Question

Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in the profits of the firm. Ajay bring Rs.5,00,000 as his share of capital. The value of the total assets of the firm was Rs.15,00,000 and outside liabilities were valued at Rs.5,00,000 on that date. Give necessary Journal entry to record goodwill at the time of Ajay’s admission. Also show your workings. 

Answer 1

Working Notes :

Calculation of Goodwill brought in by Ajay

Value of firm's goodwill = Capitalised value of the firm - Net worth

Capitalised value of the firm = share of ajay's capital reciprocal of ajay's share

Net worth of the new firm= Total assets -outside liabilities + ajay's capital 

=15,000 -5,00,000+5,00,000 =Rs.15,00,000

Value of firm's goodwill = Capitalised value of firm - Net worth of the new firm

= 25,00,000 - 15,00,00 =Rs. 10,00,000