Question

L, M and O were partners in a firm sharing profits in 1 : 3 : 2 ratio. L retired and the new profit sharing ratio between M and O was 1 : 2. On L’s retirement the goodwill of the firm was valued at 1,20,000. Pass necessary journal entry for the treatment of goodwill on L’s retirement.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr.	Cr.
	O’s Capital A/c        ...Dr.		40,000
	To L’s Capital A/c			20,000
	To M’s Capital A/c			20,000
	(Being Valued Goodwill of the firm adjusted)

Working Note:

1. Calculation of Gain/sacrifice of Partners

Old Ratio of L, M and O is 1 : 3 : 2

L retired

New Ratio of M and O is 1 : 2

M’s gain = `1/3-3/6=(2-3)/6=(-1)/6`

O’s gain = `2/3-2/6=(4-2)/6=2/6`

2. Calculation of Partner’s share in firm Goodwill

Goodwill of the firm = ₹ 1,20,000

L’s share in Goodwill = `1,20,000xx1/6` = ₹ 20,000

M’s share in Goodwill = `1,20,000xx1/6` = ₹ 20,000

O’s share in Goodwill = `1,20,000xx2/6` = ₹ 40,000