Question

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

Liabilities	(Rs.)	Assets	(Rs.)
Reserves J's Capital 1,50,000 K's Capital 1,00,000	1,00,000 2,50,000	Cash Other Assets	2,00,000 1,50,000
	3,50,000		3,50,000

$M$ joins the firm from $1^{st}$April, 2018 for a half share in the future profits. He is to pay $Rs.1,00,000$ for goodwill and $Rs.3,00,000$ 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 proportion from the original partners.
(c) If $M$ acquires his share of profit in the ratio $3:1$ from the original partners, ascertain the future profit-sharing ratio of the partners in each case.

Answer 1

(a) M acquires his share of profit in the profit sharing ratios of the partners:

(i) JOURNAL

1. Reserve a/c... Dr. 100000

To J's Capital a/c 60000

To K's Capital a/c 40000

(Being reserve distributed among the partners)

2. Cash a/c... Dr. 400000

To M's Capital a/c 300000

To Premium for Goodwill a/c 100000

(Being capital and premium for goodwill brought in by M)

3. Premium for goodwill a/c.... Dr. 100000

To J's Capital a/c 60000

To K's Capital a/c 40000

(Being premium for goodwill distributed among the partners in the sacrificing ratio)

BALANCE SHEET

LIABILITIES	AMOUNT	ASSETS	AMOUNT
J's Capital	235000	Cash	600000
K's Capital	215000	Other Assets	150000
M's Capital	300000
	750000		750000

Calculation of new profit sharing ratio:

Old ratio= 3:2

M is admitted for 1/2 share in profits

Remaining share= 1/2

J's new ratio= 3/5 * 1/2

= 3/10

K's new ratio= 2/5 * 1/2

= 2/10

New profit sharing ratio= 3:2:5

(b) M acquires his share in equal proportion from the partners

(i) JOURNAL

1. Reserve a/c... Dr. 100000

To J's Capital a/c 60000

To K's Capital a/c 40000

(Being reserve distributed among the partners)

2. Cash a/c... Dr. 400000

To M's Capital a/c 300000

To Premium for Goodwill a/c 100000

(Being capital and premium for goodwill brought in by M)

3. Premium for goodwill a/c.... Dr. 100000

To J's Capital a/c 50000

To K's Capital a/c 50000

(Being premium for goodwill distributed among the partners in the sacrificing ratio of 1:1)

BALANCE SHEET

LIABILITIES	AMOUNT	ASSETS	AMOUNT
J's Capital	235000	Cash	600000
K's Capital	215000	Other assets	150000
M's Capital	300000
	750000		750000

Calculation of new profit sharing ratio:

Old ratio= 3:2

M is admitted for 1/2 share in profits

J's sacrifice= 1/2 * 1/4= 1/8

K's sacrifice= 1/2* 1/4= 1/8

J's new ratio= 3/5-1/8

= 19/40

K's new ratio= 2/5- 1/8

= 11/40

New profit sharing ratio= 19:11:20

(c) M acquires his share in the ratio of 3:1

(i) JOURNAL

1. Reserve a/c... Dr. 100000

To J's Capital a/c 60000

To K's Capital a/c 40000

(Being reserve distributed among the partners)

2. Cash a/c... Dr. 400000

To M's Capital a/c 300000

To Premium for Goodwill a/c 100000

(Being capital and premium for goodwill brought in by M)

3. Premium for goodwill a/c.... Dr. 100000

To J's Capital a/c 75000

To K's Capital a/c 25000

(Being premium for goodwill distributed among the partners in the sacrificing ratio of 3:1)

BALANCE SHEET

LIABILITIES	AMOUNT	ASSETS	AMOUNT
J's Capital	235000	Cash (200000+400000)	600000
K's Capital	215000	Other assets	150000
M's Capital	300000
	750000		750000

Calculation of new profit sharing ratio:

Old ratio= 3:2

M is admitted for 1/2 share in profits

J's sacrifice= 1/2 * 3/4= 3/8

K's sacrifice= 1/2* 1/4= 1/8

J's new ratio= 3/5-3/8

= 9/40

K's new ratio= 2/5- 1/8

= 11/40

New profit sharing ratio= 9:11:20