Admission with Goodwill and Capital Adjustment
A and B share profits in the ratio 3:2. Their capitals on 31 March 2024, before admission, are ₹1,50,000 and ₹1,00,000. On 1 April 2024 they admit C for 1/5 share. C brings ₹1,20,000 as capital and ₹30,000 as goodwill in cash. The partnership deed is silent on the sacrifice ratio and on the treatment of goodwill. On revaluation, stock falls by ₹10,000, machinery rises by ₹25,000, and a provision for doubtful debts of ₹5,000 is created. The partners agree that after admission the capitals of A and B should be proportionate to C's capital, taking C's capital as the basis. C's goodwill is not to be retained in the firm. A and B are unsure whether the sacrifice is 3:2, whether goodwill is shared in the new ratio, and how much cash each must bring.
1. Determine the sacrificing ratio, distribute goodwill, and prepare the revaluation account.
Read the worked answer
Since the deed is silent, the sacrifice is in the old ratio 3:2. C's share is 1/5, so A sacrifices 3/5 × 1/5 = 3/25 and B sacrifices 2/5 × 1/5 = 2/25.
Goodwill of ₹30,000 is credited to the sacrificing partners, not in the new ratio: A = 3/5 × ₹30,000 = ₹18,000; B = 2/5 × ₹30,000 = ₹12,000.
Revaluation account
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| Stock | 10,000 | Machinery | 25,000 |
| Provision for doubtful debts | 5,000 | ||
| Profit transferred: A 6,000; B 4,000 | 10,000 | ||
| Total | 25,000 | Total | 25,000 |
Revaluation profit ₹10,000 is shared A ₹6,000 and B ₹4,000 in the old ratio.
2. Compute the adjusted capitals and the cash each partner must bring or withdraw.
Read the worked answer
C's capital of ₹1,20,000 represents 1/5 share, so total capital = ₹1,20,000 × 5 = ₹6,00,000. New ratio is A 12/25, B 8/25 and C 5/25.
Required capitals: A = 12/25 × ₹6,00,000 = ₹2,88,000; B = 8/25 × ₹6,00,000 = ₹1,92,000.
Adjusted capitals before bringing cash: A = ₹1,50,000 + ₹6,000 revaluation + ₹18,000 goodwill = ₹1,74,000. B = ₹1,00,000 + ₹4,000 + ₹12,000 = ₹1,16,000.
Cash to bring: A = ₹2,88,000 − ₹1,74,000 = ₹1,14,000; B = ₹1,92,000 − ₹1,16,000 = ₹76,000.
C's goodwill is withdrawn by A and B in the sacrifice ratio, so it does not remain in the firm.