A and b carrying on business as partners used to share profit and loss...
Explanation of the Situation
A and B were partners in a business and their profit and loss sharing ratio was 4/7 and 3/7 respectively. The firm had a goodwill of 280000. Later, C was admitted as a partner with a share of 1/7 in profits and losses. C was required to pay a premium of 75000 for goodwill. The profit sharing ratio between A and B remained unchanged.
Calculation of New Profit Sharing Ratio
The new profit sharing ratio between A, B, and C can be calculated as follows:
- A's share = 4/7
- B's share = 3/7
- C's share = 1/7
The total share is 4/7 + 3/7 + 1/7 = 8/7. To make the ratio meaningful, we need to multiply each share by a factor that makes the total equal to 1. The factor is 7/8.
- A's new share = (4/7) x (7/8) = 4/8 = 1/2
- B's new share = (3/7) x (7/8) = 3/8
- C's new share = (1/7) x (7/8) = 1/8
Therefore, the new profit sharing ratio between A, B, and C is 1/2 : 3/8 : 1/8.
Calculation of Goodwill
The total value of goodwill is 280000 + 75000 = 355000. The new share of A and B in the goodwill can be calculated as follows:
- A's share = (1/2) / (1/2 + 3/8) = 4/7
- B's share = (3/8) / (1/2 + 3/8) = 3/7
Therefore, A's share in goodwill is 4/7 x 355000 = 202857.14 and B's share is 3/7 x 355000 = 152142.86.
Conclusion
After C was admitted as a partner, the new profit sharing ratio between A, B, and C became 1/2 : 3/8 : 1/8. C was required to pay a premium of 75000 for goodwill, which was distributed between A and B according to their new profit sharing ratio. A's share in goodwill was 202857.14 and B's share was 152142.86.