Question

Mr. $A$ commenced business with a capital $Rs.2,50,000$ on $1^{st}$April,2013. During the five years ended ${31}^{st}$March,2018, the following profits and losses were made:
${31}^{st}$March,2014 $=$ Loss $Rs.5,000$
${31}^{st}$March,2015 $=$ Profit $Rs.13,000$
${31}^{st}$March,2016 $=$ Profit $Rs.17,000$
${31}^{st}$March,2017 $=$ Profit $Rs.20,000$
${31}^{st}$March,2018 $=$ Profit $Rs.25,000$
During this period he had drawn $Rs.40,000$ for his personal use. On $1^{st}$April,2018, he admitted $B$ into partnership on the following terms:
$B$ to bring for his half share in the business, capital equal to $A^{\prime }s$ Capital on ${31}^{st}$March,2018 and to pay for the one-half share of goodwill of the business, on the basis of three times the average profit of the last five years. Prepare the statement showing what amount $B$ should invest to become a partner and pass entries to record the transaction relating to admission.

Answer 1

Capital as on April,1 2013 Less: Loss on 31st March, 2014 Add: Profit on 31st March, 2015 Add: Profit on 31st March, 2016 Add: Profit on 31st March, 2017 Add: Profit on 31st March, 2018	250000 (5000) 13000 17000 20000 25000
Less: Drawings	320000 (40000)
Capital as on March 31st, 2018	280000

Calculation of Goodwill:

Average profit= [-5000+13000+17000+20000+25000]/5

= 14000

Goodwill= 14000 * 3

= 42000

B's share of Goodwill= 42000 * 1/2= 21000

B's Capital= A's Capital= 280000

JOURNAL

1. Cash a/c..... Dr. 301000

To B's Capital a/c 280000

To Premium for Goodwill a/c 21000

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

2. Premium for Goodwill a/c... Dr. 21000

To A's Capital a/c 21000

(Being premium for goodwill transferred to A's Capital account)