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Mandeep, Vinod and Abbas Are Partners Sharing Profits and Losses in the Ratio of 3 : 2 : 1. from 1st April, 2019 They Decided to Share Profits Equally. - CBSE (Arts) Class 12 - Accountancy

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Question

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1. From 1st April, 2019 they decided to share profits equally. The Partnership Deed provides that in the event of any change in profit-sharing ratio, goodwill shall be valued at three years' purchase of average profit of last five years. The profits and losses of past five years are:
Profit − Year ended 31st March, 2015 − ₹ 1,00,000; 2016 − ₹ 1,50,000; 2018 − ₹ 2,00,000; 2019 − ₹ 2,00,000.
Loss − Year ended 31st March, 2017 − ₹ 50,000.
Pass the Journal entry showing the working.

Solution

Journal

Date

Particulars

L.F.

Debit

Amount

(₹)

Credit

Amount

(₹)

2019

 

 

 

 

 

April 1

Abbas’s Capital A/c

Dr.

 

60,000

 

 

     To Mandeep’s Capital A/c

 

 

 

60,000

 

(Adjustment entry made for change in ratio)

 

 

 

Working Notes:

WN1: Calculation of Sacrifice or Gain

Mandeep : Vinod : Abbas = 3 : 2 : 1 (Old ratio)

Mnadeep : vinod : abbas = 1 : 1: 1 (new ratio)

sacrificing (or gaining ratio) = Old ratio - new ratio

Mnadeep's share = `3/6 - 1/3 = (3-2)/6 = 1/6` (sacrifice)

Vinod's share = `2/6 - 1/3 = (2-2)/6 = 0`

Abba's share = `1/6 - 1/3 = (1-2)/6 = -1/6` (gain)

WN2: Valuation of Goodwill

Goodwill = average profit x no. of years purchase

               = `1,20,000 xx 3`

               = Rs 3,60,000

Average profit = `"total profits of past years given"/"number of years"`

                 = `(1,00,000 + 1,50,000 + 2,00,000 - 50,000)/5`

                 = Rs 1,20,000

WN3: Adjustment of  Goodwill

Amount debited to abbas capital A/c = `3,60,000 xx 1/6` = Rs 60,000 (share of gain)

Amount credited to mandeep's capital A/c = `3,60,000 xx 1/6` = Rs 60,000 (share of sacrifice)

  Is there an error in this question or solution?

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Solution Mandeep, Vinod and Abbas Are Partners Sharing Profits and Losses in the Ratio of 3 : 2 : 1. from 1st April, 2019 They Decided to Share Profits Equally. Concept: Retirement and Death of a Partner - Calculation of New Profit Sharing Ratio.
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