Admission of a Partner: Goodwill and Revaluation
A and B share profits 3:2. Their capitals are ₹1,20,000 and ₹80,000. On 1 April 2025 they admit C for 1/5 share. C brings ₹60,000 capital and ₹30,000 for goodwill in cash. Before admission the firm’s goodwill is valued at ₹1,50,000, and an existing goodwill account of ₹20,000 appears in the books. Revaluation of assets shows stock reduced by ₹10,000, machinery increased by ₹25,000, and a provision for doubtful debts of ₹5,000 created. The partners agree that C’s share of goodwill will be credited to the sacrificing partners and that the existing goodwill account will be written off. C’s capital is not to be adjusted to any proportionate capital. B argues that because C is now a partner, C should also share the existing goodwill write-off.
1. Pass journal entries for C’s capital and goodwill, the write-off of existing goodwill, and the revaluation. Show distribution among partners.
Read the worked answer
C’s share of goodwill = 1/5 × ₹1,50,000 = ₹30,000. Sacrificing ratio of A and B is 3:2, so A gets ₹18,000 and B gets ₹12,000.
Entry for cash brought in: Bank A/c Dr ₹90,000 To C’s Capital A/c ₹60,000 To A’s Capital A/c ₹18,000 To B’s Capital A/c ₹12,000
Write-off of existing goodwill in old ratio 3:2: A’s Capital A/c Dr ₹12,000 B’s Capital A/c Dr ₹8,000 To Goodwill A/c ₹20,000
Revaluation: stock falls ₹10,000, machinery rises ₹25,000, provision is created ₹5,000. Net gain = 25,000 − 10,000 − 5,000 = ₹10,000. Machinery A/c Dr ₹25,000 To Stock A/c ₹10,000 To Provision for Doubtful Debts A/c ₹5,000 To Revaluation Profit A/c ₹10,000
Then distribute revaluation profit: A ₹6,000; B ₹4,000: Revaluation Profit A/c Dr ₹10,000 To A’s Capital A/c ₹6,000 To B’s Capital A/c ₹4,000
2. Calculate the capital balances immediately after admission, assuming the old partners withdraw half of the goodwill credited to them. Include the existing goodwill write-off.
Read the worked answer
Prepare the capital movements:
| Particulars | A ₹ | B ₹ | C ₹ |
|---|---|---|---|
| Opening capital | 1,20,000 | 80,000 | - |
| Revaluation profit | +6,000 | +4,000 | - |
| Existing goodwill written off | −12,000 | −8,000 | - |
| Goodwill credited on C’s admission | +18,000 | +12,000 | - |
| Half of goodwill withdrawn | −9,000 | −6,000 | - |
| Cash brought in as capital | - | - | 60,000 |
| Closing capital | 1,23,000 | 82,000 | 60,000 |
A = 1,20,000 + 6,000 − 12,000 + 18,000 − 9,000 = ₹1,23,000. B = 80,000 + 4,000 − 8,000 + 12,000 − 6,000 = ₹82,000. C’s capital is ₹60,000 as brought in.
3. Is B correct that C should share the existing goodwill write-off? Explain.
Read the worked answer
No. Existing goodwill in the books arose from the old firm and belongs to A and B. When a new partner is admitted, the existing goodwill is written off to the old partners in their old profit-sharing ratio because they were the owners when it was generated. C did not exist as a partner at that time and should not bear the write-off. C instead pays for a share of the firm’s goodwill because C is acquiring a 1/5 interest; that contribution compensates the sacrificing partners A and B.