Question

Ram, Laxman and Bharat are partners sharing profits in the ratio of 3 : 2 : 1. Goodwill is appearing in the books at a value of ₹ 1,80,000. Laxman retires and at the time of his retirement, goodwill is valued at ₹ 2,52,000. Ram and Bharat decided to share future profits in the ratio of 2 : 1. The Profit for the first year after Laxman's retirement amount to ₹ 1,20,000. Give the necessary Journal entries to record goodwill  and to distribute the profit. Show your calculations clearly. 

Answer 1

Journal

Date	Particulars		L.F.	Debit Amount (Rs)	Credit Amount (Rs)
	Ram’s Capital A/c	Dr.		90,000
	Laxman’s Capital A/c	Dr.		60,000
	Bharat’s Capital A/c	Dr.		30,000
	To Goodwill A/c				1,80,000
	(Goodwill written off)
		Dr.		42,000
	Ram’s Capital A/c	Dr.		42,000
	Bharat’s Capital A/c				84,000
	To Laxman’s Capital A/c
	(Adjustment of Laxman’s share of goodwill)
	Profit & Loss Appropriation A/c	Dr.		1,20,000
	To Ram’s Capital A/c				80,000
	To Bharat’s Capital A/c				40,000
	(Profit on revaluation transferred to Partners’ Capital A/c)

Working Notes:

WN1:Calculation of Gaining Ratio

Ram :LaxmaN :Bharat = `3 : 2 : 1` ( old ratio) 

Ram :Bharat = `2 : 1` (new ratio)

Gaining ratio = New Ratio - Old Ratio

Ram's Gain = `2/3 - 3/6 = (4-3)/6 = 1/6`

Bharat;s Gain = `1/3 - 1/6 = (2-1)/6 = 1/6`

Ram :Bharat = `1 : 1`

WN2: Calculation of Retiring Partner’s Share of Goodwill

Laxmans share of goodwill = `2,52,000 xx 2/6 = "Rs" 84,000`

Laxmans share of goodwill will be brought by Ram and Bharat in their Gaining ratio `1 : 1`

Therefore, Ram's Capital A/c will be debited with `84,000 xx 1/2 = "Rs" 42,000`

And Bharat Capital A/c will be Debited with `84,000 xx 1/2 = "Rs" 42,000`

Note: The entry for distributing profit as given in the book is wrong. The profit will be distributed between Ram & Bharat and not Ram and Laxman (since Laxman has retired)