A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in profits. C will bring in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at Rs. 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?
Journal Entries in the Books of A and B
1. Bank A/c Dr. 35,000 To C's Capital A/c 30,000 To Premium for Goodwill A/c 5,000 (Being capital and goodwill premium brought in by C)
2. Premium for Goodwill A/c Dr. 5,000 To A's Capital A/c 2,000 To B's Capital A/c 3,000 (Being goodwill premium credited to sacrificing partners in sacrificing ratio)
3. A's Capital A/c Dr. 2,000 B's Capital A/c Dr. 3,000 To Bank A/c 5,000 (Being goodwill premium withdrawn by old partners)
Explanation
The question requires calculating C's share of goodwill and distributing it to sacrificing partners. C's share is 1/4, so his goodwill premium = 1/4 × Rs. 20,000 = Rs. 5,000. The sacrificing ratio is calculated as: A's sacrifice = 3/5 - 2/4 = 1/10; B's sacrifice = 2/5 - 1/4 = 3/20. Converting to common denominator: A's sacrifice = 2/20, B's sacrifice = 3/20. Thus, sacrificing ratio = 2:3. The premium of Rs. 5,000 is distributed as A's share = 2/,000 = Rs. 2,000 and B's share = 3/,000 = Rs. 3,000. Since A and B withdraw their share, their capital accounts are debited and Bank is credited.
Solution Steps
Step 1: Calculate C's share of goodwill premium = 1/4 × Rs. 20,000 = Rs. 5,000
Step 2: Calculate sacrificing ratio - A's sacrifice = 3/5 - 2/4 = 1/10; B's sacrifice = 2/5 - 1/4 = 3/20; Sacrificing ratio = 2:3
Step 3: Distribute goodwill premium in sacrificing ratio - A's share = 2/,000 = Rs. 2,000; B's share = 3/,000 = Rs. 3,000
Step 4: Pass journal entries for capital and goodwill brought in, distribution of premium, and withdrawal by old partners