Question

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

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
	Ajay’s Capital A/c	Dr.		2,00,000
	To Asin’s Capital A/c				1,00,000
	To Shreya’s Capital A/c				1,00,000
	(Ajay’s share of goodwill distributed among the old partners in their sacrificing ratio 1:1.)

Working Notes:

Calculation of Goodwill brought in by Ajay

Value of firm’s goodwill = Capitalised value of the firm – Net worth

$$\begin{gathered} \mathrm{Capitalised}\mathrm{value}\mathrm{of}\mathrm{the}\mathrm{firm}=\mathrm{Share}\mathrm{of}\mathrm{Ajay}\text{'}\mathrm{s}\mathrm{capital}\times \mathrm{Reciprocal}\mathrm{of}\mathrm{Ajay}\text{'}\mathrm{s}\mathrm{share} \\ =5,00,000\times \frac{5}{1}=\mathrm{Rs}25,00,000 \\ \mathrm{Net}\mathrm{worth}\mathrm{of}\mathrm{the}\mathrm{new}\mathrm{firm}=\mathrm{Total}\mathrm{assets}-\mathrm{Outside}\mathrm{liabilities}+\mathrm{Ajay}\text{'}\mathrm{s}\mathrm{capital} \\ =15,00,000-5,00,000+5,00,000=\mathrm{Rs}15,00,000 \\ \mathrm{Value}\mathrm{of}\mathrm{firm}\text{'}\mathrm{s}\mathrm{goodwill}=\mathrm{Capitalised}\mathrm{value}\mathrm{of}\mathrm{firm}-\mathrm{Net}\mathrm{worth}\mathrm{of}\mathrm{the}\mathrm{new}\mathrm{firm} \\ =25,00,000-15,00,000=\mathrm{Rs}10,00,000 \\ \mathrm{Ajay}\text{'}\mathrm{s}\mathrm{share}\mathrm{of}\mathrm{goodwill}=10,00,000\times \frac{1}{5}=\mathrm{Rs}2,00,000 \end{gathered}$$