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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. - CBSE (Arts) Class 12 - Accountancy

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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
2018

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

  Is there an error in this question or solution?

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Solution 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. Concept: Retirement and Death of a Partner - Calculation of New Profit Sharing Ratio.
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