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Question
Kumar, Gupta and Kavita were partners in the firm sharing profits and losses equally. The firm was engaged in the storage and distribution of canned juice and its godowns were located at three different places in the city. Each godown was being managed individually by Kumar, Gupta and Kavita. Because of increase in business activities at the godown managed by Gupta, he had devoted more time. Gupta demanded that his share in the profits of the firm be increased, to which Kumar and Kavita agreed. The new profit sharing ratio was agreed to be 1: 2: 1. For this purpose, the goodwill of the firm was valued at two years purchase of the average profits of last five years. The profits of the last five years were as follows :
| Years |
Profit Rs |
|
| I | 4,00,000 | |
| II | 4,80,000 | |
| II | 7,33,000 | |
| IV | Loss | 33,000 |
| V | 2,20,000 |
You are required to:
1) Calculate the goodwill of the firm
2) Pass necessary Journal Entry for the treatment of goodwill on the change in profit sharing ratio of Kumar, Gupta and Kavita.
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Solution
| Journal | ||||
| Date | Particulars | L.F |
Dr. Rs |
Cr. Rs |
|
Gupta’s Capital A/c Dr. To Kumar’s Capital A/c To Kavita’s Capital A/c (Being goodwill adjusted at the time of change in profit sharing ratio) |
1,20,000
|
60,000 60,000
|
||
Working Note:
WN 1 Calculation of Gaining Ratio
Old Ratio = 1:1:1
New Ratio = 1:2:1
Gaining Ratio = New Ratio – Old Ratio
Kumar = `1/4 - 1/3 = (3-4)/12 = -1/12` (sacrifice)
Gupta = `2/4- 1/3 = (6-4)/12 = 2/12` (Gain)
Kavita = `1/4 - 1/3 = (3-4)/12 = -1/12` (sacrifice)
Only Gupta is gaining, Kumar and Kavita are sacrificing in the ratio of 1:1.
WN2 Calculation of Goodwill of the firm
Average Profit = `" Sum of years of profit"/"Number of years"`
= `(4,00,000 + 4,80,000 + 7,33,000 - 33,000 + 2,20,000)/5`
`= 1800000/5 = 360000`
Goodwill is calculated on the basis of two years purchase of last 5 years average profit
Goodwill = 2 x Average Profit
= 2 x 3,60,000 = 7,20,000
Amount of goodwill to be adjusted = `720000 xx 1/12 = 60000`
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RELATED QUESTIONS
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 |
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(a) The amount standing to the credit of partner's capital account.
(b) Interest on capital @12% per annum.
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(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 |
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| Balance Sheet as at 31st March,2021 | |||||
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| Sundry Creditors | 56,500 | Cash | 1,17,300 | ||
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Complete the following Table:
| ? | = | `"Total Profit"/"Number of Years"` |
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| Amount (₹) | 30,000 (Profit) |
40,000 (Profit) |
70,000 (Profit) |
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50,000 (Profit) |
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______ = Average profit x No. of years of purchase
