Question

Bhuwan and Shivam were partners in a firm sharing profits in the ratio of 3 : 2. Their capitals were ₹ 50,000 and ₹ 75,000 respectively. They admitted Atul on 1st April, 2018 as a new partner for 1/4th share in future profits. Atul brought ₹ 75,000 as his capital. Calculate the value of goodwill of the firm and record necessary Journal entries for the above transactions on Atul's admission.

Answer 1

The journal entries are as follows:

Journal
Date 2018	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
April 1	Bank/Cash A/c	Dr.		75,000
	To Atul’s Capital A/c				75,000
	(for capital brought on Atul’s admission)
April 1	Atul’s Capital A/c	Dr.		25,000
	To Bhuwan’s Capital A/c				15,000
	To Shivam’s Capital A/c				10,000
	(for goodwill distributed in sacrificing ratio of 3:2)

Here, Atul is entered into partnership for 1/4^th share in future profits. He contributes Rs 75,000 towards his share of capital.

Taking Atul’s capital as the base, we can calculate the firm’s capital as
Firm's Capital = New Partner's Capital × Reciprocal of his share
i.e., = 75,000 × 4 = Rs 3,00,000
However, the total capital as at that date is Rs 2,00,000 (i.e. 50,000 + 75,000 + 75,000)
So, the difference of 1,00,000 is hidden goodwill.
Atul’s share in goodwill = 1/4^th of 1,00,000 = Rs 25,000

Note: In this case, as no information is provided for the share sacrificed by the old partners, so it is assumed that the old partners are sacrificing in their old profit share.