Question

George and Henry are partners sharing profits in the ratio of 3 : 2. They decided to admit David as a new partner and to share future profits and losses equally.

David brings in Rs 50,000 as his capital. Goodwill of the firm is valued at Rs 60,000. Record the necessary journal entries :

(a) When no goodwill appears in the books

(b) When goodwill appears at Rs 50,000, and

(c) When goodwill appears at Rs 1,00,000.

Answer 1

(a) When no goodwill appears in the books:

JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Dr. (Rs)}& \text{Cr. (Rs)}\\ & \text{Bank A/c}Dr.& & 50,000& \\ & \text{To David's Capital A/c}& & & 50,000\\ & \text{(The amount of Capital brought in cash by David on his}& & & \\ & \text{admission)}& & & \\ & \underset{–}{}& & & \\ & \text{David's Capital A/c}Dr.& & 20,000& \\ & \text{To George's Capital A/c}& & & 16,000\\ & \text{To Henry's Capital A/c}& & & 4,000\\ & \text{(David's share of goodwill i.e., 1/3rd of Rs 60,000 credited}& & & \\ & \text{to George and Henry in sacrificing ratio of 4:1)}& & & \end{array}$

(b) When goodwill appears at Rs 50,000:

In such a case, the following entry be passed first of all, in addition to the ratio entries mentioned in (a) above:

JOURNAL.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Dr. (Rs)}& \text{Cr. (Rs)}\\ & \text{George's Capital A/c}Dr.& & 30,000& \\ & \text{Henry's Capital A/c}Dr.& & 20,000& \\ & \text{To Goodwill A/c}& & & 50,000\\ & \text{(Goodwill already appearing in the books written}& & & \\ & \text{off in old ratio)}& & & \end{array}$

(c) When goodwill appears at Rs 1,00,000:

In such a case, the following entry will be passed first of all, in addition to the two entries mentioned in (a) above:

JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F}& \text{Dr. (Rs)}& \text{Cr. (Rs)}\\ & \text{George's Capital A/c}Dr.& & 60,000& \\ & \text{Henry's Capital A/c}Dr.& & 40,000& \\ & \text{To Goodwill A/c}& & & 1,00,000\\ & \text{(Goodwill already appearing in the books written}& & & \\ & \text{off in old ratio)}& & & \end{array}$

Calculation of Sacrificing Ratio:

$\text{George}=\frac{3}{5}-\frac{1}{3}=\frac{9-5}{15}=\frac{4}{15}$

$\text{Henry}=\frac{2}{5}-\frac{1}{3}=\frac{6-5}{15}=\frac{1}{15}$

Hence, Sacrificing Ratio is 4 : 1.