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Question
Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in the profits of the firm. Ajay brings ₹ 5,00,000 as his share of capital. The value of the total assets of the firm was ₹ 15,00,000 and outside liabilities were valued at ₹ 5,00,000 on that date. Give the necessary Journal entry to record goodwill at the time of Ajay's admission. Also show your workings.
Solution
| Journal Entry | ||||
| Date | Particulars | L.F. | Debit Amount (Rs) | Credit Amount (Rs) |
| Ajay’s Capital A/c ...(Dr.) | 2,00,000 | |||
| To Asin’s Capital A/c | 1,00,000 | |||
| To Shreyas’s Capital A/c | 1,00,000 | |||
| (Being Ajay’s share of goodwill distributed among the old partners in their sacrificing ratio 1:1.) | ||||
Calculation of Goodwill brought in by Ajay:
Value of firm’s goodwill = Capitalised value of the firm – Net worth
Capitalised Value of the Firm = Share of Ajay's Capital x Reciprocal of Ajay
= 5,00,000 × `5/1`
= Rs. 25,00,000
Net worth of the new firm = Total assets − Outside Liabilities + Ajay's Capital
= 15,00,000 - 5,00,000 + 5,00,000
= Rs. 15,00,000
Value of firm's goodwill = Capitalised value of firm − Net worth of the next firm
= 25,00,000 − 15,00,000
= Rs. 10,00,000
Ajay's share of goodwill = 10,00,000 x `1/5`
= Rs. 2,00,000.
WN-1: Calculation of sacrificing ratio:
Old Ratio = 1 : 1 or `1/2 : 1/2`
Ajay's share = `1/5`
Let total profit = 1
Remaining Profit = `1/1 - 1/5`
= `(5 - 1)/5`
= `4/5`
New Ratio = Old Ratio × Remaining Profit
Asin's = `1/2 xx 4/5 = 4/10`
Shreyas = `1/2 xx 4/5 = 4/10`
Ajay = `1/5` or `2/10`
New Ratio = `4/10 : 4/10 : 2/10` or 4 : 4 : 2 or 2 : 2 : 1
Sacrifice Ratio = Old Ratio − New Ratio
Asin = `1/2 - 2/5 = (5 - 4)/10 = 1/10`
Shreyas = `1/2 - 2/5 = (5 - 4)/10 = 1/10`
Sacrifice Ratio = `1/10 : 1/10` or 1 : 1
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| Liabilities |
Amount(₹) |
Assets | Amount(₹) |
| Capitals : |
|
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||
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| Year | (₹) | |
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- Danish's capital contribution.
