Question

LDG, PG and AG are partners in G’s Garage. On March 31^st, LDG’s capital is $174,000, PG - $142,000 and AG $84,000. The income sharing ratio is the last three digits of your student number - exclude any zeros and go to the next value in the student number. For example, a student number n01200474 would be on a 4:7:4 basis and someone who has n01288400 would need to be 8:8:4 basis. If you select any other numbers for the ratio – not your own student number, you will earn zero on this question in full. SG was admitted to the partnership on April 1^st by admitting him to the business as a partner with twenty percent equity. Address the following scenarios – a) SG decides to invest $105,000; b) SG decides to put in $140,000, and c) SG decides to invest $60,000. Journalize accordingly. Show all your work.

Answer 1

Admission of Partner in a Partnership Firm :-

When a new partner is admitted in the firm, question of share of profit arises. Sometimes the new partners purchases the share of an old partner and sometime he is admitted as a partner on a predefined share and the amount of his share is sacrificed by all old partner in their profit sharing ratios.

Here we have also another situation about the capital introduction by the new partner. The new partner may bring capital as per his profit sharing ratio. In some cases he may bring an amount in addition to the capital as per his share of profit, which is known as share of goodwill of firm for his share. Some time he may introduce capital less than his share of profit, which is known as negative goodwill. In both the cases of goodwill; the amount of goodwill is shared by the old partners. Sharing of goodwill is done by old partners on the basis of either equally or in their sacrificing ratios.

My student numbe is - n01296431. so our profit sharing ratio is 4:3:1.

Let us solve this question :-

a). SG decides to invest $1,05,000 :-

Total capital after introduction of SG capital :- $174,000+$142,000+$84,000+$105,000 = $505,000

20% share of SG in the total capital :- $505,000/20% = $101,000

Since SG is bringing $105,000, he is paying $4,000 for goodwill. Journal entries for it will be as follows.

For introduction of Capital :-

Cash A/C Dr	$105,000
To SG Capital A/C		$101,000
To Goodwill A/C		$4,000

(Being Capital and goodwill amount introduced in the firm by SG)

For Credit of Goodwill amount in account of Old Partners :-

Goodwill A/C Dr	$4,000
To LDG Capital A/C		$2,000
To PG Capital A/C		$1,500
To AG Capital A/C		$500

(Being the amount of goodwill being distribued among old partners in their respective sacrificed PSR)

b). SG decides to invest $1,40,000 :-

Total capital after introduction of SG capital :- $174,000+$142,000+$84,000+$140,000 = $540,000

20% share of SG in the total capital :- $540,000/20% = $108,000

Since SG is bringing $140,000, he is paying $32,000 for goodwill. Journal entries for it will be as follows.

For introduction of Capital :-

Cash A/C Dr	$140,000
To SG Capital A/C		$108,000
To Goodwill A/C		$32,000

(Being Capital and goodwill amount introduced in the firm by SG)

For Credit of Goodwill amount in account of Old Partners :-

Goodwill A/C Dr	$32,000
To LDG Capital A/C		$16,000
To PG Capital A/C		$12,000
To AG Capital A/C		$4,000

(Being the amount of goodwill being distribued among old partners in their respective sacrificed PSR)

c). SG decides to invest $60,000 :-

otal capital after introduction of SG capital :- $174,000+$142,000+$84,000+$60,000 = $460,000

20% share of SG in the total capital :- $460,000/20% = $92,000

Since SG is bringing $60,000, he is receiving $32,000 for negative goodwill. So this amount of negative goodwill will be bourn by old partners in their respective PSR. Journal entries for it will be as follows.

For introduction of Capital :-

Cash A/C Dr	$60,000
Goodwill A/C Dr	$32,000
To SG Capital A/C		$92,000

(Being Capital amount introduced in the firm by SG and negative goodwill amount debited in goodwill A/C)

For Debit of Goodwill amount in account of Old Partners :-

LDG Capital A/C Dr	$16,000
PG Capital A/C Dr	$12,000
AG Capital A/C Dr	$4,000
To Goodwill A/C		$32,000

(Being the amount of negative goodwill being distribued among old partners in their respective sacrificed PSR)

Note :-

1. All above entries of goodwill and negative goodwill can be done without creation of goodwill account by crediting the all amount invested by SG in his capital and than Debiting his account for distribution of goodwill among the old partners.

2. Amount of goodwill is allowed to show in books of acccounts only if the goodwill is being purchased by the firm. In the case of admission of new partner their is no purchase of goodwill, it is just transfer of profit sharing ratios amounts. So always take care about the balance of goodwill account created during the admission of new partner. The whole amount of goodwill created during admission of new partner should be transferred to the old partners' capital accounts.