Multiple choice

A & B are sharing profits & losses in the ratio of $3:2$. C is coming as a new partner who pays Rs.$25,000$ as premium fro goodwill. The profit sharing ration among A,B & C is equal. If premium money is retained in business which of the following journal entry is correct for sharing permium for goodwill? A Capital A/c Dr. B Capital A/c Dr. To Premium for Goodwill A/c $20,000$ $5,000$ $25,000$ Premium for Goodwill A/c Dr. To A Capital A/c To B Capital A/c $25,000$ $5,000$ $20,000$ Premium for Goodwill A/c Dr. To A Capital A/c To B Capital A/c $25,000$ $20,000$ $5,000$ Premium for Goodwill A/c Dr. To A Capital A/c To B Capital A/c $25,000$ $15,000$ $10,000$

  1. A

  2. B

  3. C

  4. D
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Old ratio A:B = 3:2. New ratio A:B:C = 1:1:1. Sacrificing ratio: A = 3/5 - 1/3 = 4/15; B = 2/5 - 1/3 = 1/15. Ratio of sacrifice is 4:1. Goodwill of 25,000 is distributed in 4:1, so A gets 20,000 and B gets 5,000. The entry is Premium for Goodwill Dr. 25,000 to A 20,000 to B 5,000.

AI explanation

When a new partner brings in premium for goodwill and the money is retained, it is distributed among the old partners in their sacrificing ratio. A and B are sharing future profits equally with C, making their new ratio 1/3 each and their sacrifice 4/15 and 1/15 respectively. The Rs. 25,000 premium is credited to A and B in the ratio of 4:1, resulting in Rs. 20,000 to A's capital and Rs. 5,000 to B's capital.

Keep practicing — related questions