Question

A, B, C and D are partners sharing profits in the ratio of 1 : 2 : 3 : 4. D retires and his share is taken up by A and B equally. Goodwill was valued at 3 year's purchase of average profits which were ₹ 20,000. General Reserve showed a balance of ₹ 65,000 at the time of D's retirement.

You are required to record necessary journal entries to record the above adjustments on D's retirement. You are also required to prepare his capital account to find out the amount due to him when his capital balance in the balance sheet was ₹ 1,50,000 before any adjustment. Also calculate the new profit sharing ratios.

Answer 1

1. Calculation of New Profit-Sharing Ratio

Old Ratio (A : B : C : D): 1 : 2 : 3 : 4 (Total = 10)

D's Retiring Share = `4/10`

Share gained by A: `4/10 xx 1/2 = 2/10`

Share gained by B: `4/10 xx 1/2 = 2/10`

Share gained by C: 0

A's New Share = Old Share + Gained Share = `1/10 + 2/10 = 3/10`

B's New Share = Old Share + Gained Share = `2/10 + 2/10 = 4/10`

C's New Share = Old Share = `3/10`

New Profit-Sharing Ratio (A : B : C) = 3 : 4 : 3

2. Valuation and Adjustment of Goodwill & Reserve

Total Goodwill = Average Profit × No. of Years’ Purchase = 20,000 × 3 = 60,000

D’s Share of Goodwill = `60,000 xx 4/10 = 24,000

3.

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	General Reserve A/c   ...Dr.		65,000
	To A's Capital A/c			6,500
	To B's Capital A/c			13,000
	To C's Capital A/c			19,500
	To D's Capital A/c			26,000
	(Being General Reserve distributed among old partners in their old profit-sharing ratio of 1 : 2 : 3 : 4)
2.	A's Capital A/c   ...Dr.		12,000
	B's Capital A/c   ...Dr.		12,000
	To D's Capital A/c			24,000
	(Being D's share of valued goodwill adjusted through gaining partners A and B in their gaining ratio of 1 : 1)

4.

D's Capital Account
Particulars	Amount (₹)	Particulars	Amount (₹)
To D's Loan A/c (Balancing figure)	2,00,000	By Balance b/d	1,50,000
		By General Reserve A/c	26,000
		By A's Capital A/c (Goodwill)	12,000
		By B's Capital A/c (Goodwill)	12,000
Total	2,00,000	Total	2,00,000