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, 2019

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, 2019 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	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019 Apr.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)
Apr.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)
Apr.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, 2019 after M’s admission
Liabilities	Amount (₹)	Assets	Amount (₹)
		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	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019
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, 2019 after M’s admission
Liabilities	Amount (₹)	Assets	Amount (₹)
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	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
2019 Apr.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, 2019 after M’s admission
Liabilities	Amount (₹)	Assets	Amount (₹)
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)