,000
	To O’s Capital A/c			4,50,000
	To Premium for Goodwill A/c			1,50,000
	(Being cash brought in by O for capital and goodwill)
	Premium for Goodwill A/c   ...Dr.		1,50,000
	To L’s Capital A/c			75,000
	To M’s Capital A/c			50,000
	To N’s Capital A/c			25,000
	(Being goodwill distributed to old partners in their sacrificing ratio 3 : 2 : 1)
	L’s Capital A/c   ...Dr.		75,000
	M’s Capital A/c   ...Dr.		50,000
	N’s Capital A/c   ...Dr.		25,000
	To  Bank A/c			1,50,000
	(Being goodwill withdrawn by the old partners)

Working Note:

Calculate the New Ratio:

The total share is 1. The remaining share for the old partners = `1 − 1/5`

= `4/5`

This remaining `4/5` share is divided among L, M, and N in their old ratio of 3 : 2 : 1.

L’s new share = `4/5 xx 3/6`

= `12/30`

= `6/15`

M’s new share = `4/5 xx 2/6`

= `8/30`

= `4/15`

N’s new share = `4/5 xx 1/6`

= `4/30`

= `2/15`

The denominator must be the same for all partners:

O’s new share = `1/5`

= `(1 xx 6)/(5 xx 6)`

= `6/30`

= `3/15`

New Profit-Sharing Ratio L, M, N, and O = `6/15 : 4/15 : 2/15 : 3/15` or 6 : 4 : 2 : 3

Calculate the Sacrificing Ratio:

Sacrificing Ratio = Old Share − New Share

L = `3/6 - 6/15`

= `(3 xx 5)/(6 xx 5) - (6 xx 2)/(15 xx 2)`

= `15/30 - 12/30`

= `(15 - 12)/30`

= `3/30`

M = `2/6 - 4/15`

= `(2 xx 5)/(6 xx 5) - (4 xx 2)/(15 xx 2)`

= `10/30 - 8/30`

= `(10 - 8)/30`

= `2/30`

N = `1/6 - 2/15`

= `(1 xx 5)/(6 xx 5) - (2 xx 2)/(15 xx 2)`

= `5/30 - 4/30`

= `(5 - 4)/30`

= `1/30`

Sacrificing Ratio L, M, and N = 3 : 2 : 1

Distribute the Premium for Goodwill to the Old Partners:

L’s share = `1,50,000 xx 3/6`

= 75,000

M’s share = `1,50,000 xx 2/6`

= 50,000

N’s share = `1,50,000 xx 1/6`

= 25,000