Question

A. B and C are partners sharing profits and losses in the ratio of 5:4:1. It was decided that with effect from 1st April 2016 the profit sharing ratio will be 9:6:5. Goodwill is to be valued at 2 year's purchase of average of 3 year's profits. The profits for 2013-14, 2014-15 and 2015-16 were Rs 48,000, Rs 42,000 and Rs 60,000 respectively.

Pass the necessary journal entry for the treatment of goodwill.

Answer 1

Average Profits $=Rs\frac{48,000+42,000+60,000}{3}=Rs50,000$

Value of Goodwill at 2 year's purchase $=Rs50,000\times 2=Rs1,00,000.$

Old Ratio of A, B and C = 5:4:1

New Ratio of A, B and C = 9:6:5

Sacrifice or Gain:

$A=\frac{5}{10}-\frac{9}{20}=\frac{10-9}{20}=\frac{1}{20}$ (Sacrifice)

$B=\frac{4}{10}-\frac{6}{20}=\frac{8-6}{20}=\frac{2}{20}$ (Sacrifice)

$C=\frac{1}{10}-\frac{5}{20}=\frac{2-5}{20}=\frac{3}{20}$ (Gain)

Since A has sacrificed, he will be credited by $\frac{1}{20}$ of Rs 1,00,000 = Rs 5,000

Since B has sacrificed, he will be credited by $\frac{2}{20}$ of Rs 1,00,000 = Rs 10,000

Since C has gained, he will be debited by $\frac{3}{20}$ of Rs 1,00,000 = Rs 15,000

JOURNAL

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{L.F.}& \text{Dr.(Rs)}& \text{Cr.(Rs)}\\ 2016& & & & \\ \text{April 1}& \text{C's Capital A/c}Dr.& & 15,000& \\ & \text{To A's Capital A/c}& & & 5,000\\ & \text{To B's Capital A/c}& & & 10,000\\ & \text{(Adjustment for goodwill due to change in profit}& & & \\ & \text{sharing ratio)}& & & \end{array}$