Question

Haridas and Sudheer Raj are partners in a firm sharing profits in the ratio 3:2. On 1.04.2004, they admit Ramdas into the firm for a 5^th share in profits. Ramdas contributed the following in respect of his capital and goodwill.

Stock	Rs. 10,000
Furniture	Rs. 20,000
Plant	Rs. 30,000
Building	Rs. 40,000

Goodwill has been valued at 2 years purchase of super profit of past 3 years.

1.4.2002	Profit Rs. 18,000
1.4.2003	Profit Rs. 25,000
1.4.2004	Profit Rs. 32,000

Capital employed is Rs. 2,00,000 and normal rate of return is 10%. 

Give journal entries in respect of:

1. Capital contributed by Ramdas.

2. Goodwill brought in by him.

Answer 1

Super profit = (Actual profit) Average profit – Normal profit 

Average profit =\(\cfrac{\text {Total profit}}{\text {No. of years}}\) = \(\cfrac{18,000+25,000+32,000}{4}\)

= \(\cfrac{75000}{3}\) = 25000

Normal Profit = Capital employed × Normal rate of return = 200000 × \(\frac{10}{100}\) = 20000 

Super Profit = 25000 – 20000 = 5000 

Value of Goodwill = Super profit × No. of years purchase = 5000 × 2 = 10000 

Ramdas’s (New Partner) Share of goodwill = Total goodwill of firm × Ramdas’ share

= 1000 x \(\frac{1}{5} = 2000\)