Multiple choice

Goodwill of a firm of A and B is valued at $Rs, 50,000$. A and B share profits in the ratio of $3 : 1$ and C is admitted for $1/5^{th}$ share. If C does not bring goodwill in cash and also goodwill account is not to be raised, what adjustment entry should be passed?

  1. A's capital A/c Dr. $Rs. 37,500$

    B's Capital A/c Dr. $Rs. 12,500$

    To C's capital A/c $Rs. 50,000$
  2. C's Capital A/c Dr. $10,000$

    To A's capital A/c $Rs. 7,500$

    To B's capital A/c $Rs. 2,500$
  3. C's Capital A/c Dr. $Rs. 50,000$

    To A's capital A/c $37,500$

    To B's capital A/c $12,500$
  4. A's Capital A/c Dr. $7,500$

    B's capital A/c Dr. $2,500$

    To C's capital A/c $Rs. 10,000$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

C's share is 1/5. Total goodwill is 50,000, so C's share is 10,000. A and B sacrifice in their ratio 3:1. A sacrifices 10,000 * 3/4 = 7,500. B sacrifices 10,000 * 1/4 = 2,500. Entry: C's Capital Dr 10,000 to A 7,500 to B 2,500.

AI explanation

C's share of goodwill is 1/5 of the total goodwill of Rs. 50,000, which equals Rs. 10,000. Since the amount is not brought in cash and the goodwill account is not raised, C's capital account is debited by Rs. 10,000. This amount is credited to the sacrificing partners, A and B, in their old profit sharing ratio of 3:1, resulting in credits of Rs. 7,500 to A and Rs. 2,500 to B.

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