Question

$B$ and $C$ are in partnership sharing profits and losses as $3:1$. They admit $D$ into the firm, $D$ paying a premium of $Rs.15,000$ for $1/3^{rd}$ share of the profits. As between themselves, $B$ and $C$ agree to share the future profits and losses equally. Draft Journal entries showing appropriation of the premium money.

Answer 1

JOURNAL

1. Cash a/c.... Dr. 15000

To Premium for Goodwill a/c 15000

(Being premium for goodwill brought in by D)

2. Premium for Goodwill a/c... Dr. 15000

To B's Capital a/c 15000

(Being premium brought in by D transferred to B's capital)

3. C's Capital a/c... Dr. 3750

To B's Capital a/c 3750

(Being goodwill charged from C due to his gain in profit sharing)

Working Note:

1. Calculation of sacrificing ratio:

D is admitted for 1/3rd share

Remaining share= 1-[1/3]

= 2/3

B and C agree to share profits equally in future.

Hence, B's new share= 2/3 * 1/2 = 1/3

C's new share= 2/3 * 1/2 = 1/3

B's sacrifice= 3/4- 1/3

= 5/12

C's gain= 1/4- 1/3

= -1/12

2. D brings in 15000 as goodwill for 1/3rd share in profit.

Therefore total goodwill of the firm= 15000 * 3/1

= 45000

C's share of goodwill= 45000 * 1/12

= 3750