Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were Rs. 50,000 for 2013, Rs. 60,000 for 2014, Rs. 90,000 for 2015 and Rs. 70,000 for 2016. Ram Lal did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lal’s admission when: a) Goodwill already appears in the books at Rs. 2,02,500. b) Goodwill appears in the books at Rs. 2,500. c) Goodwill appears in the books at Rs. 2,05,000.
Journal Entries (Case a): Goodwill appears at Rs. 2,02,500
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2013 Jan 1 | Mohan Lal's Capital A/c Dr. | 1,21,500 | ||
| Sohan Lal's Capital A/c Dr. | 81,000 | |||
| To Goodwill A/c | 2,02,500 | |||
| (Being existing goodwill written off in old ratio) | ||||
| Ram Lal's Capital A/c Dr. | 50,625 | |||
| To Mohan Lal's Capital A/c | 30,375 | |||
| To Sohan Lal's Capital A/c | 20,250 | |||
| (Being Ram Lal's share of goodwill credited to sacrificing partners) |
Journal Entries (Case b): Goodwill appears at Rs. 2,500
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2013 Jan 1 | Mohan Lal's Capital A/c Dr. | 1,500 | ||
| Sohan Lal's Capital A/c Dr. | 1,000 | |||
| To Goodwill A/c | 2,500 | |||
| (Being existing goodwill written off in old ratio) | ||||
| Ram Lal's Capital A/c Dr. | 50,625 | |||
| To Mohan Lal's Capital A/c | 30,375 | |||
| To Sohan Lal's Capital A/c | 20,250 | |||
| (Being Ram Lal's share of goodwill credited to sacrificing partners) |
Journal Entries (Case c): Goodwill appears at Rs. 2,05,000
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2013 Jan 1 | Mohan Lal's Capital A/c Dr. | 1,23,000 | ||
| Sohan Lal's Capital A/c Dr. | 82,000 | |||
| To Goodwill A/c | 2,05,000 | |||
| (Being existing goodwill written off in old ratio) | ||||
| Ram Lal's Capital A/c Dr. | 50,625 | |||
| To Mohan Lal's Capital A/c | 30,375 | |||
| To Sohan Lal's Capital A/c | 20,250 | |||
| (Being Ram Lal's share of goodwill credited to sacrificing partners) |
Explanation
In all three cases, the first step is to write off the existing goodwill appearing in the books by debiting the old partners' Capital Accounts in their old profit-sharing ratio (3:2). The second step is to record the new partner's (Ram Lal) share of goodwill (Rs. 50,625). Since he did not bring cash, his Capital Account is debited, and the Sacrificing Partners' (Mohan Lal and Sohan Lal) Capital Accounts are credited in the sacrificing ratio (which is assumed to be the old ratio 3:2 as no new ratio is given).