Admission of a Partner When Only One Old Partner Sacrifices
A and B have been sharing profits in the ratio 3:2 and their capitals are ₹3,00,000 and ₹2,00,000. They admit C for 1/5 share. C brings ₹1,50,000 as capital and ₹60,000 as premium for goodwill for his 1/5 share. At admission, stock is found undervalued by ₹20,000, machinery is overvalued by ₹30,000, a provision for doubtful debts of ₹5,000 is to be created, and an unrecorded creditor of ₹8,000 is to be recognised. A and B agree to share future profits equally. No goodwill appears in the books. C pays his capital and goodwill in cash. The partners want to keep the capitals of A and B proportionate to C's capital after admission. B argues that because he is an old partner he must receive a part of C's goodwill; A argues that B has not sacrificed anything. The firm also wants to know how the goodwill would be treated if C were unable to bring the premium in cash.
1. Calculate the sacrificing ratio and show how C's goodwill of ₹60,000 should be distributed. Resolve the dispute between A and B.
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Old shares: A 3/5, B 2/5. New shares after C is admitted for 1/5: A 2/5, B 2/5, C 1/5, because A and B share the remaining 4/5 equally. Sacrifice = old share − new share: A = 3/5 − 2/5 = 1/5 B = 2/5 − 2/5 = 0 Only A has sacrificed. Goodwill brought by the incoming partner is compensation for the sacrifice, so the whole ₹60,000 belongs to A.
Entries: Bank A/c Dr ₹60,000 To Premium for Goodwill A/c ₹60,000 Premium for Goodwill A/c Dr ₹60,000 To A's Capital A/c ₹60,000
B receives nothing because B's share in the firm has not decreased. Giving B a part of the premium would make B a gainer at A's expense. The phrase old partner is irrelevant; the test is sacrifice, not seniority.
2. Prepare the revaluation account and the partners' capital accounts. Determine the cash to be brought in or withdrawn so that A and B have capitals proportionate to C's capital.
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Revaluation: Stock increase ₹20,000 Machinery decrease ₹30,000 Provision for doubtful debts ₹5,000 Unrecorded creditor ₹8,000 Net loss = ₹20,000 − ₹30,000 − ₹5,000 − ₹8,000 = ₹23,000. Shared in old ratio 3:2: A ₹13,800, B ₹9,200.
Capital after revaluation: A: ₹3,00,000 − ₹13,800 = ₹2,86,200 B: ₹2,00,000 − ₹9,200 = ₹1,90,800 Add goodwill to A: A = ₹3,46,200; B = ₹1,90,800; C = ₹1,50,000. Total = ₹6,87,000.
C's capital of ₹1,50,000 represents 1/5 of total capital, so desired total = ₹7,50,000. Desired capitals: A 2/5 = ₹3,00,000; B 2/5 = ₹3,00,000; C 1/5 = ₹1,50,000. A has excess ₹46,200, so A withdraws ₹46,200. B is short by ₹1,09,200, so B brings ₹1,09,200. After these adjustments the capitals are A ₹3,00,000, B ₹3,00,000 and C ₹1,50,000.
3. If C could not bring the ₹60,000 premium in cash, how should the goodwill be recorded? Why is raising only ₹60,000 and writing it off among all partners wrong?
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The premium is a personal adjustment between partners, not a permanent asset of the firm. If C does not bring cash, debit C's Current Account and credit A's Capital Account with ₹60,000. If current accounts are not maintained, debit C's Capital Account and credit A's Capital Account. No goodwill account should remain in the balance sheet.
Alternatively, raise goodwill at the full firm value. Since ₹60,000 is C's 1/5 share, the firm's goodwill is ₹3,00,000. Raise it by debiting Goodwill and crediting A and B in old ratio 3:2: A ₹1,80,000, B ₹1,20,000. Then write it off among A, B and C in new ratio 2:2:1: A ₹1,20,000, B ₹1,20,000, C ₹60,000. Net effect: A +₹60,000, B zero, C −₹60,000.
Raising only ₹60,000 and writing it off in the new ratio would not give A the full premium. It would spread the burden over all partners and under-compensate A. The amount raised must be the full goodwill, or the adjustment must be made directly through capital or current accounts.