Question
X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2018, they decided to share profits and losses equally. The Partnership Deed provides that in the event of any change in the profit-sharing ratio, the goodwill should be valued at two years' purchase of the average profit of the preceding five years. The profits and losses of the preceding years ended 31st March, are:
| Year | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 |
| Profits (₹) | 70,000 | 85,000 | 45,000 | 35,000 | 10,000 (Loss) |
You are required to calculate goodwill and pass journal entry.
Solution
Journal
|
Date |
Particulars |
L.F. |
Debit Amount Rs |
Credit Amount Rs |
|
|
April 1 |
Y’s Capital A/c |
Dr. |
|
3,000 |
|
|
|
Z’s Capital A/c |
Dr. |
|
12,000 |
|
|
|
To X’s Capital A/c |
|
|
|
15,000 |
|
|
(Amount of goodwill adjusted on change in profit sharing ratio) |
|
|
|
|
Working Notes:
WN 1 Calculation of Sacrificing (or Gaining) Ratio
Old Ratio (X, Y and Z) = 5 : 3 : 2
New Ratio (X, Y and Z) = 1 : 1 : 1
Sacrificing (or Gaining) Ratio = Old Ratio − New Ratio
X's share = `5/10 - 1/3 = (15-10)/30 = 5/30` (sacrifice)
Y's share = `3/10 -1/3 = (9-10)/30 = (-1)/30` (Gain)
Z's share = `2/10 - 1/3 = (6-10)/30 = (-4)/30` (gain)
WN 2 Calculation of Goodwill
Goodwill = Average profit x No. of years purchased
Average profit = `(70,000 + 85,000 + 45,000 + 35,000 - 10,000)/5` Rs 45,000
Goodwill = `45,000 xx 2` = Rs 90,000
WN 3 Adjustment of Goodwill
Amount to be credited to X's capital A/c =`90,000 xx 5/30` (share of sacrifice)
= Rs 15,000
Amount to be debited to Y's capital A/c =`90,000 xx 1/30` (share of gain)
= Rs 3,000
Amount to be debited to Z's capital A/c =`90,000 xx 4/30` (share of gain)
= Rs 12,000
