Q.A and B share profits in the ratio 3:2. They admit C for 1/4 share. C brings ₹80,000 as capital and ₹20,000 as premium for goodwill in cash, which is retained permanently in the business. C's share of goodwill is to be credited to A and B in their sacrificing ratio, which is the same as their old ratio (3:2). Pass the necessary journal entries.

The ₹20,000 premium is first recorded through a Premium for Goodwill Account, then distributed to A and B in the 3:2 sacrificing ratio.

Total cash brought in by C = Capital ₹80,000 + Premium for Goodwill ₹20,000 = ₹1,00,000.

Journal Entry 1 — recording the cash received:

Bank A/c Dr ₹1,00,000

To C's Capital A/c ₹80,000

To Premium for Goodwill A/c ₹20,000

Since the sacrificing ratio of A and B is 3:2, the ₹20,000 premium is distributed as:

A's share = 20,000 × 3/5 = ₹12,000

B's share = 20,000 × 2/5 = ₹8,000

Journal Entry 2 — transferring the premium to the old partners in their sacrificing ratio:

Premium for Goodwill A/c Dr ₹20,000

To A's Capital A/c ₹12,000

To B's Capital A/c ₹8,000 …

A frequent error is crediting the ₹20,000 premium to A and B in the NEW ratio, or in a 1:1 equal split, instead of in their SACRIFICING ratio — goodwill compensation …