Question

L, M, N and O are partners in a firm sharing profits and losses on the ratio of 2 : 2 : 1 : 1. M and O decided to retire from the firm. The goodwill of the firm was valued at ₹ 3,60,000. L and N decided to share future profits equally.

Find out Gaining Ratio and Pass necessary journal entry for the treatment of goodwill.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	L's Capital A/c   ...Dr.		60,000
	N's Capital A/c   ...Dr.		1,20,000
	To M's Capital A/c			1,20,000
	To O's Capital A/c			60,000
	(Being goodwill adjusted by debiting gaining partners in their gaining ratio of 1 : 2 and crediting retiring partners with their respective shares)

Working note:

1. Calculation of Gaining Ratio

Old Ratio (L : M : N : O) = 2 : 2 : 1 : 1

New Ratio (L : N) = 1 : 1 (equally)

Gain = New Share − Old Share

L's Gain = `1/2 - 2/6 = (3 - 2)/6 = 1/6`

N's Gain = `1/2 - 1/6 = (3 - 1)/6 = 2/6`

Gaining Ratio of L and N = 1 : 2

2. Adjustment of Goodwill Value

Total Goodwill of the firm = ₹ 3,60,000

M's Share of Goodwill (Retiring) = `3,60,000 xx 2/6 = 1,20,000`

O's Share of Goodwill (Retiring) = `3,60,000 xx 1/6 = 60,000`

Total Goodwill to be compensated = ₹ 1,20,000 + ₹ 60,000 = ₹ 1,80,000

This total amount of ₹ 1,80,000 will be contributed by the gaining partners (L and N) in their Gaining Ratio (1 : 2):

L's contribution = `1,80,000 xx 1/3 = 60,000`

N's contribution = `1,80,000 xx 2/3 = 1,20,000`