Question

A, B and C are partners sharing profits and losses in the ratio of 3 : 2 : 1. With effect from 1st April, 2015, it was decided to change the profit sharing ratio to 4 : 3 : 2. Goodwill already appearing in the books as Rs 40,000. Goodwill is to be valued at 2 years' purchase of average of 3 years profit. The profits were Rs 95,000, Rs 85,000 and Rs 90,000. Pass necessary journal entry for goodwill without opening goodwill account assuming that the firm adopted fixed capital method.

Answer 1

JOURNAL
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{L.F.}& \text{Debit}& \text{Credit}\\ & & & & \text{(Rs)}& \text{(Rs)}\\ & \text{A's Capital A/c}& \text{Dr.}& & 20,000& \\ & \text{B's Capital A/c}& \text{Dr.}& & 13,333& \\ & \text{C's Capital A/c}& \text{Dr.}& & 6,667& \\ & \text{To Goodwill A/c}& & & & 40,000\\ & \underset{–}{\text{(Being old goodwill written off in old ratio)}}& & & & \\ & \text{C's Capital A/c}& \text{Dr.}& & 10,000& \\ & \text{To A's Capital A/c}& & & & 10,000\\ & \text{(Being adjustment of new goodwill when there is a}& & & & \\ & \text{change in ratio)}& & & & \end{array}$

Working Notes:

Calculation of Sacrificing Ratio = Old Ratio - New Ratio

$A=\frac{3}{6}-\frac{4}{9}=\frac{(9-8)}{18}=\frac{1}{18}$ (Sacrifice)

$B=\frac{2}{6}-\frac{3}{9}=\frac{(6-6)}{18}=0$

$C=\frac{1}{6}-\frac{2}{9}=\frac{(3-4)}{18}=-\frac{1}{18}$ (Gain)

Average profit $=\frac{(95,000+85,000+90,000)}{3}$

= $\frac{2,70,000}{3}=Rs90,000$

Goodwill = $90,000\times 2=Rs1,80,000$

A's share of goodwill = $1,80,000\times \frac{1}{18}=Rs10,000$