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Karan and Varun were partners in a firm sharing profits and losses in the ratio of 1: 2. Their fixed capitals were Rs. 2,00,000 and Rs. 3,00,000 respectively. On 1st April, 2016 Kishore was admitted as a new partner for 1/4th share in the profits. Kishore brought Rs. 2,00,000 for his capital which was to be kept fixed like the capitals of Karan and Varun. Kishore acquired his share of profit from Varun only. Calculate goodwill of the firm on Kishore’s admission and the new profit-sharing ratio of Karan, Varun and Kishore. Also, pass necessary Journal Entry for the treatment of Goodwill on Kishore’s admission considering that Kishore did not bring his share of goodwill premium in Cash.

SOLUTION

DateParticularL.FDebit
Amount
(Rs.)		Credit
Amount(Rs.)
 Cash A/c                                Dr.  
To Kishore’s Capital A/c
(Capital Brought in Cash)

Kishore’s current A/c          Dr.
To Varun’s Current A/c
(Goodwill Adjusted through Current Accounts)  		 2,00,000



25,000


2,00,000



25,000

STEP 2 OF 2

Working Notes:
Calculation of Kishore’s Share of Goodwill (Hidden)
Total capital of the firm = Rs. 8,00,000 (2,00.000 x 4 / 1)
Net worth = Rs. 7,00,000 (2,00,000 + 3,00,000 + 2,00,000)
Hidden goodwill = Rs. 1,00,000 (8,00,000 – 7,00,000)
Kishore’s Share of Goodwill = 1,00;000 X 1 / 4 = Rs. 25,000
Calculation of New Profit-Sharing Ratio:
Karan’s share = 1 / 3 (same as old)Varun = 2 / 3 – 1 / 4 = 5 / 12
Kishore = 1 / 4
New Ratio = 1/3: 5/12: 1/4 = 4: 5: 3

Final Answer
The goodwill of the firm on Kishore’s admission is Rs. 25,000 and the new share ratio is 4: 5: 3.
The Journal entry for the goodwill of the firm is made.


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