Question

P and Q are in partnership sharing profits in the ratio of 5 : 3. They admit R into the firm, R paying a premium of ₹ 1,00,000 for 1/4 share of the profits. As between themselves, P and Q agree to share future profits and losses equally. Pass entries.

Answer 1

Journal Entries in the Books of the Firm
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Bank/Cash A/c   ...Dr.		1,00,000
	To Premium for Goodwill A/c			1,00,000
	(Being premium for goodwill brought in cash by R for his 1/4th share)
2.	Premium for Goodwill A/c   ...Dr.		1,00,000
	To P's Capital A/c			1,00,000
	(Being premium for goodwill transferred entirely to P's capital account since P is the only sacrificing partner)

Working note:

To distribute the premium for goodwill, we must determine how much each old partner sacrificed based on the change in their profit shares.

Old Shares:

P's old share = `5/8`

Q's old share = `3/8`

New Shares:

R joins the firm for a `1/4` share. The remaining share left for P and Q is:

remaining share = `1 - 1/4 = 3/4`

As agreed, P and Q will share this remaining future profit equally (1 : 1):

P's new share = `3/4 xx 1/2 = 3/8`

Q's new share = `3/4 xx 1/2 = 3/8`

R's new share = `1/4 = 2/8`

(The new profit-sharing ratio among P, Q, and R is 3 : 3 : 2.

Sacrifice or Gain (Old Share − New Share)

P's sacrifice = `5/8 - 3/8 = 2/8` (Sacrifice)

Q's sacrifice = `3/8 - 3/8 = 0` (No Sacrifice/No Gain)

Because Q's share remains exactly the same, P is the sole sacrificing partner. The entire premium for goodwill brought by R will be credited to P's Capital Account.