Question

Abhay and Beena are partners in a firm. They admit Chetan as a partner with 1/4th share in the profits of the firm. Chetan brings Rs 2,00,000 as his share of capital. The value of the total assets of the firm is Rs 5,40,000 and outside liabilities are valued at Rs 1,00,000 on that date. Give the necessary entry to record goodwill at the time of Chetan's admission. Also show your working notes.

Answer 1

In this question, hidden goodwill is to be calculated.

Combined Capital of Abhay and Beena will be equal to the net worth of the business.

Net Worth = Sundry Assets - Outside Liabilities

= Rs 5,40,000 - Rs 1,00,000 = Rs 4,40,000

Hence, combined capital of Abhay and Beena is Rs 4,40,000.

CALCULATION OF HIDDEN GOODWILL

Based on Chetan's share, total capital of the new firm ought to be:

$\begin{array}{ccc}Rs2,00,000\times \frac{4}{1}& =& 8,00,000\\ \text{Less : Net worth or Combined Capital of Abhay and Beena}& 4,40,000& \\ \text{Capital of Chetan}& \underset{–}{2,00,0000}& 6,40,000\\ \text{Value of Firm's Goodwill}& & \underset{–}{\overline{1,60,000}}\end{array}$

Chetan's Share of Goodwill $=Rs1,60,000\times \frac{1}{4}=Rs40,000.$

JOURNAL ENTRIES

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Dr.(Rs)}& \text{Cr.(Rs)}\\ & \text{Bank A/c}Dr.& & 2,00,000& \\ & \text{To Chetan's Capital A/c}& & & 2,00,000\\ & \text{(Cash brought in by Chetan as his capital)}& & & \\ & \underset{–}{}& & & \\ & \text{Chetan's Capital A/c}Dr.& & 40,000& \\ & \text{To Abhay's Capital A/c}& & & 20,000\\ & \text{To Beena's Capital A/c}& & & 20,000\\ & \text{(Credit given for goodwill to Abhay and Beena}& & & \\ & \text{on Chetan's admission.)}& & & \end{array}$