Question

X and Y are partners sharing profits and losses in the ratio of 6: 9. They agree to admit Z into partnership who brings 1,00,000 in cash for his capital and goodwill. Goodwill is valued at `1 1/2` year's purchase of the last 4 years average profits, which were ₹ 30,000; ₹ 8,000 (loss); ₹ 20,000 and ₹ 38,000 respectively. X, Y and Z will share future profits in equal proportion. Pass entries.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Bank/Cash A/c   ...Dr.		1,00,000
	To Z's Capital A/c			90,000
	To Premium for Goodwill A/c			10,000
	(Being total cash brought in by Z for capital and his 1/3rd share of goodwill)
2.	Premium for Goodwill A/c   ...Dr.		10,000
	To X's Capital A/c			2,000
	To Y's Capital A/c			8,000
	(Being premium for goodwill distributed between X and Y in their sacrificing ratio of 1 : 4)

Working note:

1. Calculation of Goodwill and Capital

To record the incoming cash correctly, we must first break down Z's total ₹ 1,00,000 contribution into capital and premium for goodwill.

Total Profit of 4 years = ₹ 30,000 − ₹ 28,000 (loss) + ₹ 220,000 + ₹ 38,000 = ₹ 80,000

Average Profit = `(80,000)/4 = 20,000`

Value of Firm's Goodwill = `1 1/2` years purchase × 20,000 = 1.5 × 20,000 = 30,000

Z's Share of Goodwill = Since the future profit ratio is equal (1 : 1 : 1), Z's share is `1/3`.

Z's Goodwill = `30,000 xx 1/3 = 10,000`

Z's Capital Amount = 

2's Capital Amount = Total Cash Brought − Z's Goodwill Share = 1,00,000 − 10,000 = 90,000

2. Calculation of Sacrificing Ratio

Premium for goodwill is distributed to the old partners based on what they sacrifice to the new partner.

Old Ratio of X and Y = 6 : 9 (or simplified to 2 : 3)

New Ratio of X, Y, and Z = 1 : 1 : 1

Sacrifice = Old Share − New Share

X's Sacrifice = `2/5 - 1/3 = (6 - 5)/15 = 1/15`

Y's Sacrifice = `3/5 - 1/3 = (9 - 5)/15 = 4/15`

The Sacrificing Ratio between X and Y is 1 : 4.

The ₹10,000 premium for goodwill brought by Z is divided between X and Y in their sacrificing ratio 1 : 4:

X's share = `10,000 xx 1/5 = 2,000`

Y's share = `10,000 xx 4/5 = 8,000`