Question

Gopal and Govind are partners sharing profits and losses in the ratio of 60 : 40. The firm’s Balance Sheet as at 31.3.2024 was as follows:

Liabilities	₹	Assets	₹
Capital Accounts:		Fixed Assets	3,00,000
Gopal	1,20,000	Investments	50,000
Govind	80,000	Current Assets	2,00,000
Long-term Loan	2,00,000	Loans and Advances	1,00,000
Current Liabilities	2,50,000
	6,50,000		6,50,000

Due to financial difficulties, they have decided to admit Guru as a partner in the firm from 1.4.2024 on the following terms:

Guru will be entitled to 40% of the profits.

Guru will bring in cash ₹ 1,00,000 as capital. It is agreed that Goodwill of the firm will be valued at 2 years’ purchase of 3 years’ normal average profits of the firm and Guru will bring in cash his share of Goodwill. It was also decided that the partners will not withdraw their share of goodwill nor will the goodwill appear in the books of account.

The profits of the previous three years were as follows:

For the year ended 31.3.2022 profit ₹ 20,000 (including an insurance claim received for ₹ 40,000).

For the year ended 31.3.2023 loss ₹ 80,000 (including voluntary retirement compensation paid ₹ 1,10,000).

For the year ended 31.3.2024 profit ₹ 1,05,000 (including a profit of ₹ 25,000 on the sale of assets).

It was decided to revalue the assets on 31.3.2024 as follows:

	₹
Fixed Assets (net)	4,00,000
Investments	Nil
Current Assets	1,80,000
Loans and Advances	1,00,000

The new profit-sharing ratio after the admission of Guru was 35 : 25 : 40.

Pass Journal entries on admission, show goodwill calculation and prepare Revaluation Account, partners’ Capital Accounts, and Balance Sheet as on 1.4.2024 after the admission of Guru.

Answer 1

Journal Entry
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c   ...Dr.		1,24,000
	To Guru’s Capital A/c			1,00,000
	To Premium for Goodwill A/c			24,000
	(Capital and premium for goodwill brought in by Guru)
	Premium for Goodwill A/c   ...Dr.		24,000
	To Gopal’s Capital A/c			15,000
	To Govind’s Capital A/c			9,000
	(Premium for goodwill distributed to sacrificing partners in the ratio 5 : 3)
	Fixed Assets A/c   ...Dr.		1,00,000
	To Revaluation A/c			1,00,000
	(Increase in the value of Fixed Assets recorded)
	Revaluation A/c   ...Dr.		70,000
	To Investments A/c			50,000
	To Current Assets A/c			20,000
	(Decrease in the value of Investments and Current Assets recorded)
	Revaluation A/c   ...Dr.		30,000
	To Gopal’s Capital A/c			18,000
	To Govind’s Capital A/c			12,000
	(Gain on revaluation transferred to old partners’ capital accounts)

 

Dr.	Revaluation Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Investments A/c	50,000	By Fixed Assets A/c	1,00,000
To Current Assets A/c	20,000
To Gain on Revaluation transferred to:
Gopal’s Capital A/c	18,000
Govind’s Capital A/c	12,000
	1,00,000		1,00,000

 

Dr.	Partners’ Capital Accounts						Cr.
Particulars	Gopal (₹)	Govind (₹)	Guru (₹)	Particulars	Gopal (₹)	Govind (₹)	Guru (₹)
To Balance c/d	1,53,000	1,01,000	1,00,000	By Balance b/d	1,20,000	80,000
				By Bank A/c			1,00,000
				By Premium for Goodwill	15,000	9,000
				By Revaluation A/c	18,000	12,000
	1,53,000	1,01,000	1,00,000		1,53,000	1,01,000	1,00,000

 

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital Accounts:		Fixed Assets (net)	4,00,000
Gopal	1,53,000	Investments	Nil
Govind	1,01,000	Current Assets	1,80,000
Guru	1,00,000	Loans and Advances	1,00,000
Long-term Loan	2,00,000	Bank	1,74,000
Current Liabilities	2,50,000
	8,04,000		8,04,000

Calculate Goodwill:

For the year ended 31.3.2022:

Profit = ₹ 20,000

Less: Abnormal gain (insurance claim received) = ₹ 40,000

Normal Profit = ₹ 20,000 − ₹ 40,000

= − ₹ 20,000 (Loss)

For the year ended 31.3.2023:

Loss = ₹ 80,000

Add: Abnormal loss (voluntary retirement compensation paid) = ₹ 1,10,000

Normal Profit = − 80,000 + 1,10,000

= 30,000

For the year ended 31.3.2024:

Profit: ₹ 1,05,000

Less: Abnormal gain (profit on sale of assets) = ₹ 25,000

Normal Profit = ₹ 1,05,000 − ₹ 25,000

= ₹ 80,000

Average Normal Profit = `(-20,000 + 30,000 + 80,000)/3`

= `(90,000)/3`

= 30,000

Firm’s Goodwill = `30,000 × 2`

= 60,000

Guru’s Share of Goodwill = `60,000 xx 40/100`

= 24,000

Calculation of Sacrificing Ratio:

Sacrifice Ratio = Old Ratio − New Ratio

Gopal’s Sacrifice = `60/100 - 35/100`

= `25/100`

Govind’s Sacrifice = `40/100 - 25/100`

= `15/100`

Sacrificing Ratio = `25/100 : 15/100` or 25 : 15 = 5 : 3