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Practice each question, then open the answer or worked solution.
Sandeep and Navdeep are partners in a firm, sharing profits in 5:3 ratio. They admit C into the firm, and the new profit-sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio.
The solution to this question is as follows:
Sacrificing Ratio = Old Ratio − New Ratio
Rao and Swami are partners in a firm, sharing profits and losses in 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits. The new profit-sharing ratio between Rao and Swami is 4:3. Calculate the new profit-sharing ratio and sacrificing ratio.
The solution to this question is as follows:
New Ratio = Combined Share of Rao and Swami × Proportion of Rao and Swami in the combined share
4:3:1
Sacrificing Ratio = Old Ratio − New Ratio
Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows:
| ₹ | |
| 2013 | 40,000 |
| 2014 | 50,000 |
| 2015 | 60,000 |
| 2016 | 50,000 |
| 2017 | 60,000 |
| Year | Profit |
| 2013 | 40,000 |
| 2014 | 50,000 |
| 2015 | 60,000 |
| 2016 | 50,000 |
| 2017 | 60,000 |
| Sum of 5 years profit | 2,60,000 |
Average Profit = = 52,000
Goodwill = Average Profit × Number of Year’s Purchases = 52,000 × 4 = ₹ 2, 08,000
Capital employed in a business is ₹.2, 00,000. The normal rate of return on capital employed is 15%. During the year 2015, the firm earned a profit of ₹. 48,000. Calculate goodwill on the basis of 3 years’ purchase of super profit.
The solution to this question is as follows:
The books of Ram and Bharat showed that the capital employed on 31.12.2016 was ₹. 5,00,000 and the profits for the last 5 years: 2015 ₹. 40,000; 2014 ₹. 50,000; 2013 ₹. 55,000; 2012 ₹. 70,000 and 2011 ₹. 85,000. Calculate the value of goodwill on the basis of 3 years’ purchase of the average super profits of the last 5 years, assuming that the normal rate of return is 10%.
The solution to this question is as follows:
| Year | Profit |
| 2015 | 40,000 |
| 2014 | 50,000 |
| 2013 | 55,000 |
| 2012 | 70,000 |
| 2011 | 85,000 |
| Sum of 5 years profit | 3,00,000 |
Average Super Profit = Average Actual Profit – Normal Profit
= 60,000 – 50,000
= ₹ 10,000
Goodwill = Average Super Profit × Number of year purchase
= 10,000 × 3
= ₹ 30,000
Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹.3, 00,000; Rajani ₹. 2, 00,000. During the year 2015, the firm earned a profit of ₹. 1, 50,000. Calculate the value of goodwill of the firm, assuming that the normal rate of return is 20%.
The solution to this question is as follows:
| Rajan’s Capital | 3,00,000 |
| Rajni’s Capital | 2,00,000 |
| Total Capital Employed | 5,00,000 |
Normal Rate of Return = 20%
Alternative Method
Normal Profit = Capital Employed ×
= 5,00,000 ×
= ₹ 1,00,000
Super profit = Actual Profit − Normal Profit
= 1, 50,000 − 1, 00,000
= ₹ 50,000
Goodwill = Super Profit ×
= 50,000 ×
= ₹ 2, 50,000
A business has earned average profits of ₹. 1, 00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are ₹. 10, 00,000 and its external liabilities are ₹. 1, 80,000. The normal rate of return is 10%.
The solution to this question is as follows:
Capital Employed = Assets − External Liabilities
= 10, 00,000 − 1, 80,000
= Rs 8, 20,000
Normal Profit = Capital Employed ×
= Rs 82,000
Super Profit = Actual Profit − Normal Profit
= 1, 00,000 − 82,000
= Rs 18,000
Goodwill = Super Profit ×
= Rs 1, 80,000
Alternative Method
Verma and Sharma are partners in a firm, sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in ₹. 20,000 as capital and ₹. 4,000 as his share of goodwill premium. Give the necessary journal entries.
a) When the amount of goodwill is retained in the business.
b) When the amount of goodwill is fully withdrawn.
c) When 50% of the amount of goodwill is withdrawn.
d) When goodwill is paid privately.
