Question

A and B are partners sharing profit and losses equally with capitals of Rs.7000 each. They admit C as a partner with 1/4th share in the profits of the firm. C brings Rs.8000 as his share of capital. The necessary journal entry to record goodwill be ___________________.

• A. As capital a/c Dr. 5,000
  Bs capital a/c Dr. 5,000
  To Goodwill a/c 10,000
• B. Goodwill a/c Dr. 10,000 To As capital a/c 5,000
  To Bs capital a/c 5,000
• C. C's capital a/c Dr. 10,000
  To As capital a/c 5,000
  To Bs capital a/c 5,000
• D. C's capital a/c Dr. 2,500 To A's capital a/c 1,250 To B's capital a/c 1,250

Answer 1

The correct option is D C's capital a/c Dr. 2,500

To A's capital a/c 1,250

To B's capital a/c 1,250

C brings in capital = Rs. 8,000 for 1/4th share in profits and losses.

Total value of the new firm = 8,000 x 4/1 = Rs. 32,000

Existing capital of the new firm = Rs. 7,000 + 7,000 + 8,000 = Rs. 22,000

Goodwill = Rs. 32,000 - 22,000 = Rs. 10,000

C's share of goodwill = Rs. 10,000 x 1/4 = Rs. 2,500

which will be divided among A & B equally.