Question

A, B and C are partners sharing profits in the ratio of 4/9 : 3/9 : 2/9. B retires and his capital after making adjustments for reserves and gain (profit) on revaluation stands at ₹ 1, 39, 200. A and C agreed to pay him ₹ 1,50,000 in full settlement of his claim. Record necessary journal entry for adjustment of goodwill if the new profit-sharing ratio is decided at 5 : 3.

Answer 1

Answer:

Profit sharing refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies these plans typically amount to allocation of shares to employees.

Answer 2

Working notes

i. Calculation of B’s share of goodwill

A, B and C are sharing profits in ratio $4 / 9: 3 / 9: 2 / 9$

B retires from the firm. Remaining partners agreed to pay him Rs 1,50,000

B’s capital after making necessary adjustments Rs 1,39,200

Therefore, Hidden Goodwill is Rs (1,50,000 – 1,39,200) i.e. Rs 10,800

ii. Gaining Ratio

New profit sharing ratio between A and B is 5:3

$\text { A's gain }=\frac{5}{8}-\frac{4}{9}=\frac{13}{72}$

$\text { C's gain }=\frac{3}{8}-\frac{2}{9}=\frac{11}{72}$

Gaining ratio = 13 : 11

Thus, B’s share of goodwill will be brought in by A and C in the gaining ratio 13:11 i.e.

$A \text { is debited with } 10,800 \times \frac{13}{24}=5,850$

$\mathrm{C} \text { is debited with } 10,800 \times \frac{11}{24}=4,950$