Question

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1 . 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 shall be valued at three years' purchase of the average profit of last five years . The profits and losses of the past five years are:

Profit$—$Year ended 31st March, 2014$—$₹ 1,00,000; 2015$—$₹ 1,50,000; 2017$—$₹ 2,00,000; 2018$—$₹ 2,00,000;
Loss$—$Year ended 31st March, 2016$—$₹ 50,000.
Pass the journal entries showing the working.

Answer 1

Journal
Date 2018	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
April 1	Abbas’s Capital A/c	Dr.		60,000
	To Mandeep’s Capital A/c				60,000
	(Adjustment entry made for change in ratio)

Working Notes:

WN1: Calculation of Sacrifice or Gain

$\begin{array}{l}\text{Mandeep :Vinod :Abbas}=3\text{:2:1}\left(\text{Old Ratio}\right)\\ \text{Mandeep :Vinod :Abbas}=\text{1:1:1}\left(\text{New Ratio}\right)\\ \text{Sacrificing (or Gaining Ratio) = Old Ratio - New Ratio}\\ \text{Mandeep's share}=\frac{3}{6}-\frac{1}{3}=\frac{3-2}{6}=\frac{1}{6}\left(Sacrifice\right)\\ \text{Vinod's share}=\frac{2}{6}-\frac{1}{3}=\frac{2-2}{6}=0\\ \text{Abbas's share}=\frac{1}{6}-\frac{1}{3}=\frac{1-2}{6}=-\frac{1}{6}\left(Gain\right)\end{array}$

WN2: Valuation of Goodwill

$\begin{array}{l}\text{Goodwill}=\text{Average Profit}\times \text{No. of years' Purchase}\\ =1,2\text{0,000}\times 3=\text{Rs 3,60,000}\end{array}$

$\begin{array}{l}\text{Average Profit}=\frac{\text{Total Profits of past years given}}{\text{Number of years}}\\ =\frac{1,00,000+1,50,000+2,00,000+2,00,000-50,000}{5}=\text{Rs 1,20,000}\end{array}$
WN3: Adjustment of Goodwill



$\begin{array}{l}\text{Amount debited to Abbas's Capital A/c}=\text{3,60,000}\times \frac{1}{6}=\text{Rs 60,000 (share of gain)}\\ \text{Amount credited to Mandeep's Capital A/c}=\text{3,60,000}\times \frac{1}{6}=\text{Rs 60,000 (share of sacrifice)}\end{array}$