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Question
Suresh, Ramesh and Tushar were partners of a firm sharing profits in the ratio of 6:5:4. Ramesh retired and his capital after making adjustments on account of reserves, revaluation of assets and reassessment of liabilities stood at ₹ 2,50,400. Suresh and Tushar agreed to pay him ₹ 2,90,000 in full settlement of his claim. Pass necessary journal entry for the treatment of goodwill. Show workings clearly.
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Solution
| JOURNAL ENTRY | ||||
| Date | Particulars | L.F. | Dr. Amount | Cr. Amount |
| Suresh’s Capital A/c Dr. | 23,760 | |||
| Tushar’s Capital A/c Dr | 15,840 | |||
|
Ramesh’s Capital A/c (Being goodwill adjusted) |
39,600 | |||
Working Note:
Ramesh’s share of Goodwill = ₹2,90,000 − ₹2,50,400
= ₹39,600
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RELATED QUESTIONS
Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. Vaibhav's share of profit in the year of his death was to be calculated on the basis of the average profit of last five years. The average profit of last five years was Rs. 75,000.
Pass necessary journal entries in the books of the firm on Vaibhav's death.
On1.4.2014 the Balance Sheet of Anant, Sampat and Gunvant was as follows :
| Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Sundry Creditors General Reserve Capital Reserve Anant 30,000 Sampat 15,000 Gunvant 15,000 |
9,000 9,600
60,000 |
Bank Bills Receivables Stock Tools Furniture
|
15,600 18,000 18,000 3,000 24,000
|
| 78,600 | 78,600 |
Gunvant died on 30.9.2014. Under the terms of Partnership Deed, the executors of the deceased partner were entitled to:
(a) The amount standing to the credit of partner's capital account.
(b) Interest on capital @12% per annum.
(c) A share of goodwill on the basis of twice the average of past three years profits.
(d) A share of profit from the closing of last financial year to the date of death on the basis of last year's profit.
The profits of the last three years were as follows:
| Year | Profit |
| 2011 - 2012 | 18.000 |
| 2012 - 2013 | 21,000 |
| 2013 - 2014 | 24,000 |
The firm closes its books on 31st March every year. Partners share profits in the ratio of their capitals.
Prepare Gunvant's Capital Account to be presented to his executors
Joshi, Pandey and Agarwal were partners in a firm sharing profits in the ratio of 2:2:1. On 31.3.2014, their Balance Sheet was as follows:
| Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Creditors Bills Payable Agarwal's Loan Capitals Joshi 2,10,000 Pandey 2,04,000 |
51,000 36,000 84,000
4,14,000 |
Cash Debtors Bills payable Furniture Machinery Agarwal’s Capital |
24,000 39,000 27,000 81,000 3,75,000 39,000 |
| 5,85,000 | 5,85,000 |
On 31.12.2014, Agarwal died. The partnership deed provided for the following to the executors of the deceased partner:
(a) His share in the goodwill of the firm, calculated on the basis of three year's purchase of the average profits of the last four years. The profits of the last four years were Rs 2,70,000; Rs 3,00,000; Rs 5,40,000 and Rs 8,10,000 respectively.
(b) His share in the profits of the firm till the date of his death, calculated on the basis of the average profits of the last four years.
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(d) Interest on his loan @12% per annum.
Prepare Agarwal's Capital Account to be presented to his executors.
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State 'True' or 'False'
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State 'True' or 'False'
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Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
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|
Balance Sheet of Keith, Bina, and Veena as on 31-3-2019 |
||||
| Liabilities |
Amount (₹) |
Amount (₹) |
Assets | Amount (₹) |
| Capitals: |
|
3,25,000 |
Plant and Machinery | 2,40,000 |
| Keith | 1,50,000 | Stock | 60,000 | |
| Bina | 1,00,000 | Sundry debtors | 35,000 | |
| Veena |
75,000 |
Cash at bank | 50,000 | |
| General Reserve |
|
30,000 |
||
| Sundry creditors |
|
30,000 |
||
| 3,85,000 | 3,85,000 | |||
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- Balance in the capital account
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- Share of goodwill calculated on the basis of twice the average profits of the past three years.
- Share of profit from the closure of the last accounting year till the date of death on the basis of the average of three completed years profits before death.
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Find the Odd one.
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Gini, Bini and Mini were in partnership sharing profits and losses in the ratio of 5:2:2. Their Balance Sheet as at 31st March, 2021 was as follows:
| Balance Sheet as at 31st March,2021 | |||||
| Liabilities | Amount (₹) | Assets | Amount (₹) | ||
| Sundry Creditors | 56,500 | Cash | 1,17,300 | ||
| Bank Overdraft | 61,500 | Debtors | 38,000 | ||
| Workmen’s Compensation Reserve | 32,000 | Less: Provision For Doubtful Debts | (2,300) | 35,700 | |
| Capitals: | Inventories | 1,34,000 | |||
| Gini | 4,60,000 | Machinery | 1,00,000 | ||
| Bini | 3,00,000 | Furniture | 1,80,000 | ||
| Mini | 2,90,000 | 10,50,000 | Building | 5,70,000 | |
| Goodwill | 63,000 | ||||
| 12,00,000 | 12,00,000 | ||||
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Prepare Revaluation Account and Partners’ Capital Accounts as on 31st March, 2021.
When the new partner is admitted goodwill can be treated in how many ways?
What would be the journal entry for revaluation of an increase in the value of an asset?
What would be the journal entry for if goodwill is raised at full value and retained in books?
Analyse the case given below and answer the question that follow:
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Identify the formula for calculating goodwill with the help of capitalised method of super profit.
Fill in the blank.
______ = `("Total Profit")/("Number of Years")`
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Calculate the value of goodwill of the firm on C's admission.
Manas and Mili are partners in a firm sharing profits in the ratio of 3 : 2. Anita is admitted as a new partner for `1/4`th share in future profits. Capitals of Manas and Mili were ₹ 3,00,000 and ₹ 1,50,000 respectively. Anita brought ₹ 2,00,000 as her capital. The value of goodwill of the firm on Anita's admission.
Goodwill is to be valued on the basis of 2 years purchases of last 5 years average profit. The profits and losses of last five years were as follows :
| Year | 1 | 2 | 3 | 4 | 5 |
| Amount (₹) | 30,000 (Profit) |
40,000 (Profit) |
70,000 (Profit) |
30,000 (Loss) |
50,000 (Profit) |
Find out value of Goodwill.
______ means profit which is earned over and above the normal profit.
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During the three years ending 31st March, 2023, the results of his business were:
| Year | (₹) | |
| 2020-21 | Loss | 20,000 |
| 2021-22 | Profit | 34,000 |
| 2022-23 | Profit | 46,000 |
From the year 2020-21 to the year 2022-23, Anish withdrew ₹ 30,000 from the firm for his personal use.
On 1st April, 2023, he admitted Danish into partnership on the following terms:
- Goodwill of the firm to be valued at two years’ purchase of the average profits of the last three years.
- Danish to have a `1/4` share in the future profits.
- Danish’s capital is to be equal to `1/4` of Anish’s capital determined on 1st April, 2023, after the goodwill compensation has been taken into account.
You are required to give:
- The formula to calculate goodwill by the Average Profit Method.
- The value of self-generated goodwill of the firm.
- Danish’s capital contribution.
