Dev and Anand are partners sharing profits equally. They admit Karan for 1/4 share in profits. Karan pays ₹1,00,000 for goodwill out of his share of ₹1,80,000. Goodwill exists in the Balance Sheet at ₹6,00,000. Pass journal entries to record these transactions.
Answer (2)
In this scenario, Dev and Anand are partners who share profits equally. They admit Karan into their partnership, giving him a 1/4 share in profits. Karan pays ₹1 , 00 , 000 for goodwill out of his total share of ₹1 , 80 , 000 . There is already a goodwill of ₹6 , 00 , 000 recorded in the balance sheet.
To record these transactions, we need to make adjustments in the books to account for Karan's entry and the goodwill payment. Here are the steps and journal entries needed:
Record the premium for goodwill paid by Karan :
Karan pays ₹1 , 00 , 000 for goodwill. Since this is out of his share, it needs to be credited to the existing partners' capital accounts (Dev and Anand) in their old profit-sharing ratio, which is equally.
Cash/Bank Account Dr → Karan’s Capital Account ₹1,00,000
[\text{Karan's Capital Account} , \text{Dr} , \to , \text{Dev’s Capital Account} , \text{₹50,000} \
\text{Karan's Capital Account} , \text{Dr} , \to , \text{Anand’s Capital Account} , \text{₹50,000}]
Here, Karan's payment of goodwill is shared equally between Dev and Anand as per their original profit-sharing ratio.
Account for goodwill already existing in the balance sheet :
The goodwill account in the books is already recorded at ₹6 , 00 , 000 , and this does not need any adjustment unless there is a revaluation. Typically, partnerships might continue to reflect this in their books if there is no change in its value due to the admission of a new partner or agreement among partners.
These entries ensure that the introduction of Karan as a partner and the impact of the goodwill payment are accurately recorded in accordance with accounting principles for partnerships. The old partners' capital accounts are credited with the premium Karan pays for goodwill, compensating them for sharing their profit share.
The journal entries required include recording Karan’s payment of ₹1,00,000 for goodwill, which is split equally between the existing partners. Additionally, the goodwill recorded in the balance sheet at ₹6,00,000 remains unchanged unless a revaluation is agreed upon. This ensures accurate accounting when admitting a new partner.
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