Question 52 of 64intermediate🔧 ApplyNumerical4 marks

Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring his share of goodwill premium in cash. The Goodwill of the firm was valued at Rs. 80,000 on Kanwar’s admission. Record necessary journal entry for goodwill on Kanwar’s admission.

Correct Answer

Journal Entries in the books of the firm:

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
Kanwar's Capital A/c Dr.20,000
To Premium for Goodwill A/c20,000
(Being share of goodwill debited to new partner's capital account as he could not bring it in cash)
Premium for Goodwill A/c Dr.20,000
To Amar's Capital A/c15,000
To Samar's Capital A/c5,000
(Being premium for goodwill credited to sacrificing partners in their sacrificing ratio)

Working Notes:

  1. Calculation of Kanwar's Share of Goodwill: Value of Goodwill = Rs. 80,000 Kanwar's Share = 1/4 Kanwar's Share of Goodwill = 80,000×1000 \times 1/4 = Rs. 20,000

  2. Calculation of Sacrificing Ratio: Old Ratio (Amar : Samar) = 3 : 1 Kanwar is admitted for 1/4 share. Assuming the new partner acquires his share from the old partners in their old ratio (since no specific agreement is mentioned), the sacrificing ratio remains the same as the old ratio. Sacrificing Ratio = 3 : 1

  3. Distribution of Goodwill: Amar's Share = 20,000 × (3/4) = Rs. 15,000 Samar's Share = 20,000 × (1/4) = Rs. 5,000

Exercise: Questions for Practice | Q: 23 | (Page 55)
For More Understanding

Explanation

When a new partner (Kanwar) cannot bring his share of goodwill (premium) in cash, the amount is adjusted through his Capital Account. The first entry debits the new partner's capital account and credits the Premium for Goodwill Account to record the liability. The second entry distributes this premium among the old partners (Amar and Samar) in their sacrificing ratio. Since the new profit-sharing ratio is not specified, it is assumed that the partners sacrifice in their old ratio (3:1).

Solution Steps

  1. Step 1: Calculate the new partner's share of goodwill. Kanwar's Share = Total Goodwill × Kanwar's Profit Share = Rs. 80,000×1000 \times 1/4 = Rs. 20,000.

  2. Step 2: Determine the Sacrificing Ratio. Since the new ratio is not given, the sacrificing ratio is assumed to be the Old Ratio, which is 3:1 for Amar and Samar.

  3. Step 3: Record the adjustment entry. Debit Kanwar's Capital A/c with Rs. 20,000 (his share of goodwill).

  4. Step 4: Credit the sacrificing partners' Capital Accounts. Credit Amar with Rs. 15,000 (20,000×3000 \times 3/4) and Samar with Rs. 5,000 (20,000×1000 \times 1/4).

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