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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.

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Solution

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

Ram :Laxman :Bharat=3:2:1(Old ratio)Ram :Bharat = 2:1(New ratio)Gaining Ratio = New Ratio - Old RatioRam's Gain =2336=436=16Bharat's Gain =1316=216=16Ram:Bharat=1:1


WN2: Calculation of Retiring Partner’s Share of Goodwill
Laxman's share of goodwill=2,52,000×26=Rs 84,000Laxman's share of goodwill will be brought by Ram and Bharat in their gaining ratio1:1Therefore, Ram's Capital A/c will be debited with 84,000×12=Rs 42,000And, Bharat's Capital A/c will be debited with 84,000×12=Rs 42,000

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)


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