Question

A and B are partners sharing profit & losses in the ratio of 3:2. They admit C as a partner who is unable to bring goodwill in cash, but pays Rs. 16,000 as his capital. A Goodwill Account is raised in the books of the firm. Goodwill of the firm is valued at two year’s purchase of average three year’s profits. The profits for the three years were Rs. 10,000, Rs. 8,000 and Rs. 9,000. The net profit sharing ratio will be 5:2:2. The partners decided to write o goodwill after C’s admission. Make the Journal Entries, write up the Capital A/c. of partners & Goodwill calculation.

Answer 1

Journal

Capital A/c

Calculation of Goodwill Average profit = \(\frac{10,000+8,000+9,000} {3}\) = 9,000 

Goodwill = Average profit × No. of years purchase = 9,000 × 2 = 18,000

C’s share of Goodwill = 18,000 × 2/9 = 4,000 

Sacrificing ratio = Old ratio – New ratio 

Old ratio = 3:2 

New ratio = 5:2:2 

Sacrifice of A = 3/5 – 5/9 = 27 – 25 / 45 = 2/45 

Sacrifice of B = 2/5 – 2/9 = 18 – 10 / 45 = 8/45 

Sacrificing ratio of A and B = 2 : 8 = 1 : 4