Question

X and Y are in partnership sharing profits in the ratio of 2 : 3 . With effect from 1st April, 2018, they agreed to share profits in the ratio f 1 : 2 . For this purpose, goodwill of the firm is to be valued at two years purchase of the average profit of last three years , which were ₹ 1, 50,000; ₹ 1,60,000 and ₹ 2,00,000 respectively. The reserves appear in the books at ₹ 1,10,000. Partners decide to continue showing Reserves in the books . You are required to give effect to the change by passing a single journal entry.

Answer 1

and ₹ 2,00,000 respectively. The reserves appear in the books at ₹ 1,10,000. Partners decide to continue showing Reserves in the books . You are required to give effect to the change by passing a single journal entry.

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Answer 2

Average profit of Goodwill is Rs.1,70,000.

Explanation:

1) Calculation of Goodwill

Goodwill =Average profit × Number of year's purchase

Average Profit =$\frac{1,50,000+ 1,60,000+ 2,00,000}{3}$ =Rs.1,70,000

Goodwill = 1,70,000×2 =3,40,000

2) Calculation of sacrificing Ratio

Old Ratio (X and Y) =2:3

New Ratio (X and Y) = 1: 2

Sacrificing Ratio =Old ratio - New ratio

X's Ratio = $\frac{2}{5}$ - $\frac{1}{3}$ = $\frac{1}{15}$ ( Sacrifice)

Y's Ratio = $\frac{3}{5}$ - $\frac{2}{3}$ = $\frac{1}{15}$ (Gain)

3) Adjustment of Goodwill

Credits to X's Capital = 3,40,000 × $\frac{1}{15}$ = 22,667

Dedits to Y's Capital  = 3,40,000 × $\frac{1}{15}$ = 22,667

4) Adjustment of General purpose

Credits to X's Capital = 1,10,000 × $\frac{1}{15}$ = 7,333

Dedits to Y's Capital  = 1,10,000 × $\frac{1}{15}$ = 7,333