Question

Ram, Laxman and Bharat are partners sharing profits in the ratio of 3 : 2 : 1. Goodwill is appearing in the books at a value of ₹ 1,80,000. Laxman retires and at the time of his retirement, goodwill is valued at ₹ 2,52,000. Ram and Bharat decided to share future profits in the ratio of 2 : 1. The Profit for the first year after Laxman's retirement amount to ₹ 1,20,000. Give the necessary Journal entries to record goodwill and to distribute the profit. Show your calculations clearly.

Answer 1

Journal
Date	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
	Ram’s Capital A/c	Dr.		90,000
	Laxman’s Capital A/c	Dr.		60,000
	Bharat’s Capital A/c	Dr.		30,000
	To Goodwill A/c				1,80,000
	(Goodwill written off)
		Dr.		42,000
	Ram’s Capital A/c	Dr.		42,000
	Bharat’s Capital A/c				84,000
	To Laxman’s Capital A/c
	(Adjustment of Laxman’s share of goodwill)
	Profit & Loss Appropriation A/c	Dr.		1,20,000
	To Ram’s Capital A/c				80,000
	To Bharat’s Capital A/c				40,000
	(Profit on revaluation transferred to Partners’ Capital A/c)

Working Notes:

WN1:Calculation of Gaining Ratio

$\begin{array}{l}\text{Ram :Laxman :Bharat}=3\text{:2:1}\left(\text{Old ratio}\right)\\ \text{Ram :Bharat = 2:1(New ratio)}\\ \text{Gaining Ratio = New Ratio - Old Ratio}\\ \text{Ram's Gain =}\frac{2}{3}-\frac{3}{6}=\frac{4-3}{6}=\frac{1}{6}\\ \text{Bharat's Gain =}\frac{1}{3}-\frac{1}{6}=\frac{2-1}{6}=\frac{1}{6}\\ \text{Ram:Bharat}=1:1\end{array}$

WN2: Calculation of Retiring Partner’s Share of Goodwill
$\begin{array}{l}\text{Laxman's share of goodwill=2,52,000}\times \frac{2}{6}=\text{Rs 84,000}\\ \text{Laxman's share of goodwill will be brought by Ram and Bharat in their gaining ratio1:1}\\ \text{Therefore, Ram's Capital A/c will be debited with 84,000}\times \frac{1}{2}=\text{Rs 42,000}\\ \text{And, Bharat's Capital A/c will be debited with 84,000}\times \frac{1}{2}=\text{Rs 42,000}\end{array}$
Note: The entry for distributing profit as given in the book is wrong. The profit will be distributed between Ram & Bharat and not Ram and Laxman (since Laxman has retired)