Question

Balance Sheet of J and K who share profits in the ratio of 3 : 2 is as follows:

BALANCE SHEET
as at 31st March, 2018

Liabilities		₹	Assets	₹
Reserve		1,00,000	Cash	2,00,000
J's Capital	1,50,000		Other Assets	1,50,000
K's Capital	1,00,000	2,50,000
		3,50,000		3,50,000

M joins the firm from 1st April, 2018 for a half share in the future profits . He is to pay ₹ 1,00,000 for goodwill and ₹ 3,00,000 for capital. Draft the journal entries and prepare Balance Sheet in each of the following cases:
(a) If M acquires his share of profit from the firm in the profit -sharing ratios of the partners.
(b) If M acquires his share of profits from the firm in equal proportions from the original partners .
(c) If M acquires his share of profit in the ratio of 3 : 1 from the original partners, ascertain the future profit-sharing ratio of the partners in each case.

Answer 1

(a) If M acquires his share of profit from the firm in the original ratios of the partners.

Journal
Date 2018	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
April 1	Cash A/c	Dr.		4,00,000
	To M’s Capital A/c				3,00,000
	To Premium for Goodwill A/c				1,00,000
	(M brought capital and his of goodwill in cash)
April 1	Premium for Goodwill A/c	Dr.		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(Premium for Goodwill distributed between J and K in their Sacrificing Ratio)
April 1	Reserve A/c	Dr.		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(Reserve distribution between M and J in their old ratio)

Partners’ Capital Accounts
Dr.							Cr.
Particulars	J	K	M	Particulars	J	K	M
				Balance b/d	1,50,000	1,00,000
				Cash			3,00,000
				Premium for Goodwill	60,000	40,000
Balance c/d	2,70,000	1,80,000	3,00,000	Reserve	60,000	40,000
	2,70,000	1,80,000	3,00,000		2,70,000	1,80,000	3,00,000

Balance Sheet as on April 01, 2018 after M’s admission
Liabilities	Amount Rs	Assets	Amount Rs
		Cash (2,00,000 + 4,00,000)	6,00,000
J’s Capital	2,70,000	Other Assets	1,50,000
K’s Capital	1,80,000
M’s Capital	3,00,000
	7,50,000		7,50,000

Calculation of Future (New) Profit Sharing Ratio

M is admitted for share of profit
Let the combined share of all partners after admission of M be = 1
Combined share of J and K after M’s admission = 1 − M’s share



Working Notes-

WN1
Distribution of Premium for Goodwill (in sacrificing ratio)


WN2
Distribution of General Reserve (in old ratio)
J will get
K will get

(b) If M acquires his share of profit from the firm in equal proportions from the original partners.

Journal
Date 2018	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
April 1	Reserve A/c	Dr.		1,00,000
	To J’s Capital A/c				60,000
	To K’s Capital A/c				40,000
	(Reserve distributed between J and K in old ratio)
April 1	Cash A/c	Dr.		4,00,000
	To M’s Capital A/c				3,00,000
	To J’s Premium for Goodwill A/c				1,00,000
	(M brought capital and his share of goodwill)
April 1	Premium for Goodwill A/c	Dr.		1,00,000
	To J’s Capital A/c				50,000
	To K’s Capital A/c				50,000
	(Premium for Goodwill distributed between J and K in sacrificing Raito i.e 1:1)

Partners’ Capital Accounts
Dr.							Cr.
Particulars	J	K	M	Particulars	J	K	M
				Balance b/d	1,50,000	1,00,000
				Cash			3,00,000
				Premium for Goodwill	50,000	50,000
Balance c/d	2,60,000	1,90,000	3,00,000	Reserve	60,000	40,000
	2,60,000	1,90,000	3,00,000		2,60,000	1,90,000	3,00,000

Balance Sheet as on April 01, 2018 after M’s admission
Liabilities	Amount Rs	Assets	Amount Rs
J’s Capital	2,60,000	Cash (2,00,000 + 4,00,000)	6,00,000
K’s Capital	1,90,000	Others Assets	1,50,000
M’s Capital	3,00,000
	7,50,000		7,50,000

Calculation of future (new) profit sharing ratio

M is admitted for share of profit
J and K each will sacrifice in favour of




Working Notes:

WN1
Distribution of Premium for Goodwill (in Sacrificing ratio)
J and K each will get

WN2
Distribution of General Reserve (in old ratio)
J will get
K will get

(c) If M acquires his share of profit in the ratio of 3:1 from the original partners

Journal
Date 2018	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
April 1	Reserve A/c	Dr.		1,00,000
	To J’s Capital A/c				60,000
	(Reserve distributed between J and K at the time of M’s admission)
April 1	Cash A/c	Dr.		4,00,000
	To M’s Capital A/c				3,00,000
	To Premium for Goodwill A/c				1,00,000
	(M brought Capital his share of Goodwill)
April 1	Premium for Goodwill A/c	Dr.		1,00,000
	To J’s Capital A/c				75,000
	To K’s Capital A/c				25,000
	(Premium for Goodwill distributed between J and K in their sacrificing ratio i.e 3:1)

Partners’ Capital Accounts
Dr.							Cr.
Particulars	J	K	M	Particulars	J	K	M
				Balance b/d	1,50,000	1,00,000
				Cash			3,00,000
				Premium for Goodwill	75,000	25,000
				Reserve	60,000	40,000
Balance c/d	2,85,000	1,65,000	3,00,000
	2,85,000	1,65,000	3,00,000		2,85,000	1,65,000	3,00,000

Balance Sheet as on April 01, 2018 after M’s admission
Liabilities	Amount Rs	Assets	Amount Rs
J’s Capital	2,85,000	Cash (2,00,000 + 4,00,000)	6,00,000
K’s Capital	1,65,000	Other Assets	1,50,000
M’s Capital	3,00,000
	7,50,000		7,50,000

Calculation of Future (New) Profit Sharing Ratio

M is admitted for share of profit

New Ratio = Old Ratio − Sacrificing Ratio



Working Notes:

WN1
Distribution of Premium for Goodwill (in sacrificing ratio)


WN2
Distribution of Reserve (in old ratio)