Admission of Mira: Whose Goodwill, and Who Actually Brings Capital?
Kabir and Leena share profits 3:2. Their balance sheet on 31 March 2024 shows capitals of ₹6,00,000 and ₹4,00,000 and carries no goodwill account. On 1 April 2024 they admit Mira for a 1/5 share; she brings ₹1,00,000 as her share of goodwill and ₹3,00,000 as capital. Before admission, the assets were revalued: building up by ₹80,000, stock down by ₹25,000, and a provision of ₹5,000 was created against debtors. The deed is silent on the ratio in which a new partner's premium is shared, and nothing has been agreed about adjusting the old partners' capitals to the new profit-sharing ratio. Mira's capital is taken as the base for proportionate capitals. Kabir, who needs money for his son's admission, wants to withdraw any surplus arising from the adjustment; Leena, who has just bought a flat, wants to bring in as little as possible.
1. Pass the journal entries for the goodwill premium and the revaluation, and derive the new profit-sharing ratio.
Read the worked answer
New ratio. Mira takes 1/5, so the old partners retain 4/5 between them in 3:2: Kabir 4/5 × 3/5 = 12/25; Leena 4/5 × 2/5 = 8/25; Mira 5/25. Ratio 12:8:5.
Sacrifice. Kabir 3/5 − 12/25 = 3/25; Leena 2/5 − 8/25 = 2/25; total 5/25 = 1/5, matching Mira's share. Because the deed is silent, sacrifice is presumed to be in the old profit-sharing ratio, so the premium goes only to the sacrificing partners: Kabir ₹60,000, Leena ₹40,000. Mira receives nothing out of her own premium.
| Entry | Dr ₹ | Cr ₹ |
|---|---|---|
| Bank A/c Dr | 4,00,000 | |
| To Premium for Goodwill A/c | 1,00,000 | |
| To Mira's Capital A/c | 3,00,000 | |
| Premium for Goodwill A/c Dr | 1,00,000 | |
| To Kabir's Capital A/c | 60,000 | |
| To Leena's Capital A/c | 40,000 |
Revaluation. Net effect = +80,000 − 25,000 − 5,000 = profit ₹50,000, shared 3:2 → Kabir ₹30,000, Leena ₹20,000.
Building A/c Dr 80,000 To Revaluation A/c 80,000
Revaluation A/c Dr 30,000 To Stock A/c 25,000 To Provision for Doubtful Debts A/c 5,000
Revaluation A/c Dr 50,000 To Kabir's Capital 30,000 To Leena's Capital 20,000
2. Mira's ₹3,00,000 is treated as the base for proportionate capitals. Work out the capitals Kabir and Leena must hold and state the cash each brings in or withdraws.
Read the worked answer
Step 1 - adjusted capitals.
Kabir: 6,00,000 + 30,000 (revaluation) + 60,000 (goodwill) = 6,90,000
Leena: 4,00,000 + 20,000 + 40,000 = 4,60,000
Mira: 3,00,000
Step 2 - total capital implied. Mira's ₹3,00,000 is 1/5 of the firm, so total capital = 3,00,000 × 5 = ₹15,00,000.
Step 3 - required capitals.
Kabir 15,00,000 × 12/25 = 7,20,000; Leena 15,00,000 × 8/25 = 4,80,000; Mira 3,00,000.
Step 4 - shortfall or surplus.
Kabir: 7,20,000 − 6,90,000 = brings ₹30,000
Leena: 4,80,000 − 4,60,000 = brings ₹20,000
Neither partner withdraws anything, so Kabir's plan collapses. The reason is that the goodwill of ₹1,00,000 stays inside the firm and already sits in the old partners' adjusted capitals; once that is counted, the firm is under-capitalised relative to Mira's contribution, not over-capitalised. A candidate who compares the required capitals with the balance-sheet capitals of 6,00,000 and 4,00,000 alone will wrongly conclude that both must withdraw.