Question

Balances of A Band C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A Rs. 4,00,000; B Rs. 6,00,000 and C Rs. 4.00,000. A desired to retire from the firm. B and C decided to share the future profits equally, Goodwill of the entire firm be valued at Rs. 2,80,000 and no Goodwill account being raised. Journal entry for goodwill is _______.

• A. credit partner's capital account with old profit sharing ratio for Rs. 2,80,000
• B. credit partner's capital account with new profit sharing ratio for Rs. 2,80,000
• C. credit A's account with Rs. 80,000 and debit B's capital account with Rs. 20,000 and C's capital account with Rs. 60,000.
• D. credit partner's capital account with gaining ratio for Rs. 2,80,000

Answer 1

The correct option is C credit A's account with Rs. 80,000 and debit B's capital account with Rs. 20,000 and C's capital account with Rs. 60,000.

Profit sharing ratio of A,B and C is in proportion to their capital i.e., 400000 : 600000 : 400000 or 2 : 3 : 2, Herein, after called as old ratio. After retirement of A, profit sharing ratio of B and C is 1 : 1, Herein, called as new ratio.

Calculation of gaining and sacrificing ratio of partners:

Partner	Old share	New share	Gain	Sacrifice
A	2/7	-	-	2/7
B	3/7	½	1/14	-
C	2/7	1/2	3/14	-

Therefore, A's share of goodwill is :

Rs. 280000 * (2/7) = Rs. 80000

Adjusting entry would be :

B's capital A/c Dr. 20000

C's capital A/c Dr. 60000

To A's capital A/c 80000

(The amount of share of goodwill adjusted on A's retirement)