Question

$A$ and $B$ are partners sharing profits and losses in the proportion of $7:5$. They agree to admit $C$, their Manager, into partnership who is to get $1/6^{th}$ share in the business. $C$ brings in $Rs.10,000$ for his capital and $Rs.3,600$ for the $1/6^{th}$ share of goodwill which he acquire $1/{24}^{th}$ from $A$ and $1/8^{th}$ from $B$. The profits for the first year of the new partnership amount to $Rs.24,000$. Pass necessary journal entries in connection with $C^{\prime }s$ admission and apportion the profits between the partners.

Answer 1

JOURNAL

1. Cash a/c... Dr. 13600

To C's Capital a/c 10000

To Premium for Goodwill a/c 3600

(Being capital and premium for goodwill brought in by C)

2. Premium for Goodwill a/c.. Dr. 3600

To A's Capital a/c 900

To B's Capital a/c 2700

(Being premium for goodwill brought in by C distributed among the partners in the ratio of 1:3)

3. Profit and Loss Appropriation a/c.. Dr. 24000

To A's Capital a/c 13000

To B's Capital a/c 7000

To C's Capital a/c 4000

(Being profit after C's admission distributed among the partners in the ratio of 13:7:4)

Working Note:

1. Calculation of sacrificing ratio:

A's sacrifice= 1/24

B's sacrifice= 1/8

Hence, Sacrificing ratio= 1:3

2. Distribution of premium for goodwill in sacrificing ratio:

A's share= 3600 * 1/4= 900

B's share= 3600 * 3/4= 2700

3. Calculation of new Profit sharing ratio:

A's new share= 7/12- 1/24= 13/24

B's new share= 5/12- 1/8= 7/24

C's share= 1/4

New profit sharing ratio= 13:7:4

4. Distribution of profit in new profit sharing ratio:

A's share= 24000 * 13/24= 13000

B's share= 24000 * 7/24= 7000

C's share= 24000 * 4/24= 4000