Question

Arjun, Bhim and Nakul are partners sharing profits & losses in the ratio of 14 : 5 : 6 respectively. Bhim retires and surrenders his 5/25^th share in favour of Arjun. The goodwill of the firm is valued at 2 years purchase of super profits based on average profits of last 3 years. The profits for the last 3 years are Rs 50,000, Rs 55,000 & Rs 60,000 respectively. The normal profits for the similar firm are Rs 30,000. Goodwill already appears in the books of the firm at Rs 75,000. The profit for the first year after Bhim's retirement was Rs 1,00,000. Give the necessary Journal Entries to adjust Goodwill and distribute profits showing your workings.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Arjun's Capital A/c   ...Dr.		42,000
	Bhim's Capital A/c   ...Dr.		15,000
	Nakul's Capital A/c   ...Dr.		18,000
	To Goodwill A/c			75,000
	(Being existing book goodwill written off among old partners in their old ratio of 14:5:6)
2.	Arjun's Capital A/c   ...Dr.		10,000
	To Bhim's Capital A/c			10,000
	(Being Bhim's share of valued goodwill adjusted through Arjun, who gained his entire share)
3.	Profit & Loss Appropriation A/c   ...Dr.		1,00,000
	To Arjun's Capital A/c			76,000
	To Nakul's Capital A/c			24,000
	(Being first-year post-retirement profit distributed in the new profit-sharing ratio of 19 : 6)

Working note:

1. Calculation of New and Gaining Profit-Sharing Ratios

Old Ratio: Arjun : Bhim : Nakul = 14 : 5 : 6

Bhim retires and surrenders his entire share `(5/25)` in favour of Arjun.

Gaining Share: Arjun = `5/25`, Nakul = 0 (Arjun is the only gaining partner).

Arjun's New Share = Old Share + Gained Share = `14/25 + 5/25 = 19/25`

nakul's New Share = `6/25` (unchanged)

New Profit-Sharing Ratio (Arjun : Nakul) = 19 : 6

2. Valuation of Goodwill

Average Profit = `(50,000 + 55,000 + 60,000)/3 = (1,65,000)/3 = 55,000`

Normal profit = 30,000

Super Profit = Average Profit − Normal Profit = 55,000 − 30,000 = 25,000

Firm's Valued Goodwill = Super Profit × 2 years purchase = 25,000 × 2 = 50,000

Bhim's Share of Valued Goodwill = `50,000 xx 5/25 = 10,000`

(Debited entirely to Arjun's Capital A/c as he is the sole gainer)

3. Writing Off Existing Goodwill (₹ 75,000)

Written off among all partners in their old profit-sharing ratio (14 : 5 : 6):

Arjun = `75,000 xx 14/25 = 42,000`

Bhim = `75,000 xx 5/25 = 15,000`

Nakul = `75000 xx 6/25 = 18,000`

4. Distribution of First Year’s Post-Retirement Profit (₹ 1,00,000)

Distributed between the remaining partners (Arjun and Nakul) in their new ratio (9 : 6)

Arjun's Profit Share = `1,00,000 xx 19/25 = 76,000`

Nakul's profit SHare = `1,00,000 xx 6/25 = 24,000`