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

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×No.ofpurchaseyear
Substitute values in the above equation
Goodwill=Rs39,000+Rs57,000+Rs24,000+Rs27,000Rs12,0005×2years=Rs1,35,0005×2=Rs54,000
Now, sacrifising ratio of X, Y and Z has to be calculated using the formula given below
Sacrifisingratio=OldratioNewratio
X's sacrifising ratio=510210=310
Y's sacrifising ratio=310510=210
Z's sacrifising ratio=210310=110
As we see that Y and Z are gaining due to change in ratios but X has sacrifised
Y's gain=Rs54,000×210=Rs10,800
Z's gain=Rs54,000×110=Rs5,400
X's sacrifise=Rs54,000×310=Rs16,200
Journal entry for adjustement
GainToSacrifise
Substitute values in above equation
Yscapitala/cDrRs10,800Zscapitala/cDrRs5,400ToXscapitala/cRs16,200
Hence, Y is debited with Rs10,800 along with Z as Rs5,400 but X is credited with Rs16,200

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