A and B are partners in a firm sharing profits in the ratio 2 : 1. C is admitted into the firm with 1/4 share in profits. He will bring in ₹30,000 as capital and capitals of A and B are to be adjusted in the profit sharing ratio. The balance sheet of A and B as on March 31, 2017 (before C's admission ) was as under :

Balance Sheet of A and B as at March 31,2017

Other terms of agreement are as under :

1. C will bring in ₹12,000 as his share of goodwill.

2. Building was valued at ₹45,000 and Machinery at ₹23,000

3. A provision for bad debts is to be created @6% in debtors.

4. The capital accounts A and B are to be adjusted by opening current accounts.

Journal entry for adjustment of Goodwill brought by new partner C between partners.

Goodwill Premium A/c Dr 12,000
     To A's Capital A/c              8,000
     To B's Capital A/c              4,000

The correct answer is option 2-
Goodwill Premium A/c Dr 12,000
     To A's Capital A/c                8,000
     To B's Capital A/c               4,000

Goodwill is brought by partner 12000.
So firm cash account is increased by goodwill amount so cash account is debited and goodwill account is credited. After bringing of goodwill this premium is distributed between old partners in their old ratio.

12,000 is distributed between A & B in 2:1.
A' share = 8,000
B's share = 4,000

Journal entry passed for this adjustment of goodwill is as follows-

Goodwill Premium A/c Dr 12,000
     To A's Capital A/c                8,000
     To B's Capital A/c                4,000