Question

Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with $\frac{1}{5}$ share in the profits of the firm. Ajay brings Rs 5,00,000 as his share of capital. The value of the total assets of the firm was Rs 15,00,000 and outside liabilities were valued at Rs 5,00,000 on that date. Give the necessary Journal entry to record good will at the time of Ajay's admission. Also show your workings.

Answer 1

Working Notes:

Calculation of hidden goodwill:

(A) Net worth of the new firm on the basis of capital brought in by Ajay

$(Rs5,00,000\times \frac{5}{1})=Rs25,00,000$

(B) Less: Net worth (excluding goodwill) of new firm

=(Adjusted old capital of old partners + Incoming partner's capital)

=[(Rs 15,00,000 - Rs 5,00,000) + Rs 5,00,000] =Rs 15,00,000

Value of firm's goodwill = A - B

=Rs 25,00,000 - Rs 15,00,000 = Rs 10,00,000

(C) Ajay's share of goodwill $=Rs10,00,000\times \frac{1}{5}=Rs2,00,000$

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F.}& \text{Debit}& \text{Credit}\\ & & & \left(\text{Rs}\right)& \left(\text{Rs}\right)\\ & \text{Ajay's Capital A/c}& & 2,00,000& \\ & \text{To Asin's Capital A/c}& & & 1,00,000\\ & \text{To Shreya's Capital A/c}& & & 1,00,000\\ & (\text{Being Ajay's share of goodwill adjusted through Capital}& & & \\ & \text{Accounts})& & & \end{array}$