A, B and C are partners sharing profits in the ratio of 4 : 3 : 2. B decides to retire and surrenders his share
to A and C in the ratio of 3 : 1. The goodwill of the firm is valued at 1.5 years purchase of super profits
based on average profits of the last three year which were ` 2,00,000, ` 2,40,000 and ` 3,10,000
respectively. The normal profits for the similar firm are ` 1,70,000. Goodwill already appears in the
books of the firm at `72,000. The profit for the first year after B’s retirement was ` 5,40,000. Give the
necessary journal entries to adjust goodwill and to distribute profits.
Answers
Answer:
Calculation of gaining ratio
Old ratio (A, B and C) = 4 : 3 : 2
B retires from the firm
New artio (A and C ) = 5 : 3
Gaining ratio = New ratio - Old ratio
A's new share = (5/8) - (4/9) = (45 - 32) /72 = 13/72
C's new share = (3/8) - (2/9) = (27 - 16) / 36 = 11/72
gaining ratio = 13 : 11
2. Adjustment of goodwill
C's share of goodwill = (10800 * 3) / 9 = 3600
This share of goodwill is to be debited to remaining partners' capital account in their gaining ratio (i.e., 13 : 11 )
Journal entry for the above will be:
A's capital A/c Dr. 1950
C's capital A/c Dr. 1650
To B's capital A/c 3600
Answer:
Following are the Journal Entries -
- Profit and Loss Appropriation A/c Dr. 5,40,000
To A's Capital Account 2,40,000
To B's Capital Account 1,80,000
To C's Capital Account 1,20,000
(being profit distributed among three partners)
- A's Capital Account Dr. 30,000
C's Capital Account Dr. 10,000
To B's Capital Account 40,000
(Being B's Share of Goodwill given on his retirement)
Working Note
1. Goodwill Value on the basis of Super profits
Super Profits = Average Profit - Normal Profit
= 2,50,000 - 1,70,000
= 80,000
Goodwill = Number of years purchase of super-profits × Super-profits
= 1.5 × 80000
= 1,20,000
B's Share of Goodwill = × 1,20,000 = 40,000
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