Q.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 ₹20,000 for his capital and ₹7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at ₹40,000. Show necessary journal entries in the books of X, Y and Z?
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Start your 14-day free trial to unlock the full solution →Z is admitted for 1/8 share, bringing ₹20,000 capital and ₹7,000 goodwill premium. Existing goodwill of ₹40,000 is written off. Journal entries record goodwill treatment, capital, and premium distribution.
Concept and Accounting Treatment
When a new partner is admitted, two key adjustments are needed for goodwill:
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Existing goodwill in books – The old goodwill (₹40,000) is already recorded. Since it was generated by past efforts of X and Y, it must be written off by debiting the old partners' capital accounts in their old profit-sharing ratio (4:3). This removes the asset from the books.
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Goodwill brought by new partner – Z brings ₹7,000 as his share of goodwill premium. This is not an asset; it's compensation to X and Y for sacrificing their share of future profits. The premium is credited to the sacrificing partners in their sacrificing ratio. Since Z gets 1/8 share from X and Y equally (unless stated otherwise, we assume old partners sacrifice in their old ratio), the sacrificing ratio is 4:3.
The journal entries follow the double-entry rule: every debit has a corresponding credit. For goodwill write-off, we debit old partners' capital accounts (reducing their capital) and credit goodwill account (reducing the asset). For premium brought in, we debit cash/bank and credit the old partners' capital accounts.
Solution: Journal Entries in the Books of the Firm
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Entry 1: Writing off existing goodwill | ||||
| X's Capital A/c Dr. | 22,857 | |||
| Y's Capital A/c Dr. | 17,143 | |||
| To Goodwill A/c | 40,000 | |||
| (Being existing goodwill written off among old partners in old ratio 4:3) | ||||
| Entry 2: Recording Z's capital and goodwill premium | ||||
| Bank A/c Dr. | 27,000 | |||
| To Z's Capital A/c | 20,000 | |||
| To Premium for Goodwill A/c | 7,000 | |||
| (Being capital and goodwill premium brought by Z) | ||||
| Entry 3: Distributing goodwill premium to old partners | ||||
| Premium for Goodwill A/c Dr. | 7,000 | |||
| To X's Capital A/c | 4,000 | |||
| To Y's Capital A/c | 3,000 | |||
| (Being goodwill premium credited to sacrificing partners in ratio 4:3) |
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