Question 50 of 64intermediate🔧 ApplyNumerical4 marks

X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z?

Correct Answer

Journal Entries in the books of X, Y and Z

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
X's Capital A/c Dr.22,857
Y's Capital A/c Dr.17,143
To Goodwill A/c40,000
(Being existing goodwill written off in old ratio 4:3)
Bank A/c Dr.27,000
To Z's Capital A/c20,000
To Premium for Goodwill A/c7,000
(Being capital and goodwill brought in by Z)
Premium for Goodwill A/c Dr.7,000
To X's Capital A/c4,000
To Y's Capital A/c3,000
(Being goodwill premium distributed in sacrificing ratio 4:3)

Working Notes:

1. Writing off Existing Goodwill: Existing goodwill of Rs. 40,000 is written off in old ratio (4:3)

  • X's share = 40,000×4000 \times 4/7 = Rs. 22,857
  • Y's share = 40,000×3000 \times 3/7 = Rs. 17,143

2. Sacrificing Ratio: Since Z is admitted for 1/8 share and no information about acquisition is given, sacrificing ratio remains same as old ratio i.e., 4:3.

3. Distribution of Premium: Premium of Rs. 7,000 distributed in sacrificing ratio (4:3)

  • X's share = 7,000×4000 \times 4/7 = Rs. 4,000
  • Y's share = 7,000×3000 \times 3/7 = Rs. 3,000
Exercise: Questions for Practice | Q: 21 | (Page 54)
For More Understanding

Explanation

According to the textbook context, when goodwill already appears in the books at the time of admission, it must be written off in the old profit sharing ratio among old partners. The premium for goodwill brought by the new partner is then distributed to the sacrificing partners in the sacrificing ratio. In this case, since Z acquires his share from the existing partners without specific mention, the sacrificing ratio remains the same as the old ratio (4:3).

Solution Steps

  1. Step 1: Write off existing goodwill of Rs. 40,000 in old ratio 4:3 between X and Y

  2. Step 2: Record capital Rs. 20,000 and premium Rs. 7,000 brought by Z through Bank A/c

  3. Step 3: Distribute premium Rs. 7,000 to X and Y in sacrificing ratio 4:3

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