Question

Bharat and Ishu were partners in a firm sharing profits and losses in the ratio of 4 : 1. Rishab was admitted into partnership for \(\frac{1}{4}\) share in the profits of the firm. Goodwill of the firm was valued at 4,00,000. Rishab brought 2,00,000 as his capital and 60,000 out of his share of goodwill premium in cash. At the time of Rishab’s admission, goodwill was appearing in the books of the firm at 50,000.
Pass necessary journal entries for the above transactions in the books of the firm on Rishab’s admission.

Hint:

When goodwill is already appearing in books at the time of admission, write it off among old partners in the old ratio. Any premium brought in cash is distributed in the sacrificing ratio.

Answer 1

Step 1: Rishab's share in profits = \( \frac{1}{4} \) \(\Rightarrow\) Old partners' combined share = \( \frac{3}{4} \) 
Old ratio of Bharat : Ishu = 4 : 1
Step 2: Firm's goodwill = 4,00,000 \(\Rightarrow\) Rishab's share = \( \frac{1}{4} \times 4,00,000 = 1,00,000 \) 
But Rishab brought only 60,000 in cash for goodwill. Remaining 40,000 is not brought in.
Step 3: Goodwill already appearing in books = 50,000 (to be written off in old ratio 4 : 1) 
Journal Entries: 
1. For bringing capital and goodwill premium: Bank A/c Dr. & 2,60,000 
To Rishab’s Capital A/c & 2,00,000 
To Premium for Goodwill A/c & 60,000 
2. For distributing goodwill premium among old partners in sacrificing ratio (same as old ratio 4 : 1): \[ \text{Bharat = } \frac{4}{5} \times 60,000 = 48,000 \text{Ishu = } \frac{1}{5} \times 60,000 = 12,000 \] Premium for Goodwill A/c Dr. & 60,000 
To Bharat’s Capital A/c & 48,000 
To Ishu’s Capital A/c & 12,000 
3. For writing off existing goodwill of 50,000 in old ratio 4 : 1: \[ \text{Bharat = } \frac{4}{5} \times 50,000 = 40,000 \text{Ishu = } \frac{1}{5} \times 50,000 = 10,000 \] Bharat’s Capital A/c Dr. & 40,000 
Ishu’s Capital A/c Dr. & 10,000 
To Goodwill A/c & 50,000