Asha and Aditi are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Raghav as a partner for 1/4th share in the profits of the firm. Raghav brings Rs. 6,00,000 as his capital and his share of goodwill in cash. Goodwill of the firm is to be valued at two years' purchase of average profits of the last four years. The profits of the firm during the last four years are given below:<p></p> <table> <thead> <tr> <th>Year</th> <th>Profit (Rs.)</th> </tr> </thead> <tbody><tr> <td>2013-14</td> <td>3,50,000</td> </tr> <tr> <td>2014-15</td> <td>4,75,000</td> </tr> <tr> <td>2015-16</td> <td>6,70,000</td> </tr> <tr> <td>2016-17</td> <td>7,45,000</td> </tr> <tr> <td>The following additional information is given:</td> <td></td> </tr> <tr> <td>(i) To cover management cost an annual charge of Rs. 56250 should be made for the purpose of valuation of goodwill.</td> <td></td> </tr> <tr> <td>(ii) The closing stock for the year ended 31.3.2017 was overvalued by Rs. 15,000.</td> <td></td> </tr> <tr> <td>Pass necessary journal entries on Raghav's admission showing the working notes clearly.</td> <td></td> </tr> </tbody></table>

Asha and Aditi are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Raghav as a partner for 1/4th share in the profits of the firm. Raghav brings Rs. 6,00,000 as his capital and his share of goodwill in cash. Goodwill of the firm is to be valued at two years' purchase of average profits of the last four years. The profits of the firm during the last four years are given below:

Year	Profit (Rs.)
2013-14	3,50,000
2014-15	4,75,000
2015-16	6,70,000
2016-17	7,45,000
The following additional information is given:
(i) To cover management cost an annual charge of Rs. 56250 should be made for the purpose of valuation of goodwill.
(ii) The closing stock for the year ended 31.3.2017 was overvalued by Rs. 15,000.
Pass necessary journal entries on Raghav's admission showing the working notes clearly.

Working Notes:

Calculation of Average Profits:

Year	Profit (Rs.)	Adjustment for Management Cost (Rs.)	Adjusted Profit (Rs.)
2013-14	3,50,000	-56,250	2,93,750
2014-15	4,75,000	-56,250	4,18,750
2015-16	6,70,000	-56,250	6,13,750
2016-17	7,45,000	-56,250	6,88,750
Total	22,40,000	-2,25,000	20,15,000

Average Profit = Total Adjusted Profit / Number of years = 20,15,000 / 4 = 5,03,750

Calculation of Goodwill:

Goodwill = Average Profit × Number of years' purchase = 5,03,750 × 2 = 10,07,500

Raghav's Share of Goodwill:

Raghav's share of goodwill = Total Goodwill × Raghav's share = 10,07,500 × (1/4) = 2,51,875

Adjustment for Overvaluation of Closing Stock:
The closing stock for the year ended 31.3.2017 was overvalued by Rs. 15,000. This needs to be adjusted in the profit of 2016-17. Hence the adjusted profit of 2016-17 will be 6,88,750 - 15,000 = 6,73,750

Journal Entries:

Date	Account Title	Debit (Rs.)	Credit (Rs.)
	Raghav's Capital A/c	6,00,000
	Bank A/c		6,00,000
(Being capital introduced by Raghav)
	Raghav's Capital A/c	2,51,875
	Asha's Capital A/c		1,51,125
	Aditi's Capital A/c		1,00,750
(Being Raghav's share of goodwill adjusted)
	Bank A/c	2,51,875
	Raghav's Capital A/c		2,51,875
(Being goodwill brought in cash by Raghav)

Note: Asha and Aditi will share the goodwill brought in by Raghav in their old profit sharing ratio (3:2). Therefore, Asha's share will be (3/5) * 2,51,875 = 1,51,125, and Aditi's share will be (2/5) * 2,51,875 = 1,00,750.

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