Question

Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3 : 2 ratio. They admitted Ram Lal for $\frac{1}{4}$ share on 1.1.2003. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of the last 4 years which were Rs.50,000 for 2003, Rs. 60,000 for 2004, Rs. 90,000 for 2005 and Rs. 70,000 for 2006. Ram Lal did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lal's admission when

(a) Goodwill already appears in the books at Rs. 2,02,500.

(b) Goodwill appears in the books at Rs.2,500.

(c) Goodwill appears in the books at Rs. 2,05,000.

Answer 1

In case new partner does not bring his share of goodwill in cash in full or part, it is adjusted from his capital account.

$\text{Journal Entries}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F}& \text{Amt.(Cr)}& \text{Amt.(Cr)}\\ \text{a.(i)}& \text{Mohan Lal's Capital A/c}& Dr& & 1,21,500& \\ & \text{Sohan Lal's Capital A/c}& Dr& & 81,000& \\ & \text{To Goodwill A/c}& & & & \text{2,02,500}\\ & \text{(Existing goodwill written off among old partners in old ratio)}& & & & \\ & \underset{–}{}& & & & \\ \text{(ii)}& \text{Ram Lal's Capital A/c}& Dr& & 50,625& \\ & \text{To Mohan Lal's Capital A/c}& & & & \text{30,375}\\ & \text{To Sohan Lal's Capital A/c}& & & & \text{20,250}\\ & \text{(Share of goodwill of new partner not paid in cash adjusted from}& & & & \\ & \text{his capital and distributed among old partners in sacrificing ratio.)}& & & & \\ & \underset{–}{}& & & & \\ \text{b.(i)}& \text{Mohan Lal's Capital A/c}& Dr& & 1,500& \\ & \text{Sohan Lal's Capital A/c}& Dr& & 1,000& \\ & \text{To Goodwill A/c}& & & & \text{2,500}\\ & \text{(Existing goodwill written off among old partners in old ratio)}& & & & \\ & \underset{–}{}& & & & \\ \text{(ii)}& \text{Ram Lal's Capital A/c}& Dr& & 50,625& \\ & \text{To Mohan Lal's Capital A/c}& & & & \text{30,375}\\ & v\text{To Sohan Lal's Capital A/c}& & & & \text{20,250}\\ & \text{(Share of goodwill of new partner not paid in cash adjusted from his}& & & & \\ & \text{capital and distributed among old partners in sacrificing ratio)}& & & & \\ & \underset{–}{}& & & & \\ \text{c(i)}& \text{Mohan Lal's Capital A/c}& Dr& & 1,23,000& \\ & \text{Sohan Lal's Capital A/c}& Dr& & 82,000& \\ & \text{To Goodwill A/c}& & & & \text{2,05,000}\\ & \text{(Existing goodwill written off among old partners in old profit sharing ratio)}& & & & \\ & \underset{–}{}& & & & \\ \text{(ii)}& \text{Ram Lal's Capital A/c}& Dr& & 50,625& \\ & \text{To Mohan Lal's Capital A/c}& & & & \text{30,375}\\ & \text{To Sohan Lal's Capital A/c}& & & & \text{20,250}\\ & \text{(Share of goodwill of new partner not paid in cash adjusted from his capital}& & & & \\ & \text{and distributed among old partners in sacrificing ratio)}& & & & \end{array}$

Working Note :

Average profit = $\frac{50,000+60,000+90,000+70,000}{4}=\frac{2,70,000}{4}=67,500$

Goodwill of firm = 67,500 $\times$ 3 = 2,02,500

Share of new partner = $2,02,500\times \frac{1}{4}=50,625$