Question

P, Q and R are partners sharing profits equally. They decided that in future R will get 1/7 share in profits. Goodwill already exists in the books at ₹ 27,000. On the day of change, firm's Goodwill is valued at ₹ 42,000. Give Journal Entries arising on account of change in profit sharing ratio.

Hint: New Ratios `3/4 : 3/7 : 1/7.  P and Q  "gain"  2/21  "each and R sacrifices"  4/12`.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
(i)	P's Capital A/c ...Dr.		9,000
	Q's Capital A/c ...Dr.		9,000
	R's Capital A/c ...Dr.		9,000
	To Goodwill A/c			27,000
	(Being existing goodwill written off among old partners in their old equal ratio)
(ii)	P's Capital A/c ...Dr.		4,000
	Q's Capital A/c ...Dr.		4,000
	To R's Capital A/c			8,000
	(Being adjustment entry passed for goodwill on change in profit sharing ratio)

Working note:

Step 1: Calculation of Sacrificing/Gaining Ratio

Old Ratio of P, Q, and R = 1 : 1 : 1 (since they share profits equally)

Old share: `P = 1/3, Q = 1/3, R = 1/3`

New Ratio: R gets `1/7` share. The remaining share (`1 - 1/7 = 6/7`) is divided equally between P and Q.

P's New Share = `1/2 xx 6/7 = 3/7`

Q's New Share = `1/2 xx 6/7 = 3/7`

R's New Share = `1/7`

New Ratio of P, Q, and R = `3/4 : 3/7 : 1/7 = 3 : 3 : 1`

Formula: Gain/Sacrifice = New Share − Old Share

P's Share Change = `3/7 - 1/3 = (9 - 7)/21 = 2/21` (Gain)

Q's Share Change = `3/7 - 1/3 = (9 - 7)/21 = 2/21` (Gain)

R's Share Change = `1/7 - 1/3 = (3 - 7)/21 = 4/21` (Sacrifice)

Step 2: Calculation of Goodwill Values

Existing Goodwill to Write Off = ₹ 27,000

Shared equally: ₹ 27,000 ÷ 3 = ₹ 9,000 each

Adjustment for New Goodwill = ₹ 42,000

P's Gain Share = `42,000 xx 2/21 = ₹ 4,000`

Q's Gain Share = `42,000 xx 2/21 = ₹ 4,000`

R's Gain Share = `42,000 xx 4/21 = ₹ 8,000`