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Treatment in Partner's Capital Account-Change in PSR

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Question

Calculate value of goodwill on the basis of three years' purchase of average profit of the preceding five years which were as follows:

Year 2018-19 2017-18 2016-17 2015-16 2014-15

Profits (₹) 8,00,000 15,00,000 18,00,000 4,00,000 (Loss) 13,00,000

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Solution

Number of years’ purchase = 3

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Q. Calculate value of goodwill on the basis of three years purchase of average profit of the preceding five years were as follows:

year	2017-18	2016-17	2015-16	2014-15	2013-14
Profits(Rs)	$8, 00, 000$	$15, 00, 000$	$18, 00, 000$	$4, 00, 000$ (Loss)	$13, 00, 000$

Q. Profits of a firm for the year ended 31st March for the last five years were:

Year ended	31st March, 2014	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018
Profit (₹)	20,000	24,000	30,000	25,000	18,000

Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2014, 2015, 2016, 2017 and 2018.

Q. A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. Their Balance Sheet as on 31st March, 2018 is given below:


Liabilities		₹	Assets	₹
Capital A/cs:			Building	18,00,000
A	11,00,000		Investments	4,00,000
B	11,40,000		Stock	6,00,000
C	7,60,000	30,00,000	Debtors	10,00,000
Workmen Compensation Reserve		10,00,000	Cash and Bank	6,00,000
Creditors		2,00,000
Employees' Provident Fund		2,00,000
		44,00,000		44,00,000

C retires on 30th June, 2018 and it was mutually agreed that:
(a) Building be valued at ₹ 22,00,000.
(b) Investments to be valued at ₹ 3,00,000.
(c) Stock be taken at ₹ 8,00,000.
(d) Goodwill of the firm be valued at two years' purchase of the average profit of the past five years.
(e) C's share of profits up to the date of retirement be calculated on the basis of average profit of the preceding three years.
The profits of the preceding five years were as under:

Year	2013-14	2014-15	2015-16	2016-17	2017-18
Profits (₹)	4,00,000	5,00,000	6,00,000	8,00,000	7,00,000

(f) Amount payable to C to be transferred to his Loan Account carrying interest @ 10% p.a.
Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet as at 30th June, 2018.

Q. X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2018, they decided to share profits and losses equally. The Partnership Deed provides that in the event of any change in the profit-sharing ratio, the goodwill should be valued at two years' purchase of the average profit of the preceding five years. The profits and losses of the preceding years ended 31st March, are:

Year	2013-14	2014-15	2015-16	2016-17	2017-18
Profits (₹)	70,000	85,000	45,000	35,000	10,000 (Loss)

You are required to calculate goodwill and pass journal entry.

Q. Purav and Purvi are partners in a firm sharing profits and losses in the ratio of 2 : 1. They decide to take Parv into partnership for 1/4th share on 1st April, 2019. For this purpose, goodwill is to be valued at four times the average annual profit of the previous four or five years, whichever is higher. The agreed profits for goodwill purpose of the past five years are:

Year	2014-15	2015-16	2016-17	2017-18	2018-19
Profits (₹)	14,000	15,500	10,000	16,000	15,000

Calculate the value of goodwill.

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