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Question
Kabir and Farid are partners in firm sharing profits in the ratio of 3: 1 on 1-4-2019 they admitted Manik into partnership for 1/4th share in the profits of the firm. Manik brought his share of goodwill premium in cash. Goodwill of the firm was valued on the basis of 2 years purchase of the last three years' average profits. The profits of last three years were:
| 2016-17 | ₹ 90,000 |
| 2017-18 | ₹ 1,30,000 |
| 2018-19 | ₹ 86,000 |
During the year 2018-19, there was a loss of ₹ 20,000 due to fire which was not accounted for while calculating the profit. Calculate the value of goodwill and pass the necessary journal entries to the treatment of goodwill.
Solution
In the books of Kabir and Farid
Journal
| Date | Particulars | L.F. | Debit Amount (₹) | Credit Amount (₹) | |
|
2019 |
|
|
|
|
|
|
Apr.01 |
Premium for Goodwill A/c |
Dr. | 51,000 | ||
|
|
To Kabir’s Capital A/c |
38,250 | |||
|
To Farid’s Capital A/c |
12,750 | ||||
|
(Being share of goodwill credited to the existing partners in 3: 1) |
| Working Notes: | |
| Average Profit for the last three years | = `(90,000 + 1,30,000 + 86,000)/3` = ₹ 1,02,000 |
| Goodwill of the firm | = Average Profits of the last three years × Number of Years’ Purchase = ₹ (1,02,000 × 2) = ₹ 2,04,000 |
| Manik’s share of goodwil | = ₹ (2,04,000 × ¼) = ₹ 51,000 |
| Sacrificing Ratio among the partners will be same as old ratio | = 3 : 1 |
Note: Loss due to fire has not been accounted for thus; the profits for the year 2018-19 are normal profits only.
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