A, B, and C were partners in a firm sharing profits in the ratio of 2:1:2. Their respective fixed capitals were A ₹7,00,000; B ₹4,50,000 and C ₹6,00,000. On March 31st, 2025, they admitted Divya as a new partner for 1/5th share in the profits. Their new profit sharing ratio was 1:2:1:1. Divya brought ₹5,00,000 as her capital and the necessary amount for her share of goodwill premium.
Pass necessary journal entries for the above transactions in the books of the firm on Divya's admission.
Answer (2)
In this scenario, we are looking at the admission of a new partner, Divya, into an existing partnership firm consisting of partners A, B, and C. Let’s break down the necessary steps and calculations to pass the journal entries for Divya’s admission.
Step 1: Evaluate Existing Profit Sharing Ratio
The existing profit-sharing ratio among A, B, and C is 2:1:2.
Step 2: Calculation of Divya’s Share of Goodwill
When Divya is admitted, she acquires a 1/5th share in the profit. To determine the hidden goodwill in the firm, we use the capital brought in by Divya and compare it to her share of the capital.
The total capital after Divya's admission would be the sum of existing partners' capitals and Divya's capital:
A's capital = ₹7,00,000
B's capital = ₹4,50,000
C's capital = ₹6,00,000
Divya's capital = ₹5,00,000
Therefore, total capital after admission = ₹22,50,000
Divya's proportionate capital based on the new profit-sharing ratio (1:2:1:1) = Total Capital * Divya's Share
Divya's Proportionate Capital = 5 1 × ₹22 , 50 , 000 = ₹4 , 50 , 000
Since Divya actually brings in ₹5,00,000, the excess amount contributes to goodwill:
Hidden Goodwill = ₹5,00,000 - ₹4,50,000 = ₹50,000
Step 3: Journal Entry for Goodwill
The additional amount of ₹50,000 over the proportionate capital is regarded as premium for goodwill. The premium for goodwill is divided between A and C, since B's share increases (from 1 to 2 parts out of a total of 5 parts in the new ratio), B does not receive any premium.
A and C share the premium equally (since their previous ratio was 2:2), so they receive ₹25,000 each.
The entry would be:
Premium for Goodwill A/c Dr. ₹50,000 (Divya’s contribution for goodwill)
To A's Current A/c ₹25,000 (Share of goodwill credited to A)
To C's Current A/c ₹25,000 (Share of goodwill credited to C)
This journal entry records the distribution of the premium for goodwill among the existing partners."}
Divya is admitted as a new partner in the firm with a 1/5th profit share and brings in ₹5,00,000 as capital. The excess amount of ₹50,000 over her proportionate capital is recognized as goodwill, which is shared between the existing partners A and C. Journal entries are made to reflect this goodwill premium and the partners' accounts.
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