Question

Mitali and Karan were partners in a firm sharing profits and losses in the ratio of 3 : 2. Their Balance Sheet as on 31^st March, 2025, was as follows:

Balance Sheet of Mitali and Karan as on 31st March, 2025
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capitals:		13,00,000	Machinery		8,00,000
Mitali	8,00,000		Furniture		5,00,000
Karan	5,00,000		Investments		1,50,000
Investment Fluctuation Fund		20,000	Debtors	1,10,000	1,00,000
		1,30,000	Less: provision for doubtful debts	(10,000)
Creditors		2,00,000	Stock		80,000
			Cash		20,000
		16,50,000			16,50,000

On 1st April, 2025, Nitin was admitted for `1/4` share in the profits of the firm on the following terms:

1. Nitin will bring ₹ 3,00,000 as Capital and ₹ 1,50,000 for his share of goodwill premium in cash.
2. Stock was sold at ₹ 70,000
3. Machinery was found to be overvalued by ₹ 8,500.
4. All debtors were found to be good, hence provision for doubtful debts was not required.
5. A liability of ₹ 3,500 included in creditors is not likely to arise.
6. The market value of the investments was ₹ 1,40,000.
7. The new profit sharing ratio between Mitali, Karan and Nitin will be 2 : 2 : 1.

Pass the necessary journal entries for the above transactions on Nitin’s admission.

Answer 1

Journal Entries in the Books of the Firm
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
2025
April 1	Cash A/c   ...Dr.		4,50,000	-
	To Nitin’s Capital A/c		-	3,00,000
	To Premium for Goodwill A/c		-	1,50,000
	(Being capital and premium for goodwill brought in cash)
April 1	Premium for Goodwill A/c   ...Dr.		1,50,000	-
	To Mitali’s Capital A/c		-	1,50,000
	(Being premium for goodwill credited to Mitali’s account)
April 1	Investment Fluctuation Fund A/c   ...Dr.		20,000	-
	To Investment A/c (1,50,000 - 1,40,000)		-	10,000
	To Mitali’s Capital A/c `10,000 xx 3/5`		-	6,000
	To Karan’s Capital A/c `10,000 xx 2/5`		-	4,000
	(Being fall in the value of investment-adjusted and balance distributed)
April 1	Provision for Doubtful Debts A/c   ...Dr.		10,000	-
	Creditors A/c   ...Dr.		3,500	-
	To Revaluation A/c		-	13,500
	(Being provision no longer required and liability written back)
April 1	Mitali’s Capital A/c   ...Dr. `5,000 xx 3/5`		3,000	-
	Karan’s Capital A/c   ...Dr. `5,000 xx 2/5`		2,000	-
	To Revaluation A/c		-	5,000
	(Being loss on revaluation transferred to old partners)

Working Note:

1. Calculation of Sacrificing Ratio:

To distribute the goodwill premium, we first need to determine how much the old partners sacrificed.

Old Ratio (Mitali : Karan) = 3 : 2

New Ratio (Mitali : Karan : Nitin) = 2 : 2 : 1

Sacrifice = Old Share − New Share

Mitali = `3/5 - 2/5`

= `1/5`

Karan = `2/5 - 2/5`

= 0

Only Mitali is sacrificing her share; therefore, the entire goodwill premium will be credited to her capital account.

2. Revaluation Account:

Losses = Stock reduced by ₹ 10,000 + Machinery overvalued by ₹ 8,500

= ₹ 18,500

Gains = Provision cancelled ₹ 10,000 + Creditors reduced ₹ 3,500

= ₹ 13,500

Net Revaluation Loss = 18,500 − 13,500

= 5,000

3. Investment Adjustment:

Book Value of Investment = ₹ 1,50,000

Market Value (Adjustment vi): ₹ 1,40,000

Decrease in Value: ₹ 10,000

Adjustment:  This ₹ 10,000 is covered using the Investment Fluctuation Fund(₹ 20,000). The remaining ₹ 10,000 is distributed between Mitali and Karan in a 3 : 2 ratio.