Question

$X$ and $Y$ are partners with capitals of $Rs.50,000$ each. They admit $Z$ as a partner with $1/4^{th}$ share in the profits of the firm. $Z$ brings in $Rs.80,000$ as his share of capital. The Profit and Loss Account showed a credit balance of $Rs.40,000$ as on date of admission of $Z$.
Give necessary Journal entries to record the goodwill.

Answer 1

Working Note:

Calculation of hidden goodwill:

Total Capital of the firm after admission= 50000+50000+80000+40000

= 220000

Total capital of the firm based on Z's capital= 80000 * 4/1

= 320000

Hidden goodwill= 320000-220000= 100000

Z's share of Goodwill= 100000 * 1/4= 25000

JOURNAL

1. Cash a/c..... Dr. 80000

To Z's Capital a/c 80000

(Being capital brought in by Z)

2. Z's Capital a/c... Dr. 25000

To X's Capital a/c 12500

To Y's Capital a/c 12500

(Being Z's share of goodwill distributed among the partners in the ratio of 1:1)