Question

A and B are partners in a firm sharing profits in the ratio of 2 : 1 . They decided with effect from 1st April, 2017, that they would share profits in the ratio of 3 : 2 . But, this decision was taken after the profit for the year 2017-18 amounting to ₹ 90,000 was distributed in the old ratio.
Value of firm’s goodwill was estimated on the basis of aggregate of two years profits preceding the date decision became effective.
The profits for 2015-16 and 2016-17 were ₹ 60,000 and ₹ 75,000 respectively. It was decided that Goodwill Account will not be opened in the books of the firm and necessary adjustment be made through Capital Accounts which, on 31st March, 2018 stood, at ₹ 1,50,000 for A and ₹ 90,000 for B. Pass necessary journal entries and prepare Capital Accounts.

Answer 1

Solution:

                                                  Journal

Particulars                                          Debit Rs.            Credit Rs.

A's Capital A/c                            Dr.   6,000

     To B's Capital A/c                                                      6,000

(Being adjustment of profit for 2016-17 on change in profit sharing ratio)

B's Capital A/c                            Dr.   9,000

     To A's Capital A/c                                                       9,000

(Being adjustment of goodwill made on change in profit sharing ratio)

                              Partner's Capital Accounts  

Dr                                                                                                                 Cr  

Particulars                    A            B        Particulars              A                B

To B's Capital A/c     6,000              By Balance b/d   1,50,000    90,000

(Adjustment of profit)                         By A's Capital A/c

To A's Capital A/c                 9,000  (Adjustment Profit)

(Adjustment of Goodwill)

To Balance c/d 6,000    1,53,000 87,000 By B's Capital A/c  9,000

                                                               (Adjustment of Goodwill)

                                  1,59,000  96,000                           1,59,000  96,000

Working Notes:  

1. Calculation of Sacrificing (or Gaining) Ratio

Old Ratio (A and B) = 2 : 1

New Ratio (A and B) = 3 : 2

Sacrificing (or Gaining) Ratio = 0 d Ratio - New Ratio

A's Ratio = $\frac{2}{3} - \frac{3}{5}$ = $\frac{10}{15} - \frac{9}{15}$ = $\frac{1}{15}$  (Sacrifice)

B's Ratio = $\frac{1}{3} - \frac{2}{5}$ =$\frac{5}{15} - \frac{9}{15}$  = $\frac{-1}{15}$ (Gain)  

2. Adjustment of Profits for 2016-17  

Debited to A's Capital Account = 90,000 x $\frac{1}{15}$ (Sacrifice)= 6, 000

Credited to B's Capital Account =90,000 x $\frac{1}{15}$ (Gain)= 36,000

3. Calculation of New Goodwill Goodwill = Profit of (2016-17) + Profit of (2017-18) = 60,000 + 75,000 = Rs.1,35,000  

4. Adjustment of Goodwill  

Debited to A's Capital  Al c= 1, 35,000 x $\frac{1}{15}$ (Sacrifice) = 9, 000

Debited to B's Capital A /c = 1, 35,000 x $\frac{1}{15}$ (Gain)=9,000