Read the Case Study given below and answer the question.

Sterling Enterprises is a partnership business with Ryan, Williams and Sania as partners engaged in production and sales of electrical items and equipment. Their capital contributions were Rs.50,00,000, Rs.50,00,000 and Rs.80,00,000 respectively with the profit sharing ratio of 5:5:8. As they are now looking forward to expanding their business, it was decided that they would bring in sufficient cash to double their respective capitals. This was duly followed by Ryan and Williams but due to unavoidable reasons Sania could not do so and ultimately it was agreed that to bridge the shortfall in the required capital a new partner should be admitted who would bring in the amount that Sania could not bring and that the new partner would get share of profits equal to half of Sania’s share which would be sacrificed by Sania only. Consequent to this agreement Ejaz was admitted and he brought in the required capital and Rs.30,00,000 as premium for goodwill.

What will be correct journal entry for distribution of Premium for Goodwill brought by Ejaz?

Premium for Goodwill A/c    Dr. 30,00,000
    To Sania’s Capital A/c                30,00,000
(Distribution of Premium for Goodwill)

The correct answer is option 2-

Premium for Goodwill A/c    Dr. 30,00,000
    To Sania’s Capital A/c                   30,00,000
(Distribution of Premium for Goodwill)

Entire sacrifice has been made by Sania and hence the entire amount of goodwill brought by Ejaz belongs to her. So, goodwill brought by Ejaz of Rs.30,00,000 is of as compensation. Journal entry passed for this-

1) Bank A/c    Dr.           30,00,000 
       To Premium for goodwill A/c  30,00,000 
(Goodwill brought by new partner)

2) Premium for goodwill A/c    Dr.   30,00,000
         To Sania’s Capital A/c                 30,00,000
(Distribution of Premium for Goodwill)