Q.M and N are partners sharing profits in the ratio of 3:2. They admit O for a 1/5th share in profits. The goodwill of the firm is valued at ₹50,000. O is unable to bring in his share of goodwill in cash, though he brings in his agreed capital separately. Pass the necessary journal entry to record the goodwill adjustment.
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Start your 14-day free trial to unlock the full solution →Step 1 — Determine the new ratio and sacrificing ratio
O is admitted for 1/5th share; remaining 4/5th is shared by M and N in their old ratio of 3:2 (nothing else is stated).
M's new share = 3/5 × 4/5 = 12/25
N's new share = 2/5 × 4/5 = 8/25
O's share = 1/5 = 5/25
New Ratio M : N : O = 12 : 8 : 5
M's sacrifice = 3/5 − 12/25 = 15/25 − 12/25 = 3/25
N's sacrifice = 2/5 − 8/25 = 10/25 − 8/25 = 2/25
Sacrificing Ratio M : N = 3 : 2
Step 2 — Compute O's share of goodwill
Goodwill of the firm = ₹50,000
O's share of goodwill = 1/5 × ₹50,000 = ₹10,000
Since O does not bring this in cash, it must be adjusted purely through the capital accounts: O's Capital Account is debited with ₹10,000, and M's and N's Capital Accounts are credited with their shares of this amount in the sacrificing ratio of 3:2.
M's share = 3/5 × ₹10,000 = ₹6,000
N's share = 2/5 × ₹10,000 = ₹4,000
Step 3 — Journal Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| O's Capital A/c Dr. | 10,000 | |
| To M's Capital A/c | 6,000 | |
| To N's Capital A/c | 4,000 |
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