Question 14 of 64intermediate🔧 ApplyNumerical4 marks

Benu and Sunil are partners sharing profits in the ratio of 3:2 on April 1, 2017. Ina was admitted for 1/4 share who paid Rs. 2,00,000 as capital and Rs. 1,00,000 for premium for goodwill in cash. At the time of admission, general reserve amounting to Rs. 1,20,000 and profit and loss account amounting to Rs. 60,000 appeared on the liability side of the balance sheet. Required: Record necessary journal entries to record the above transactions.

Correct Answer

Journal Entries in the books of Benu and Sunil

DateParticularsL.F.Debit Amount (Rs.)Credit Amount (Rs.)
2017 April 1General Reserve A/c Dr.1,20,000
Profit and Loss A/c Dr.60,000
To Benu's Capital A/c1,08,000
To Sunil's Capital A/c72,000
(Being accumulated profits distributed between old partners in their old ratio)
April 1Bank A/c Dr.3,00,000
To Ina's Capital A/c2,00,000
To Premium for Goodwill A/c1,00,000
(Being capital and goodwill brought in by the new partner)
April 1Premium for Goodwill A/c Dr.1,00,000
To Benu's Capital A/c60,000
To Sunil's Capital A/c40,000
(Being goodwill premium distributed among old partners in sacrificing ratio)

Working Notes:

  1. Distribution of General Reserve and P&L: Total Accumulated Profits = Rs. 1,20,000 (Reserve) + Rs. 60,000 (P&L) = Rs. 1,80,000. Benu's Share = 1,80,000×3000 \times 3/5 = Rs. 1,08,000. Sunil's Share = 1,80,000×2000 \times 2/5 = Rs. 72,000.

  2. Distribution of Goodwill Premium: Benu's Share = 1,00,000×3000 \times 3/5 = Rs. 60,000. Sunil's Share = 1,00,000×2000 \times 2/5 = Rs. 40,000.

Exercise: Do It Yourself | Q: 2 | (Page 36)
For More Understanding

Explanation

The solution follows standard accounting procedures for partnership admission. First, accumulated profits (General Reserve and P&L) appearing on the liability side are distributed to the old partners (Benu and Sunil) in their old profit-sharing ratio (3:2) because these profits were earned before the new partner's admission. Second, the capital and goodwill brought in by Ina are recorded by debiting the Bank Account. Finally, the premium for goodwill is credited to the old partners' capital accounts in their sacrificing ratio. In the absence of a new ratio specified, the sacrificing ratio is assumed to be the old ratio (3:2).

Solution Steps

  1. Step 1: Calculate the share of General Reserve and Profit & Loss for old partners. Total amount = Rs. 1,20,000 + Rs. 60,000 = Rs. 1,80,000. Benu's share = 1,80,000 * 3/5 = Rs. 1,08,000. Sunil's share = 1,80,000 * 2/5 = Rs. 72,000.

  2. Step 2: Record the journal entry for distribution of accumulated profits by debiting Reserve and P&L accounts and crediting partners' capital accounts.

  3. Step 3: Record the receipt of capital and goodwill. Total cash received = Rs. 2,00,000 + Rs. 1,00,000 = Rs. 3,00,000. Debit Bank A/c, Credit Ina's Capital A/c and Premium for Goodwill A/c.

  4. Step 4: Calculate the distribution of goodwill premium. Benu's share = 1,00,000 * 3/5 = Rs. 60,000. Sunil's share = 1,00,000 * 2/5 = Rs. 40,000.

  5. Step 5: Record the journal entry for goodwill premium distribution by debiting Premium for Goodwill A/c and crediting old partners' capital accounts.

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