Latha and Radha shared profits and losses in the ratio of 3:2. W.e.f 1st April, 2020,
they decide to share profits equally. Goodwill of the firm was valued at Rs 1,00,000.
Pass necessary Journal entries for the accounting of goodwill:
a) when goodwill is adjusted through the partners’ capital account
b) when goodwill is adjusted by goodwill account
Answers
Answer:
(a) Radha's Capital a/c.............Dr ₹10,000
To Latha's Capital a/c. ₹10,000
(Being sacrificing partners share of goodwill adjusted through their capital a/c)
(b) (1) Goodwill a/c................... Dr ₹1,00,000
To Latha's Capital a/c. ₹60,000
To Radha's Capital a/c. ₹40,000
(Being goodwill a/c raised on the books on their old ratio)
(2) Latha's Capital a/c...... Dr. ₹50,000
Radha's Capital a/c........Dr. ₹50,000
To Goodwill a/c ₹1,00,000
(Being goodwill a/c written off on their new ratio)
Explanation:
(1)Calculation of sacrificing ratio -
Latha a/c = 3/5 - 1/2 = 1/10 (Sacr)
Radha a/c = 2/5 - 1/2 = ( 1/10) (Gain)
Latha sacrifices and Radha gains.
(2)Value of goodwill = 1,00,000
Latha's share = ₹1,00,000 × 1/10 = ₹10,000
(3) As per AS-26 you can't raise goodwill in the books unless there's any cash transactions happened relating to goodwill. Even if you raise the goodwill then it will be subsequently written off from the books.