Question

$A$ and $B$, carrying on business in partnership and sharing profits and losses in the ratio of $3:2$, require a partner, when their Balance Sheet stood as:

Liabilities	(Rs.)	Assets	(Rs.)
Creditors A's Capital 51,450 B's Capital 36,750	11,800 88,200	Cash Stock Debtors Furniture Machinery	1,500 28,000 19,500 2,500 48,500
	1,00,000		1,00,000

They admit $C$ into partnership and give him $1/8^{th}$ share in the future profits on the following terms:
(a) Goodwill of the firm be valued at twice the average of the last three years profits which amounted to $Rs.21,000;Rs.24,000$ and $Rs.25,560$.
(b) $C$ is to bring in cash for the amount of his share of goodwill.
(c) $C$ is to bring in cash $Rs.15,000$ as his capital.
Pass Journal entries recording these transactions, draw out the Balance sheet of the new firm and state new profit sharing ratio.

Answer 1

(i) Calculation of new profit sharing ratio:

A's old share= 3/5

B's old share= 2/5

C is admitted for 1/8th share.

Remaining share= 1-[1/8]

= 7/8

A's new share= 3/5 * 7/8 = 21/40

B's new share= 2/5 * 7/8 = 14/40

C's share= 1/8 * 5/5= 5/40

New profit sharing ratio= 21:14:5

(ii) JOURNAL

1. Cash a/c... Dr. 20880

To C's Capital a/c 15000

To Premium for Goodwill a/c 5880

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

2. Premium for Goodwill a/c... Dr. 5880

To A's Capital a/c 3528

To B's Capital a/c 2352

(Being premium for goodwill distributed among the partners in the ratio of 3:2)

PARTNER'S CAPITAL A/C
Dr. Cr.

Particulars	A	B	C	Particulars	A	B	C
				By Balance b/d	51450	36750	Nil
				By Cash a/c	Nil	Nil	15000
To Balance c/d	54978	39102	15000	By Premium for Goodwill a/c	3528	2352	Nil
Total	54978	39102	15000	Total	54978	39102	15000

(iii) BALANCE SHEET

( after admission of C)

Liabilities	Amount (in Rs.)	Assets	Amount (in Rs.)
		Cash (1500+20880)	22380
Capital - A - B - C	54978 39102 15000	Debtors	19500
Creditors	11800	Stock	28000
		Furniture	2500
		Machinery	48500
Total	120880	Total	120880

Working Note:

1. Calculation of goodwill:

Average profit= [21000+24000+25560]/3

= 23520

Goodwill= 23520 * 2

= 47040

2. C's share of Goodwill= 47040 * 1/8

= 5880

Distribution among partners:

A's share= 5880 * 3/5= 3528

B's share= 5880 * 2/5= 2352