Question 50 Chapter 5 of +2-A
50. Mr. A commenced business with a capital of 2,50,000 on 1st April, 2013.
During the five years ended 31st March, 2018, the following profits and losses were made:
31st March, 2014−Loss 5,000
31st March, 2015−Profit 13,000
31st March, 2016−Profit 17,000
31st March, 2017−Profit 20,000
31st March, 2018−Profit 25,000
During this period he had drawn 40,000 for his personal use. On 1st April, 2018, he admitted B into partnership on the following terms:
B to bring for his half share in the business, capital equal to A's Capital on 31st March, 2018 and to pay for the one-half share of goodwill of the business, on the basis of three times the average profit of the last five years. Prepare the statement showing what amount B should invest to become a partner and pass entries to record the transactions relating to admission.
| Date | Particulars |
L.F. | Debit | Credit | |
|---|---|---|---|---|---|
| Cash A/c | Dr | 3,01,000 | |||
| To B’s Capital A/c | 2,80,000 | ||||
| To Premium for Goodwill A/c | 21,000 | ||||
| (Being B brought for his share of Capital and Goodwill) | |||||
| Premium for Goodwill A/c | Dr | 21,000 | |||
| To A’s Capital A/c | 21,000 | ||||
| (Being B share of goodwill transferred to A’s Capital Account) | |||||
Working Note: -
| Capital as on April 01, 2013 | 2,50,000 |
| Less: Loss for the year 2014 | - 5,000 |
| Add: Profit for the year 2015 | 13,000 |
| Add: Profit for the year 2016 | 17,000 |
| Add: Profit for the year 2017 | 20,000 |
| Add: Profit for the year 2018 | 25,000 |
| 3,20,000 | |
| Less: Drawings | - 40,000 |
| Capital as on March 31, 2018 | 2,80,000 |
| Average Profit | = | Total Profit for past given years |
| Number of years |
| Average Profit | = | - 5,000 + 13,000 + 17,000 + 20,000 + 25,000 |
| 5 |
| Average Profit | = | 70,000 |
| 5 | ||
| = | 14,000 |
Number of years’ purchase= 3
| Goodwill | = | Average Profit X | Number of years’ purchase |
| = | 14,000 X | 3 | |
| = | 42,000 |
| Old Ratio of E and F | = | 3 : 1 |
| New Ratio of E, F, and G | = | 1 : 1 : 1 |
Sacrificing Share = Old Ratio - New Ratio
| Total Firm’s Goodwill | = | 42,000 |
| Total Firm’s Goodwill | = | 42,000 | X | 1 |
| 2 | ||||
| = | 21,000 |
Only two partner in the partnership Firm. one is gaining and other sacrificing. So the whole share of goodwill bring by the gaining partner will be transfer to the sacrificing partner.
| Share of Goodwill Transfer to A | = | B’s Share of Goodwill |
| = | 21,000 |
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Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
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