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Doremon, Shinchan and Nobita are partners sharing profits and losses in the ratio of 3 : 2 : 1. With effect from 1st April, 2022 they agree to share profits equally. - Accountancy

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Doremon, Shinchan and Nobita are partners sharing profits and losses in the ratio of 3 : 2 : 1. With effect from 1st April, 2022 they agree to share profits equally. For this purpose, goodwill is to be valued at two year’s purchase of the average profit of the last four years which were as follows:

Year ending on 31st March, 2019 ₹ 50,000 (Profit)
Year ending on 31st March, 2020 ₹ 1,20,000 (Profit)
Year ending on 31st March, 2021 ₹ 1,80,000 (Profit)
Year ending on 31st March, 2022 ₹ 70,000 (Loss)

On 1st April, 2021 a Motor Bike costing ₹ 50,000 was purchased and debited to travelling expenses account, on which depreciation is to be charged @ 20% p.a by Straight Line Method. The firm also paid an annual insurance premium of ₹ 20,000 which had already been charged to Profit and Loss Account for all the years.

Journalise the transaction along with the working notes.

Journal Entry
Ledger
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Solution

Journal Entry
Date Particulars L.F. Dr. (₹) Cr. (₹)
1.4.20 Nobita’s Capital A/c   ...Dr.   26,667  
  To Doremon’s Capital A/c     26,667
  (Being goodwill adjusted at the time of change
in profit sharing ratio)
     

Workings:

(i) Calculation of gaining ratio and sacrificing ratio:

Doremon’s gain or sacrifice = `3/6 - 2/6 = 1/6` (sacrifice)

Shinchan’s gain or sacrifice = `2/6 - 2/6` = 0

Nobita’s gain or sacrifice = `1/6 – 2/6 = - 1/6` (gain)

(ii) Calculation of goodwill:

Calculation of Normal Profit
Year Ended Profit/Loss Adjustments Normal Profit
31st March 2019 50,000 - 50,000
31st March 2020 1,20,000 - 1,20,000
31st March 2021 1,80,000 - 1,80,000
31st March 2022 (70,000) 50,000 - 10,000 (30,000)
Total     3,20,000

Goodwill = Average Profits × No. of years Purchase

Average Profits = `"Total Normal Profits"/"Number of years"`

= `(3,20,000)/4` = 80,000

Goodwill = 80,000 × 2 = ₹ 1,60,000

A’s share of goodwill = 1,60,000 × `1/6` = ₹ 26,667

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2022-2023 (March) Analysis of Financial Statements

RELATED QUESTIONS

Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. Vaibhav's share of profit in the year of his death was to be calculated on the basis of the average profit of last five years. The average profit of last five years was Rs. 75,000.

Pass necessary journal entries in the books of the firm on Vaibhav's death.


On1.4.2014 the Balance Sheet of Anant, Sampat and Gunvant was as follows :

Liabilities

Amount

Rs

Assets

Amount

Rs

Sundry Creditors

General Reserve

Capital Reserve

    Anant    30,000

   Sampat   15,000

   Gunvant  15,000

9,000

9,600

 

 

 

60,000

Bank

Bills Receivables

Stock

Tools

Furniture

 

15,600

18,000

18,000

3,000

24,000

 

  78,600   78,600

Gunvant died on 30.9.2014. Under the terms of Partnership Deed, the executors of the deceased partner were entitled to:

(a) The amount standing to the credit of partner's capital account.
(b) Interest on capital @12% per annum.
(c) A share of goodwill on the basis of twice the average of past three years profits.
(d) A share of profit from the closing of last financial year to the date of death on the basis of last year's profit.

The profits of the last three years were as follows:

Year Profit
2011 - 2012 18.000
2012 - 2013 21,000
2013 - 2014 24,000

The firm closes its books on 31st March every year. Partners share profits in the ratio of their capitals.
Prepare Gunvant's Capital Account to be presented to his executors


Joshi, Pandey and Agarwal were partners in a firm sharing profits in the ratio of 2:2:1. On 31.3.2014, their Balance Sheet was as follows:

Liabilities

Amount

Rs

Assets

Amount

Rs

Creditors

Bills Payable

Agarwal's Loan

Capitals

   Joshi     2,10,000

  Pandey   2,04,000

51,000

36,000

84,000

 

 

4,14,000

Cash

Debtors

Bills payable

Furniture

Machinery

Agarwal’s Capital

24,000

39,000

27,000

81,000

3,75,000

39,000

  5,85,000   5,85,000

On 31.12.2014, Agarwal died. The partnership deed provided for the following to the executors of the deceased partner:

(a) His share in the goodwill of the firm, calculated on the basis of three year's purchase of the average profits of the last four years. The profits of the last four years were Rs 2,70,000; Rs 3,00,000; Rs 5,40,000 and Rs 8,10,000 respectively.
(b) His share in the profits of the firm till the date of his death, calculated on the basis of the average profits of the last four years.
(c) Interest @12% per annum on the credit balance, if any, in his Capital account.
(d) Interest on his loan @12% per annum.

Prepare Agarwal's Capital Account to be presented to his executors.


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Liabilities Amount (₹) Assets Amount (₹)
Sundry Creditors   56,500 Cash   1,17,300
Bank Overdraft   61,500 Debtors 38,000  
Workmen’s Compensation Reserve   32,000 Less: Provision For Doubtful Debts (2,300) 35,700
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    12,00,000     12,00,000

On 31st March, 2021, Gini retired from the firm. All the partners agreed to revalue the assets and liabilities on the following basis:

  1. Bad debts amounted to ₹ 5,000. A provision for doubtful debts was to be maintained at 10% on debtors.
  2. Partners have decided to write off existing goodwill.
  3. Goodwill of the firm was valued at ₹ 54,000 and be adjusted into the Capital Accounts of Bini and Mini, who will share profits in future in the ratio of 5:4.
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  5. Liability of ₹23,000 is to be created on account of Claim for Workmen Compensation.
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Prepare Revaluation Account and Partners’ Capital Accounts as on 31st March, 2021.


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Complete the following Table:

? = `"Total Profit"/"Number of Years"`

Goodwill is to be valued on the basis of 2 years purchases of last 5 years average profit. The profits and losses of last five years were as follows :

Year 1 2 3 4 5
Amount (₹) 30,000
(Profit)
40,000
(Profit)
70,000
(Profit)
30,000
(Loss)
50,000
(Profit)

Find out value of Goodwill.


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Choose the components required to calculate goodwill of a firm by capitalisation of average profits method.

P: The normal profits of a similar firm in the industry.

Q: The average profits of the firm.

R: The number of years purchase.

S: The actual capital employed in the business.


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