question_answer

The balance sheet of P and Q who share profits and losses in the ratio of 3 : 2 as at 31st March, 2017 was as under: Balance Sheet as at 31st March, 2017

Liabilities		Amt (Rs.)	Assets	Amt (Rs.)
Sundry Creditors		2,60,000	Cash and Bank	20,000
Bills Payable		70,000	Cash in Hand	10,000
Reserves		70,000	Debtors	40,000
Profit and Loss A/c		40,000	Stock	2,00,000
Capital A/cs			Tangible Fixed Assets	2,60,000
P	96,000		Goodwill	50,000
Q	64,000	1,60,000	Advertisement Expenditure	20,000
		6,00,000		6,00,000

They agreed to take R as a partner from 1st April, 2017 for 1/5th share in the profits of the firm. R brings in Rs. 1,20,000 as his capital. Give the necessary journal entries to record the goodwill.

Answer:

                                                                        JOURNAL

Date	Particulars		LF	Amt (Dr)	Amt (Cr)
2017
Apr 1	P's Capital A/c \[\left( Rs.\,50,000\times 3/5 \right)\]	Dr		30,000
	Q's Capital A/c \[\left( Rs.\,50,000\times 2/5 \right)\]	Dr		20,000
	To Goodwill A/c				50,000
	(Being the existing value of goodwill written-off by debiting the old partners in their old ratio)
	R's Capital A/c \[\left( Rs.\,2,80,000\times 1/5 \right)\]	Dr		56,000
	To P's Capital A/c \[\left( Rs.\,56,000\times 3/5 \right)\]				33,600
	To Q's Capital A/c \[\left( Rs.\,56,000\times 2/5 \right)\]				22,400
	(Being R's share of goodwill adjusted through capital accounts by crediting sacrificing partners in their sacrificing ratio) (WN)

Working Note Calculation of Hidden Goodwill

Net worth (including goodwill) of the new firm on the basis of capital
brought in by R \[\left( Rs\text{ }1,20,000\times 5/1 \right)\]	6,00,000
(-) Net worth (excluding goodwill) of the new firm
(Adjusted capitals of the old partners + the incoming partner's capital)
[96,000 + 64,000 + 70,000 + 40,000 - 20,000 - 50,000 (existing goodwill) + 1,20,000]	(3,20,000)
Value of Hidden Goodwill	Rs. 2,80,000

R's share of goodwill, i.e.\[2,80,000\times \frac{1}{5}=56,000\] to be distributed among old partners in their sacrificing ratio of 3:2.