Question

X, Y and Z are partners sharing profits & losses in the ratio of 5:3:2. From 1st April they decide to share profits and losses in the ratio of 2:5:3. The Partnership deed provides that in the event of any change in profit sharing ratio, the goodwill should be valued at two years' purchase of the average profits of the preceding 5 years. The profits and losses of the preceding years are:
i. Profit Rs 39,000,
ii. Profit Rs 57,000,
iii. Profit Rs 24,000,
iv. Profit Rs 27,000,
v. Loss Rs 12,000.
The necessary single adjusting entry will involve:

• A. Debit Y by Rs 10,800 and Z by Rs 5,400 and Credit X by Rs 16,200.
• B. Debit Z by Rs 10,800 and Y by Rs 5,400 and Credit X by Rs 16,200.
• C. Debit X by Rs 10,800 and Z by Rs 5,400 and Credit Y by Rs 16,200.
• D. Debit Z by Rs 10,800 and X by Rs 5,400 and Credit Y by Rs 16,200.

Answer 1

The correct option is A Debit Y by Rs 10,800 and Z by Rs 5,400 and Credit X by Rs 16,200.

Goodwill for two-year purchase of average profit can be calculated using the formula given below:

$Goodwill=Averageprofit\times No.ofpurchaseyear$

Substitute values in the above equation

$Goodwill=\frac{Rs39,000+Rs57,000+Rs24,000+Rs27,000-Rs12,000}{5}\times 2years=\frac{Rs1,35,000}{5}\times 2=Rs54,000$

Now, sacrifising ratio of X, Y and Z has to be calculated using the formula given below

$Sacrifisingratio=Oldratio-Newratio$

X's sacrifising ratio$=\frac{5}{10}-\frac{2}{10}=\frac{3}{10}$

Y's sacrifising ratio$=\frac{3}{10}-\frac{5}{10}=\frac{-2}{10}$

Z's sacrifising ratio$=\frac{2}{10}-\frac{3}{10}=\frac{-1}{10}$

As we see that Y and Z are gaining due to change in ratios but X has sacrifised

Y's gain$=Rs54,000\times \frac{2}{10}=Rs10,800$

Z's gain$=Rs54,000\times \frac{1}{10}=Rs5,400$

X's sacrifise$=Rs54,000\times \frac{3}{10}=Rs16,200$

Journal entry for adjustement

$GainToSacrifise$

Substitute values in above equation

$Y^{\prime }scapitala/cDrRs10,800Z^{\prime }scapitala/cDrRs5,400To{X}^{\prime }scapitala/cRs16,200$

Hence, Y is debited with $Rs10,800$ along with Z as $Rs5,400$ but X is credited with $Rs16,200$