Question

The firm of Harry, Potter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same years. Ali wants that he should get equal share in the profits with Harry and Potter and he further wishes that the change in the profit-sharing ratio should come into effect retrospectively were for the three years. Harry and Potter have agreement on this account. The profits for the last three years were: Year 2015-16, 2016-17 & 2017-18 Profit Rs. 2,20,000 2,40,000 2,90,000. Show adjustment of profits by means of a single adjustment Journal entry.

Answer 1

Ali, a partner wants the ratio to be chnaged from 2:2:1 to a new ratio 1:1:1.

Average Profits of three years$=\frac{Rs2,20,000+Rs2,40,000+Rs2,90,000}{3}=\frac{Rs7,50,000}{3}=Rs2,50,000$

Sacrificing ratio of partners = Old Ratio-New Ratio

Harry's Sacrifice$=\frac{2}{5}-\frac{1}{3}=\frac{6-5}{15}=\frac{1}{15}$

Potter's sacrifice$=\frac{2}{5}-\frac{1}{3}=\frac{6-5}{15}=\frac{1}{15}$

Ali's sacrifice$=\frac{1}{5}-\frac{1}{3}=\frac{3-5}{15}=\frac{-2}{15}$

It is clear that Harry and Potter have sacrificed but only Ali has gained here.

Harry's sacrifice$=\frac{1}{15}\times Rs2,50,000=Rs16,667$

Potter's sacrifice$=\frac{1}{15}\times Rs2,50,000=Rs16,666$

Ali's gain$=\frac{2}{15}\times Rs2,50,000=Rs33,333$

Hence, Adjusting journal entry is

Ali's capital a/c Dr. Rs33,333

To Harry's capital a/c Rs16,667

To Potter's capital a/c Rs16,666.