Question

P, Q and R are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2024, they decide to share profits and losses in equal proportions. The partnership deed provides that in the event of any change in profit sharing ratio, the goodwill should be valued at three years' purchase of the average of five years' profits. The profits and losses of the preceding five years ending 31st March are:

Profits: 2020: ₹ 60,000, 2021 : ₹ 1,50,000, 2022 : ₹ 1,70,000, 2023 ₹ 1,90,000.

Loss: 2024: ₹ 70,000.

Give the necessary journal entry to record the above change.

Answer 1

Old profit-sharing ratio:

P : Q : R = 5 : 3 : 2

New profit-sharing ratio:

P : Q : R = 1 : 1 : 1

Journal Entry
Date	Particulars	L.F.	Dr. ₹	Cr. ₹
	Q's Capital A/c   ...Dr.		10,000
	R's Capital A/c   ...Dr.		40,000
	To P's Capital A/c			50,000
	(Being goodwill adjusted among partners on change in profit-sharing ratio.)

Working Note:

1. Average Profit

Profits and loss of the last five years:

₹ 60,000 + ₹ 1,50,000 + ₹ 1,70,000 + ₹ 1,90,000 − ₹ 70,000 = ₹ 5,00,000

Average Profit = `(5,00,000)/5 = 1,00,000`

2. Value of Goodwill

Goodwill = 3 years' purchase of average profit:

₹ 1,00,000 × 3 = ₹ 3,00,000

3. Gain or Sacrifice

P: `5/10 - 1/3 = 1/2 - 1/3 = 1/6` sacrifice

Q: `1/3 - 3/10 = 1/30` gain

R: `1/3 - 2/10 = 1/3 - 1/5 = 2/15` gain

4. Goodwill Adjustment

P's sacrifice: `3,00,000 xx 1/6 = 50,000`

Q's gain: `3,00,000 xx 1/30 = 10,000`

R's gain: `3,00,000 xx 2/15 = 40,000`

Thus, Q and R compensate P.