1,400)
1. (Distribution of Reserves/Profit) X and Y are in partnership, sharing profits in 2:3
ratio. With effect from 1st April 2019, they agreed to share profits in the ratio of 1: 2. For
this purpose, the goodwill of the firm is to be valued at two years' purchase of the average
profits of last three years, which were *75,000, 80,000 and 1,00,000 respectively. The
reserve appears in the books at 55,000. Partners neither want to show the goodwill in the
books nor want to distribute the reserve. You are required to give effect to the change by
passing a single journal entry.
Answers
Explanation:
1. A's Capital a/c.......Dr. 30000
To B's Capital a/c 30000
(Being adjustment for goodwill and reserve made)
Working notes:
1. Goodwill = Average profit x no. of years of purchase
= (150000 + 160000 + 200000)/3 x 2 = 340000
2. A: 2/5 - 1/3 = 1/15 gain
B: 1/15 sacrifice
3. Debit A's capital A/c for goodwill + reserve = 22667 + 7333 =30000
ANSWER
1. A's Capital a/c.......Dr. 30000
To B's Capital a/c 30000
(Being adjustment for goodwill and reserve made)
Working notes:
1. Goodwill = Average profit x no. of years of purchase
= (150000 + 160000 + 200000)/3 x 2 = 340000
2. A: 2/5 - 1/3 = 1/15 gain
B: 1/15 sacrifice
3. Debit A's capital A/c for goodwill + reserve = 22667 + 7333 =30000