Question

On the admission of Rao, it was agreed that the goodwill of Murty and Shah should be valued at $Rs.30,000$. Rao is to get $1/4^{th}$ share of profits. Previously Murty and Shah shared profits in the ratio of $3:2$. Rao cannot bring in any cash. Give Journal entries in the books of Murty and Shah when: (a) there is no Goodwill Account and (b) Goodwill appears in the books at $Rs.7,500$.

Answer 1

Working Note:

1. Calculation of Rao's share of goodwill= 30000 * 1/4= 7500

2. Adjustment of Rao's share of goodwill:

Murty's share= 7500 * 3/5= 4500

Shah's share= 7500 * 2/5= 3000

(a) When there is no Goodwill account:

JOURNAL

1. Rao's Capital a/c.... Dr. 7500

To Murty's Capital a/c 4500

To Shah's Capital a/c 3000

(Being Rao's share of goodwill charged to his capital and distributed among the partners in the ratio of 3:2)

(b) Goodwill in the books appears at 7500:

JOURNAL

1. Murty's Capital a/c.... Dr. 4500

Shah's Capital a/c..... Dr. 3000

To Goodwill a/c 7500

(Being goodwill written off in the ratio of 3:2)

2. Rao's Capital a/c.... Dr. 7500

To Murty's Capital a/c 4500

To Shah's Capital a/c 3000

(Being Rao's share of goodwill charged to his capital and distributed among the partners in the ratio of 3:2)