Question

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1. From 1st April, 2018, they decided to share profits and losses equally. The Partnership Deed provides that in the event of any change in the profit-sharing ratio, the goodwill shall be valued at three years purchase of the average profit of last five years . The profits and losses of the past five years are:
Profit – Year ended 31st March, 2014 – ₹ 1,00,000; 2015 – ₹ 1,50,000; 2017 – ₹ 2,00,000; 2018 – ₹ 2,00,000;
Loss – Year ended 31st March, 2016 – ₹ 50,000.
Pass the journal entries showing the working.

Answer 1

Profit – Year ended 31st March, 2014 – ₹ 1,00,000; 2015 – ₹ 1,50,000; 2017 – ₹ 2,00,000; 2018 – ₹ 2,00,000;

Loss – Year ended 31st March, 2016 – ₹ 50,000.

Pass the journal entries showing the working.

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Answer 2

Solution:

                                                       Journal

Particulars                                         Debit Rs.                Credit Rs.

Abbas's Capital A/c             Dr.         60,000

      To Mandeep's Capital A/c                                         60,000

(Being adjustment entry made for change in ratio)

Working notes:

1. Calculation of Sacrifice or Gain

Old Ratio between Mandeep, Vinod and Abbas = 3 : 2 : 1

New Ratio between Mandeep, Vinod and Abbas = I : 1 : 1

Sacrificing ( or Gaining Ratio) = Old Ratio - New Ratio  

Mandeep's share= $\frac{3}{6}-\frac{1}{3}$ = $\frac{3}{6}-\frac{2}{6}$ = $\frac{1}{6}$ ( Sacrifice )

Vinod's share = $\frac{2}{6}-\frac{1}{3}$ = $\frac{2}{6}-\frac{2}{6}$ = NIL

Abbas's share = $\frac{1}{6}-\frac{1}{3}$ = $\frac{1}{6}-\frac{2}{6}$ = $-\frac{1}{6}$  (Gain)

2. Valuation of goodwill

Goodwill = Average profit x No. of purchase = 1, 20,000 x 3 = 3,60,000

Average profit = $\frac{Total of past years given}{Number of years}$

                        = $\frac{1, 00, 000 + 1,50,000 + 2,00, 000 + 2, 00, 000 - 50, 000}{5}$

                        = 1, 20,000

3. Adjustment of Goodwill

Debited to Abbas's Capital A/c = 3, 60,000 x $\frac{1}{6}$ (gain ) = 60,000  

Credited to Mandeep Capital A/c = 3,60,000 x $\frac{1}{6}$ (sacrifice)= 60,000