# treatement of goodwill

A and B were partners in ratio 3:1 . C was admitted for 1/5 th share. C pays 40,000 as his share of premium privately. After d admsn of C dey admit D into firm for 1/6 th share. He brings 16000 as his share of goodwill . pass necessary journal entries.

asked May 28, 2015 322 views

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C pays Rs.40000 as premium for goodwill for his 1/5 share,

Full value of goodwill of the firm is (Rs.40000 x 5/1) = Rs.200000

Since C pays Rs.40000 as goodwill privately, no entry will be passed.

When D enters the partneship for 1/6 share, he must pay Rs.200000 x 1/6 = Rs.33333.

D pays Rs.16000 as premium for goodwill, balance amount which he does not bring is Rs.33333 - Rs.16000 = Rs.17333.

Journal entry for this will be:

Cash A/c           Dr. 16000

To Premium for Goodwill    16000

Premium for Goodwill A/c   Dr.16000

D's Capital A/c                  Dr.17333

To A's Cap. A/c                                 19999

To B's Cap A/c                                    6667

To C's Cap A/c                                    6667

(Share of premium distributed to A, B and C in their sacrificing ratio 3 : 1 : 1).

1 – 1/5 = 4/5

A’s new share = 4/5 x 3/4 = 12/20

B’s new share = 4/5 x 1/4 = 4/20

C’s new share = 1/5 x 4/4 = 4/20

New Ratio of A, B and C 12:4:4 or 3 : 1 : 1

Since sacrifice of A, B and C is not given on admission of D, it is assumed that they have sacrificed in their profit sharing ratio which is 3 : 1 : 1.
answered May 28, 2015 by (3,971 points)
selected May 29, 2015 by Ishaa