Question 49 of 64intermediate🔧 ApplyNumerical4 marks

Arti and Bharti are partners in a firm sharing profits in 3:2 ratio. They admitted Sarthi for 1/4 share in the profits of the firm. Sarthi brings Rs. 50,000 for his capital and Rs. 10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at Rs. 5,000. the new profit sharing ratio between Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in the books of the new firm?

Correct Answer

Working Notes:

  1. Sacrificing Ratio: Old ratio of Arti and Bharti = 3:2. New ratio of Arti, Bharti, Sarthi = 2:1:1. Arti's sacrifice = 3/5 - 2/4 = 3/5 - 1/2 = 1/10. Bharti's sacrifice = 2/5 - 1/4 = 3/20. Sacrificing ratio = (1/10):(3/20) = 2:3.

  2. Distribution of Premium: Premium brought by Sarthi = Rs. 10,000. Arti's share = 2/5 * 10,000 = Rs. 4,000. Bharti's share = 3/5 * 10,000 = Rs. 6,000.

Journal Entries in the books of the firm:

  1. For writing off existing goodwill: Arti's Capital A/c Dr. 3,000 Bharti's Capital A/c Dr. 2,000 To Goodwill A/c 5,000 (Being existing goodwill written off in old ratio 3:2)

  2. For capital brought by Sarthi: Bank A/c Dr. 50,000 To Sarthi's Capital A/c 50,000 (Being capital brought in by new partner)

  3. For premium for goodwill brought by Sarthi: Bank A/c Dr. 10,000 To Premium for Goodwill A/c 10,000 (Being premium for goodwill brought in by new partner)

  4. For distribution of premium to sacrificing partners: Premium for Goodwill A/c Dr. 10,000 To Arti's Capital A/c 4,000 To Bharti's Capital A/c 6,000 (Being premium distributed in sacrificing ratio 2:3)

Exercise: Questions for Practice | Q: 20 | (Page 54)
For More Understanding

Explanation

The solution follows the approach shown in Illustration 17 of the textbook. The existing goodwill is written off in the old profit sharing ratio as per the hint. The sacrificing ratio is calculated to distribute the premium for goodwill brought by the new partner. The journal entries are recorded accordingly.

Solution Steps

  1. Step 1: Calculate sacrificing ratio: Old ratio 3:2, new ratio 2:1:1. Arti's sacrifice = 3/5 - 2/4 = 1/10; Bharti's sacrifice = 2/5 - 1/4 = 3/20; sacrificing ratio = 2:3.

  2. Step 2: Write off existing goodwill of Rs. 5,000 in old ratio 3:2. Debit Arti's Capital A/c Rs. 3,000 and Bharti's Capital A/c Rs. 2,000; credit Goodwill A/c Rs. 5,000.

  3. Step 3: Record capital brought by Sarthi: Debit Bank A/c Rs. 50,000; credit Sarthi's Capital A/c Rs. 50,000.

  4. Step 4: Record premium for goodwill brought by Sarthi: Debit Bank A/c Rs. 10,000; credit Premium for Goodwill A/c Rs. 10,000.

  5. Step 5: Distribute premium to sacrificing partners in ratio 2:3: Debit Premium for Goodwill A/c Rs. 10,000; credit Arti's Capital A/c Rs. 4,000 and Bharti's Capital A/c Rs. 6,000.

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