Question

Hem and Nem are partners in a firm sharing profits in the ratio of 3:2. Their capitals were 80,000 and 60,000 respectively. They admitted Sam on Jan 1, 2019 as a new partner for 1/5th share in the future profits. Sam brought 60,000 as his capital.Calculate the value of goodwill of the firm and record necessary journal entries when Sam brings his share of goodwill in cash.

Answer 1

Sam's capital account = $60,000 (for 1/5 of the firm)

the firm's total value = $60,000 x 5 = $300,000

goodwill = $300,000 - ($60,000 + $80,000 + $60,000) = $100,000

Hem's share of goodwill = ($80,000 / $140,000) x $100,000 = $57,143

Nem's share of goodwill = $100,000 - $57,143 = $42,857

the journal entry used to record goodwill:

Dr Goodwill 100,000

Cr Hem, capital, 57,143

Cr Nem, capital, 42,857