Question

P, Q and R were partners in a firm sharing profits in the ratio of 3 : 2 : 1. P died and the new profit-sharing ratio of Q and R was agreed to be equal. On P’s death, goodwill of the firm was valued at 60,000:

Pass the necessary entries for the treatment of goodwill under the following conditions:

1. When Goodwill does not exist in the books of account; and
2. When Goodwill exists in the books of account at 30,000.

Note: Q’s Gain = `1/2 - 2/6 = 1/6`; R’s Gain = `1/2 - 1/6 = 2/6` and Gaining Ratio = 1 : 2.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
(a)	Q’s Capital A/c   ...Dr.		10,000	-
	R’s Capital A/c   ...Dr.		20,000	-
	To P’s Capital A/c		-	30,000
	(Being P’s share of valued goodwill adjusted into continuing partners’ capital accounts in their gaining ratio of 1 : 2)
(b)
(i)	P’s Capital A/c   ...Dr.		15,000	-
	Q’s Capital A/c   ...Dr.		10,000	-
	R’s Capital A/c   ...Dr.		5,000	-
	To Goodwill A/c		-	30,000
	(Being existing goodwill written off among old partners in their old profit-sharing ratio of 3 : 2 : 1)
(ii)	Q’s Capital A/c   ...Dr.		10,000	-
	R’s Capital A/c   ...Dr.		20,000	-
	To P’s Capital A/c		-	30,000
	(Being P’s share of valued goodwill adjusted into continuing partners’ capital accounts in their gaining ratio of 1 : 2)

Working Notes:

1. Calculation of Gaining Ratio:

Gaining Share = New Share − Old Share

Q’s Gain = `1/2 - 2/6`

= `(1 xx 3)/(2 xx 3) - 2/6`

= `3/6 - 2/6`

= `1/6`

R’s Gain = `1/2 - 1/6`

= `(1 xx 3)/(2 xx 3) - 1/6`

= `3/6 - 1/6`

= `2/6`

Therefore, the Gaining Ratio between Q and R is 1 : 2.

2. Adjustment of Valued Goodwill (₹ 60,000):

P’s Share of Goodwill = `60,000 xx 3/6`

= 30,000

This amount is contributed by Q and R in their gaining ratio 1 : 2.

Q = `30,000 xx 1/3`

= 10,000

Q = `30,000 xx 2/3`

= 20,000

3. Writing off Existing Goodwill (₹ 30,000):

Old profit-sharing ratio = 3 : 2 : 1

P’s share = `30,000 xx 3/6`

= 15,000

Q’s share = `30,000 xx 2/6`

= 10,000

R’s share = `30,000 xx 1/6`

= 5,000