The solution to this question is as follows:
| Journal Entries | |||||||
| S.No. | Particulars | L.F. | Debit Amount ₹ | Credit Amount ₹ | |||
| Case (a) | |||||||
| Cash A/c | Dr. | 24,000 | |||||
| To Ghosh’s Capital A/c | 20,000 | ||||||
| To Premium for Goodwill A/c | 4,000 | ||||||
| (Capital and Goodwill his share brought
by Ghosh) |
|||||||
| Premium for Godwill A/c | Dr. | 4,000 | |||||
| To Verma’s Capital A/c | 2,500 | ||||||
| To Sharma’s Capital A/c | 1,500 | ||||||
| (Goodwill brought by Ghosh credited to Old Partners
in Sacrificing ratio) |
|||||||
| Case (b) | Cash A/c | Dr. | 24,000 | ||||
| To Ghosh Capital A/c | 20,000 | ||||||
| To Premium for Goodwill A/c | 4,000 | ||||||
| (Capital and Goodwill brought by Ghosh for (1/5)
share of profit) |
|||||||
| Premium for Goodwill A/c | Dr. | 4,000 | |||||
| To Verma’s Capital A/c | 2,500 | ||||||
| To Sharma’s Capital A/c | 1,500 | ||||||
| (Goodwill brought by Ghosh credited
in Old Partner in Sacrificing Ratio) |
|||||||
| Verma’s Capital A/c | Dr. | 2,500 | |||||
| Sharma’s Capital A/c | Dr. | 1,500 | |||||
| To Cash A/c | 4,000 | ||||||
| (Amount of Premium for Goodwill withdrawn by
Old Partners) |
|||||||
| Case (c) | Cash A/c | Dr. | 24,000 | ||||
| To Ghosh’s Capital A/c | 20,000 | ||||||
| To Premium for Goodwill A/c | 4,000 | ||||||
| (Capital and Goodwill brought by Ghosh for (1/5)
share of profit) |
|||||||
| Premium for Goodwill A/c | Dr. | 4,000 | |||||
| To Verma’s Capital A/c | 2,500 | ||||||
| To Sharma’s Capital A/c | 1,500 | ||||||
| (Premium for Goodwill credited to Old Partner’s
Captial Account in sacrificing ratio) |
|||||||
| Verma’s Capital A/c | Dr. | 1,250 | |||||
| Sharma’s Capital A/c | 750 | ||||||
| To Cash A/c | 2,000 | ||||||
| (Half of the amount of premium for goodwill withdrawn by Old partners) | |||||||
| Case (d) | No entry: Goodwill was not brought into firm | ||||||
A and B are partners in a firm, sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in profits. C will bring in ₹. 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at ₹, 20,000. The new profit-sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries.
The solution to this question is as follows:
| Journal Entries | ||||||
| Date | Particulars | L.F. | Debit Amount ₹ | Credit Amount ₹ | ||
| Cash A/c | Dr. | 35,000 | ||||
| To C’s Capital A/c | 30,000 | |||||
| To Premium for Goodwill A/c | 5,000 | |||||
| (Amount of Capital and Share of Goodwill brought by C) | ||||||
| Premium for Goodwill A/c | Dr. | 5,000 | ||||
| To A’s Capital A/c | 2,000 | |||||
| To B’s Capital A/c | 3,000 | |||||
| (C’s Share of Goodwill credited to A and B in 2:3,
Sacrificing Ratio) |
||||||
| A’s Capital A/c | Dr. | 2,000 | ||||
| B’s Capital A/c | Dr. | 3,000 | ||||
| To Cash A/c | 5,000 | |||||
| (Share of Goodwill withdrawn by Old Partners) | ||||||
Sacrificing Ratio = Old Ratio − New Ratio
Goodwill of the firm = Rs 20,000
C’s share of Goodwill =
A will receive
Or
B will receive
Or
Arti and Bharti are partners in a firm, sharing profits in 3:2 ratio; they admitted Sarthi for 1/4 share in the profits of the firm. Sarthi brings ₹. 50,000 for his capital and ₹. 10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at ₹. 5,000. The new profit-sharing ratio between Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in the books of the new firm.
The solution to this question is as follows:
| Journal Entries | ||||||
| Date | Particulars | L.F. | Debit Amount ₹ | Credit Amount ₹ | ||
| Arti’s Capital A/c | Dr. | 3,000 | ||||
| Bharti’s Capital A/c | Dr. | 2,000 | ||||
| To Goodwill A/c | 5,000 | |||||
| (Goodwill written off) | ||||||
| Cash A/c | Dr. | 60,000 | ||||
| To Sarthi’s Capital A/c | 50,000 | |||||
| To Premium for Goodwill A/c | 10,000 | |||||
| (Amount of capital and share of goodwill brought by Sarthi) | ||||||
| Premium for Goodwill A/c | Dr. | 10,000 | ||||
| To Arti’s Capital A/c | 4,000 | |||||
| To Bharti’s Capital A/c | 6,000 | |||||
| (Premium for Goodwill credited Arti’s Capital Account) | ||||||
Sarthi admitted for
share in a new firm.
Sacrificing Ratio = Old Ratio − New Ratio
Arti will receive
Bharti will receive
