$X$ and $Y$ are in partnership sharing profits in the ratio $2 : 3.$ With effect from $1 s t$ April, $2018$ , they agreed to share profits in the ratio of $1 : 2$ . For the purpose, goodwill of the firm is to be valued at two years' purchase of the average profit of last three years, which were Rs. $1, 50, 000; 1, 60, 000;$ and Rs. $2, 00, 000$ respectively. The reserves appear in the books at Rs. $1, 10, 000$ Partners decide to continue showing Reserves in the books. You are required to give effect to the change by passing a single Journal entry.

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Solution

1. A's Capital a/c.......Dr. 30000
To B's Capital a/c 30000
(Being adjustment for goodwill and reserve made)

Working notes:
1. Goodwill = Average profit x no. of years of purchase
= (150000 + 160000 + 200000)/3 x 2 = 340000
2. A: 2/5 - 1/3 = 1/15 gain
B: 1/15 sacrifice
3. Debit A's capital A/c for goodwill + reserve = 22667 + 7333 =30000

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