Question

X and Y are in partnership sharing profits in the ratio of 2 : 3 . With effect from 1st April, 2018, they agreed to share profits in the ratio f 1 : 2 . For this purpose, goodwill of the firm is to be valued at two years' purchase of the average profit of last three years , which were ₹ 1, 50,000; ₹ 1,60,000 and ₹ 2,00,000 respectively. The reserves appear in the books at ₹ 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.

Answer 1

Journal
Date 2018	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
April 1	Y’s Capital A/c	Dr.		30,000
	To X’s Capital A/c				30,000
	(Adjustment mode for goodwill and General Reserve)

Working Notes:

WN 1 Calculation of Goodwill

WN 2 Calculation of Sacrificing (or Gaining) Ratio

Old Ratio (X and Y) = 2 : 3

New Ratio (X and Y) = 1 : 2

Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio

WN 3 Adjustment of Goodwill

WN 4 Adjustment of General Reserve

WN 5 Net Adjustment of Goodwill and General Reserve

Particulars	X	Y
Adjustment of Goodwill	22,667 (Cr.)	22,667 (Dr.)
Adjustment of General Reserve	7,333 (Cr.)	7,333 (Dr.)
Net Amount	30,000 (Cr.)	30,000 (Dr.)