Loss: 2016: 70,000.
X, Y and Z are partners sharing profits in the ratio of 3: 2:1. Z is facing acute financial
difficulties and it is now agreed that they will share the future profits equally.
You are required to identify the virtues involved in changing the profit-sharing ratio.
Answers
The treatment of goodwill in partnership accounts is a major adjustment. Goodwill in simpler terms is the reputation of a business valued in monetary terms. Whenever there is change in the constitution of the partnership, an adjustments need to be made to the goodwill.
In the given question there is change in profit sharing ratio of the partners and we have to value the goodwill on the basis of information provided and then adjustment entries needed to be passed.
1. valuation of Goodwill:- calculation of average profit
Total profits of 5 years= ( 70,000+85,000+45,000+35,000-10,000)/5
= 2,25,000/5 = 45,000
2. Value of goodwill based on 2 years purchase= 2 * 45,000= 90,000
I hope it helps you to understand.