M and N are partners sharing profit in the ratio of 3 : 1. They admit O as a new partner on 1st April, 2022. O brings ₹40,000 as his share of premium and the new profit sharing ratio is 2 : 2 : 1. Identify the correct option related to treatment of Goodwill.
Answer & explanation
Correct answer: option 4
The correct answer is option 4-
Premium for Goodwill A/c ........ Rs. 40,000
N's Capital A/c Dr. ........ Rs. 30,000
To M's Capital A/c ........Rs.70,000
Old ratio = 3:1 (M and N)
O admits
New ratio = 2:2:1
Sacrifice = Old share - New share
Sacrifice of M = 3/4 - 2/5
= (15-8)/20
= 7/20
Sacrifice of N = 1/4 - 2/5
= (5-8)/20
= -3/20 (gain)
O brings goodwill = ₹40,000 for 1/5th share.
On basis of O's share the goodwill of the firm = 40,000 x 5
= ₹2,00,000
Share of N = 2,00,000 x 3/20
= 30,000
Share of M = 2,00,000 x 7/20
= ₹70,000
As N gains so he will also compensate sacrificing partner M.
The journal entry for the bringing of goodwill by new partner O. The journal entry for this-
Cash A/c Dr. ₹40,000
To Premium for goodwill ₹40,000
The journal entry for the distribution of goodwill will be-
Premium for goodwill A/c Dr. ₹40,000
N's Capital A/c Dr. ₹30,000
To M's Capital A/c ₹70,000