Question

Aditi and Parul are partners in a firm with capitals of Rs 35.000 each. They shared profits and losses in the ratio of 3 : 1.

On 1st April, 2017, they admit Chanda into their partnership with l/5th share in the profits. Chanda brings in Rs 40,000 as her capital and her share of goodwill in cash. Her share of goodwill is calculated on the basis of her capital contribution and her share of profits in the firm.

At the time of Chanda ‘s admission : 

(a) The firm had a Workman Compensation Reserve of Rs 60.000 against which there was a claim of Rs 20.000. 

(b) Creditors of Rs 8.000 were paid by Aditi privately for which she is not to be reimbursed. 

(c) There was no change in the value of other assets and liabilities. 

You are required to. on the date of Chanda’s admission : 

(i) Calculate the good will of the firm. (Show the workings clearly). 

(ii) Pass the necessary journal entries to record the above transactions.

Answer 1

(i)

Working Notes:

Assuming the capital of Chanda = Rs 35,000

(equal to Capital of both existing partners)

Calculation of Goodwill

Old Profit Sharing Ratio of Aditi and Parul = 3 : 1

New Profit Sharing Ratio = 3/5 : 1/5 = 1/5

= 3 : 1 = 1

Sacrifice of Aditi = 3/4 - 3/5 = 3/20

Sacrifice of Parul = 1/4 - 1/5 = 1/20

Gain of Chanda = 1/5

The amount of goodwill of Chanda = Rs 5,000

Total Goodwill of the firm = 5/1 × 5,000 Rs 25,000

(ii)