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Admission of a Partner 3.5

(i) Goodwill is to be valued at 3 times the average profits of the last 5 years.

(ii) B will have 1/2 share in future profits.
(iii) He will bring his share of goodwill in cash.

(iv) He will bring capital in cash equal to that of A after his admission.

Calculate amount to be brought in by B and pass entries to record the transactions pertaining
to admission.

Solution:

(i) Calculation of Share of Goodwill to be brought in by B:

`
(a) Total profits for 5 years (– ` 10,000 + ` 26,000 + ` 34,000 + ` 40,000 + ` 50,000) 1,40,000
(b) Average profits (` 1,40,000/5) 28,000
(c) Amount of Goodwill (` 28,000 × 3) 84,000
(d) Share of Goodwill to be brought in by B (` 84,000/2) 42,000

(ii) Calculation of A’s Capital as on 31st March, 2018:
(a) Capital as on 1st April, 2013 5,00,000
(b) Add: Net profit for 5 years 1,40,000
6,40,000
(c) Less: Drawings 80,000
5,60,000

(iii) Calculation of amount to be invested by B:
A’s Capital after B’s admission = ` 5,60,000 + Amount of goodwill to be brought in
= ` 5,60,000 + ` 42,000 = ` 6,02,000
Therefore, B will have to bring ` 6,02,000 as Capital and ` 42,000 as share of Goodwill.
Total amount to be brought in by B = ` 6,02,000 + ` 42,000 = ` 6,44,000.

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2018
April 1 Cash A/c ...Dr. 6,44,000
To B’s Capital A/c 6,02,000
To Premium for Goodwill A/c 42,000
(Being the amount brought in by B)
April 1 Premium for Goodwill A/c ...Dr. 42,000
To A’s Capital A/c 42,000
(Being the amount of goodwill credited to A’s Capital Account)