Question

Alia, Karan and Shilpa were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Goodwill appeared in their books at a value of ₹ 60,000 and General Reserve at ₹ 20,000. Karan decided to retire from the firm. On the date of his retirement, goodwill of the firm was valued at ₹ 2,40,000. The new profit sharing ratio decided among Alia and Shilpa was 2 : 3.

Record necessary Journal entries on Karan's retirement.

Answer 1

Journal entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Alia's Capital A/c   ...Dr		30,000
	Karan's Capital A/c   ...Dr.		18,000
	Shilpa's Capital A/c   ...Dr.		12,000
	To Goodwill A/c			60,000
	(Being existing goodwill written off among old partners in their old profit-sharing ratio of 5 : 3 : 2)
2.	General Reserve A/c   ...Dr.		20,000
	To Alia's Capital A/c			10,000
	To Karan's Capital A/c			6,000
	To Shilpa's Capital A/c			4,000
	(Being general reserve distributed among old partners in their old profit-sharing ratio of 5 : 3 : 2)
3.	Shilpa's Capital A/c   ...Dr.		96,000
	To Alia's Capital A/c			24,000
	To Karan's Capital A/c			72,000
	(Being revalued goodwill adjusted by debiting the gaining partner and crediting the sacrificing partners)

Working note:

1. Calculation of Gaining/Sacrificing Ratio

Old Ratio (Alia : Karan : Shilpa) = 5 : 3 : 2

New ratio (Alia : Shilpa) = 2 : 3

Gain/Sacrifice = New Share − Old Share

Alia = `2/5 - 5/10 = (4 - 5)/10 = -1/10` (Sacrifice)

Shilpa = `3/5 - 2/10 = (6 - 2)/10 = 4/10` (Gain)

Karan = `0 - 3/10 = -3/10` (Sacrifice)

Since Alia's share decreases, she is also sacrificing along with the retiring partner, Karan. Shilpa will compensate both of them.

2. Adjustment of Revalued Goodwill

Value of firm's revalued goodwill = ₹ 2,40,000

Shilpa's Gain Share (Debit) = `2,40,000 xx 4/10 = ₹ 96,000`

Alia's Sacrifice Share (Credit) = `2,40,000 xx 1/10 = ₹ 24,000`

Karan's Share (Credit) = `2,40,000 xx 3/10 = ₹ 72,000`