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Question

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1. From 1st April, 2019 they decided to share profits equally. The Partnership Deed provides that in the event of any change in profit-sharing ratio, goodwill shall be valued at three years' purchase of average profit of last five years. The profits and losses of past five years are:
Profit − Year ended 31st March, 2015 − ₹ 1,00,000; 2016 − ₹ 1,50,000; 2018 − ₹ 2,00,000; 2019 − ₹ 2,00,000.
Loss − Year ended 31st March, 2017 − ₹ 50,000.
Pass the Journal entry showing the working.

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Solution

Journal

Date

Particulars

L.F.

Debit

Amount

()

Credit

Amount

()

2019

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

Mandeep :Vinod :Abbas=3:2:1(Old Ratio)Mandeep :Vinod :Abbas=1:1:1(New Ratio)Sacrificing (or Gaining Ratio) = Old Ratio - New RatioMandeep's share=3613=326=16(Sacrifice)Vinod's share=2613=226=0Abbas's share=1613=126=16(Gain)


WN2: Valuation of Goodwill

Goodwill=Average Profit×No. of years' Purchase =1,20,000×3=Rs 3,60,000

Average Profit=Total Profits of past years givenNumber of years =1,00,000+1,50,000+2,00,000+2,00,00050,0005=Rs 1,20,000

WN3: Adjustment of Goodwill



Amount debited to Abbas's Capital A/c=3,60,000×16=Rs 60,000 (share of gain)Amount credited to Mandeep's Capital A/c=3,60,000×16=Rs 60,000 (share of sacrifice)


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