Question

P and S are partners sharing profits in the ratio of 3 : 2. Their books showed goodwill at ₹ 20,000, R is admitted with 1/5th share which he acquires equally from P and S. R brings ₹ 20,000 as his capital and ₹ 10,000 as his share of goodwill. Profit at the end of the year were of the amount of ₹ 1,00,000. You are required to give journal entries to carry out the above arrangement.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	P's Capital A/c   ...Dr.		12,000
	S's Capital A/c   ...Dr.		8,000
	To Goodwill A/c			20,000
	(Being existing book value of goodwill written off in old ratio)
2.	Bank/Cash A/c   ...Dr.		30,000
	To R's Capital A/c			20,000
	To Premium for Goodwill A/c			10,000
	(Being capital and premium for goodwill brought in by R)
3.	Premium for Goodwill A/c   ...Dr.		10,000
	To P's Capital A/c			5,000
	To S's Capital A/c			5,000
	(Being premium for goodwill distributed in sacrificing ratio of 1 : 1)
4.	Profit & Loss Appropriation A/c   ...Dr.		1,00,000
	To P's Capital A/c			50,000
	To S's Capital A/c			30,000
	To R's Capital A/c			20,000
	(Being net profit distributed in the new profit sharing ratio)

Working note:

A. Treatment of Existing Goodwill

The goodwill already appearing in the books (₹ 20,000) must be written off between the old partners (P and S) in their Old Profit Sharing Ratio (3 : 2):

P's Share to write off: `20,000 xx 3/5 = 12,000`

S's Share to write off: `20,000 xx 2/5 = 8,000`

B. Sacrificing Ratio

R is admitted for a `1/5` share, which he acquires equally from P and S.

Sacrifice by P: `1/5 xx 1/2 = 1/10`

Sacrifice by S: `1/5 xx 1/2 = 1/10`

Since both partners sacrifice an equal fraction, the Sacrificing Ratio (P : S) is 1 : 1.

Distribution of R's Premium for Goodwill (₹ 10,000): Divided equally as ₹ 5,000 each to P and S.

C. New Profit Sharing Ratio

Formula: New Share = Old Share − Sacrificed Share

P's New Share: `3/5 - 1/10 = (6 - 1)/10 = 5/10`

S's New Share: `2/5 - 1/10 = (4 - 1)/10 = 3/10`

R's New Share: `1/5 = 2/10`

New Ratio (P : S : R) = 5 : 3 : 2

D. Distribution of Year-End Profit (₹ 1,00,000)

The net profit is distributed among all three partners in their New Ratio (5 : 3 : 2):

P's Share: `1,00,000 xx 5/10 = 50,000`

S's Share: ` 1,00,000 xx 3/10 = 30,000`

R's Share: `1,00,000 xx 2/10 = 20,000`