Question

X and Y are partners with capital of ₹ 13,00,000 and ₹ 20,00,000. They share profits in the ratio of 1 : 2. They admit Z as a partner with `1/5`th share in the profits of the firm. Z brings in ₹ 12,00,000 as his share of capital. The Profit and Loss Account showed a credit balance of ₹ 6,00,000 as on the date of admission of Z. Give the necessary Journal entries to record the goodwill.

Hint: The Balance of P & L will be credited to the Capital Accounts of X and Y and hidden goodwill will be calculated thereafter.

Answer 1

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Profit & Loss A/c   ...Dr.		6,00,000
	To X’s Capital A/c			2,00,000
	To Y’s Capital A/c			4,00,000
	(The credit balance of P & L distributed to old partners)
	Bank A/c   ...Dr.		12,00,000
	To Z’s Capital A/c			12,00,000
	(Z’s capital brought into the firm)
	Goodwill A/c   ...Dr.		9,00,000
	To X’s Capital A/c			3,00,000
	To Y’s Capital A/c			6,00,000
	(Hidden goodwill raised and credited to old partners)

Calculate the adjusted capital of the old partners and the total capital of the firm:

the credit balance in the Profit and Loss account is distributed among the old partners, X and Y, in their old profit-sharing ratio of 1 : 2.

X’s share of P & L = `6,00,000 xx 1/3`

= 2,00,000

Y’s share of P & L = `6,00,000 xx 2/3`

= 4,00,000

The new adjusted capital for each partner is calculated:

X’s adjusted capital = 13,00,000 + 2,00,000

= `15,00,000`

Y’s adjusted capital = 20,00,000 + 4,00,000

= `24,00,000`

Total actual capital of the new firm = X’s adjusted capital + Y’s adjusted capital + Z’s capital

Total actual capital = ₹ 15,00,000 + ₹ 24,00,000 + ₹ 12,00,000

= ₹ 51,00,000

Calculate the hidden goodwill:

The total value of the firm is estimated based on the new partner Z’s capital contribution and his share of profit.

Total value of the firm = `12,00,000 xx 5/1`

= `60,00,000`

The hidden goodwill is the difference between the total estimated value of the firm and the total actual capital.

Hidden Goodwill = ₹ 60,00,000 − ₹ 51,00,000

= ₹ 9,00,000

This goodwill is then distributed to the old partners, X and Y, in their old profit-sharing ratio 1 : 2.

X’s share of goodwill = `9,00,000 xx 1/3`

= 3,00,000

Y’s share of goodwill = `9,00,000 xx 2/3`

= 6,00,000