Q.A and B are partners sharing profits equally. They admit C for a 1/4th share in profits. The goodwill of the firm is valued at ₹80,000. C brings in ₹1,00,000 as capital and his full share of goodwill in cash. Pass the necessary journal entries.
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Start your 14-day free trial to unlock the full solution →Step 1 — Determine the new ratio and sacrificing ratio
A and B share equally, i.e., 1/2 : 1/2. C is admitted for 1/4th share; the remaining 3/4th is shared by A and B in their old (equal) ratio.
A's new share = 1/2 × 3/4 = 3/8
B's new share = 1/2 × 3/4 = 3/8
C's share = 1/4 = 2/8
New Ratio A : B : C = 3 : 3 : 2
A's sacrifice = 1/2 − 3/8 = 4/8 − 3/8 = 1/8
B's sacrifice = 1/2 − 3/8 = 1/8
Sacrificing Ratio A : B = 1 : 1 (equal, as expected since both old shares and the split of the remainder were both equal)
Step 2 — Compute C's share of goodwill
Goodwill of the firm = ₹80,000
C's share of goodwill = 1/4 × ₹80,000 = ₹20,000
This ₹20,000 is brought in cash, in ADDITION to C's capital of ₹1,00,000, so total cash brought in by C = ₹1,00,000 + ₹20,000 = ₹1,20,000.
Step 3 — Journal Entries
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash A/c Dr. | 1,20,000 | |
| To C's Capital A/c | 1,00,000 | |
| To Premium for Goodwill A/c | 20,000 | |
| (Being capital and share of goodwill brought in cash by C) | ||
| Premium for Goodwill A/c Dr. | 20,000 |
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