Question

Anshul and Parul are partners sharing profits in the ratio of 3 : 2. They admit Payal as partner for 1/4th share in profits on 1st April, 2019. Payal brings ₹ 5,00,000 as capital and her share of goodwill by cheque. It was agreed to value goodwill at three years' purchase of average profit of last four years.

Profits for the last four years ended 31st March, were	₹
2015-16	4,00,000
2016-17	5,00,000
2017-18	6,00,000
2018-19	7,00,000

Additional Information:
1. Closing Stock for the year ended 31st March, 2018 was overvalued by ₹ 50,000.
​2. ₹ 1,00,000 should be charged annually to cover management cost.
​Pass necessary Journal entries on Payal's admission.

Answer 1

In the books of the Anshul, Parul and Payal Journal
Date	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019
April 01	Bank A/c	Dr.		8,37,500
	To Payal’s Capital A/c				5,00,000
	To Premium for Goodwill A/c				3,37,500
	(Being capital and goodwill paid by the new partner)
2019	Premium for Goodwill A/c	Dr.		3,37,500
April 01	To Anshul’s Capital A/c (3,37,500 × 3/5)				2,02,500
	To Parul’s Capital A/c (3,37,500 × 2/5)				1,35,000
	(Being premium for goodwill adjusted in sacrificing ratio)

Working Notes:

Particulars	Year	31st Mar., 2016	31st Mar., 2017	31st Mar., 2018	31st Mar., 2019
Profits for the year		4,00,000	5,00,000	6,00,000	7,00,000
Less: Overvaluation of Closing Stock				50,000
Add: Overvaluation of Opening Stock					50,000
Less: Annual Charge for Management Cost		1,00,000	1,00,000	1,00,000	1,00,000
Normal Profits		3,00,000	4,00,000	4,50,000	6,50,000

Average Profits = ₹4,50,000 Goodwill = Average Profits × No. of years of Purchase = ₹ (4,50,000 ×3) = ₹ 13,50,000