Page 104 - DEBKVOL-1

5.20 Double Entry Book Keeping—CBSE XII

2. Dr. BANK ACCOUNT Cr.
Particulars ` Particulars `
To Gauri’s Capital A/c 2,33,650 By Balance c/d 2,63,650
To Premium for Goodwill A/c 30,000
2,63,650 2,63,650

Illustration 13 (Calculation of Investment to be made to become a Partner).

A commenced his business with a capital of ` 5,00,000 on 1st April, 2013. During the five
years ended 31st March, 2018, the results of his business were:
Year Ended `
31st March, 2014 Loss 10,000
31st March, 2015 Profit 26,000
31st March, 2016 Profit 34,000
31st March, 2017 Profit 40,000
31st March, 2018 Profit 50,000
During this period, he withdrew ` 80,000 for his personal use. On 1st April, 2018,
he admitted B into partnership on the following terms:
(i) Goodwill is to be valued at 3 times the average profit of last five years.
(ii) B will have 1/2 share of the future profits.
(iii) He will bring in his share of goodwill in cash.
(iv) He will bring in 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. (Foreign 1991, Modified)
Solution:
(i) Calculation of share of goodwill to be brought in by B: `
(a) Total profits for five years (– ` 10,000 + ` 26,000 + ` 34,000 + ` 40,000 + ` 50,000) 1,40,000
(b) Average profit (` 1,40,000/5) 28,000
(c) Value 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 at 31st March, 2018:

Capital as at 1st April, 2013 5,00,000
Add: Net profit for five years 1,40,000
6,40,000
Less: Drawings 80,000
Capital as at 31st March, 2018 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 by B
= ` 5,60,000 + ` 42,000 = ` 6,02,000
Therefore, B will have to bring ` 6,02,000 as Capital and ` 42,000 as goodwill,
i.e., total amount to be brought in by B = ` 6,44,000.