Question

X and Y share profits and losses in the ratio of 3 : 2. They admit Z as a partner who pays ₹ 72,000 as premium for goodwill for `1/4`th share in the future profits of the firm.

Pass Journal entries appropriating the premium money and show the new profit sharing ratio in each of the following cases:

1. if he acquires his share of profits in the original ratio of existing partners.
2. if he acquires his share of profits in equal proportions from the existing partners.
3. if he acquires his share in the ratio of 2 : 3 from the existing partners.
4. if he acquires his share of profits as `7/32` th from X and `1/32` th from Y.

Answer 1

Journal Entries
Date	Particulars	L.F	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		72,000
	To Premium for Goodwill A/c			72,000
	(Premium for goodwill brought in Cash)

i.

Journal Entries
Date	Particulars	L.F	Debit (₹)	Credit (₹)
	Premium for Goodwill A/c   ...Dr.		72,000
	To X’s Capital A/c			43,200
	To Y’s Capital A/c			28,800
	(Premium brought in by Z credited to X and Y in the sacrificing ratio of 3 : 2)

ii.

Journal Entries
Date	Particulars	L.F	Debit (₹)	Credit (₹)
	Premium for Goodwill A/c   ...Dr.		72,000
	To X’s Capital A/c			36,000
	To Y’s Capital A/c			36,000
	(Premium brought in by Z credited to X and Y in the sacrificing ratio of 1 : 1)

Working Note:

Z acquires = `1/2 xx 1/4`

= `1/8`

iii.

Journal Entries
Date	Particulars	L.F	Debit (₹)	Credit (₹)
	Premium for Goodwill A/c   ...Dr.		72,000
	To X’s Capital A/c			28,800
	To Y’s Capital A/c			43,200
	(Premium brought in by Z credited to X and Y in the sacrificing ratio of 2 : 3)

iv.

Journal Entries
Date	Particulars	L.F	Debit (₹)	Credit (₹)
	Premium for Goodwill A/c   ...Dr.		72,000
	To X’s Capital A/c			63,000
	To Y’s Capital A/c			9,000
	(Premium brought in by Z credited to X and Y in the sacrificing ratio of 7 : 1)

Calculation of new profit sharing ratio:

First Case:

Z = `1/4`

= `1 - 1/4`

= `3/4`

X’s new share = `3/5 xx 3/4`

= `9/20`

Y’s new share = `2/5 xx 3/4`

= `6/20`

Z’s new share = `1/4`

`(1 xx 5)/(4 xx 5)`

= `5/20`

New Ratio of X, Y, and Z = `9/20 : 6/20 : 5/20` or 9 : 6 : 5.

Second Case:

X’s new share = `3/5 - 1/8`

= `(3 xx 8)/(5 xx 8) - (1 xx 5)/(8 xx 5)`

= `24/40 - 5/40`

= `(24 - 5)/40`

= `19/40`

Y’s new share = `2/5 xx 1/8`

`(2 xx 8)/(5 xx 8) - (1 xx 5)/(8 xx 5)`

= `16/40 - 5/40`

= `(16 - 5)/40`

= `11/40`

Z’s new share = `1/4`

`(1 xx 10)/(4 xx 10)`

= `10/40`

New Ratio of X, Y, and Z = `19/40 : 11/40 : 10/40` or 19 : 11 : 10.

Third Case:

Z talces his share from X = `2/5 xx 1/4`

= `2/20`

X’s new share = `3/5 - 2/20`

= `(3 xx 4)/(5 xx 4) - 2/20`

= `12/20 - 2/20`

= `(12 - 2)/20`

= `10/20`

= `2/4`

Z talces his share from Y = `3/5 xx 1/4`

= `3/20`

Y’s new share = `2/5 - 3/20`

= `(2 xx 4)/(5 xx 4) - 3/20`

= `8/20 - 3/20`

= `(5 - 3)/20`

= `5/20`

= `1/4`

Z’s new share = `1/4`

`(1 xx 5)/(4 xx 5)`

= `5/20`

= `1/4`

New Ratio of X, Y, and Z = `2/4 : 1/4 : 1/4` or 2 : 1 : 1.

Fourth Case:

X’s new share = `3/5 - 7/32`

= `(3 xx 32)/(5 xx 32) - (7 xx 5)/(32 xx 5)`

= `96/160 - 35/160`

= `(96 - 35)/160`

= `61/160`

Y’s new share = `2/5 - 1/32`

= `(2 xx 32)/(5 xx 32) - (1 xx 5)/(32 xx 5)`

= `64/160 - 5/160`

= `(64 - 5)/160`

= `59/160`

Z’s new share = `1/4`

`(1 xx 40)/(4 xx 40)`

= `40/160`

New Ratio of X, Y, and Z = `61/160 : 59/160 : 40/160` or 61 : 59 : 40.