Question

A, B and C are partners sharing profits and losses in the ratio of 5 : 3 : 2. A was unable to devote time to business due to his other commitments. Hence adjustments were required in the agreed terms of partnership. They decided to share future profits in the ratio of 2 : 5 : 3. Following balances appeared in their books:                                                                                   ₹ Advertisement Suspense A/c (Dr.)                       15,000 Workmen Compensation Reserve                        90,000 Investment Fluctuation Reserve                           60,000 Investments at Cost                                           5,00,000 It was agreed that: Goodwill should be valued at three years' purchase of super profits. Firm's average profits are ₹ 1,00,000. Capital invested in the business is ₹ 8,00,000 and normal rate of return is 10%. Claim on account of Workmen's Compensation has been estimated at ₹ 80,000.

Based on the above information, choose the correct option:

In respect of goodwill ______.

विकल्प

• Credit A by ₹ 30,000; B by ₹ 18,000 and C by ₹ 12,000

• Credit A by ₹ 12,000; B by ₹ 30,000 and C by ₹ 18,000

• Credit A by ₹ 18,000; Debit B by ₹ 12,000 and C by ₹ 6,000

• Debit A by ₹ 18,000; Credit B by ₹ 12,000 and C by ₹ 6,000

Answer 1

In respect of goodwill credit A by ₹ 18,000; debit B by ₹ 12,000 and C by ₹ 6,000.

Explanation:

Normal Profit = 10% of ₹ 8,00,000 = ₹ 80,000

Average Profit = ₹ 1,00,000

Super Profit = ₹ 1,00,000 − ₹ 80,000 = ₹ 20,000

Goodwill = ₹ 20,000 × 3 = ₹ 60,000

Old Ratio = 5 : 3 : 2; New Ratio = 2 : 5 : 3

Sacrifice or Gain:

`A = 5/10 - 2/10 = 3/10 "(Sacrifice)"    60,000 xx 3/10 = ₹ 18,000 " (Cr.)"`

`B = 3/10 - 5/10 = 2/10 "(Gain)"    60,000 xx 2/10 = ₹ 12,000 " (Dr.)"`

`C = 2/10 - 3/10 = 1/10 "(Gain)"    60,000 xx 1/10 = ₹ 6,000 " (Dr.)"`