X, Y and Z are partners sharing profit and losses in the ratio of 5:3:2 respectively. Their capital on 1st January 2012 showed credit balances of Rs 80,000, Rs 70,000 and Rs 50,000 respectively. They withdraw Rs 200 each on 1st day of every month. According to their partnership agreement they are allowed interest on capital @ 5% and charged interest on drawings @6% per year. The profit for the year 2011 as per profit and loss amounted to Rs 105500 out of which Rs 2000 were transferred to general reserve account for the first time. X and Y are entitled to a salary of Rs 2500 and Rs 3500 per year respectively and Z is entitled to a commission of 5% on net divisible profit after charging such commission. Prepare profit and loss appropriation account, general reserve account and capital account in the books of partners and show the working of how you calculated the commission for Z.
Answers
Answer:
Reconstitution of a Partnership Firm - Admission of a Partner
Valuation and Adjustment of Goodwill
X, Y and Z are partners sha...
ACCOUNTANCY
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Asked on December 26, 2019 by
Rituraj Chandramohan
X,Y and Z are partners sharing profits and losses in the ratio of 5:3:2 . 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 should be valued at two years' purchase of the average profit of the preceding five years. The profits and losses of the preceding years are :
Year 2013−14 2014−15 2015−16 2016−17 2017−18
Profit (Rs.) 70,000 85,000 45,000 35,000 10,000 (Loss)
Pass the necessary journal entries:
(i) When goodwill account is opened
(ii) When goodwill account is not opened
MEDIUM
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ANSWER
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
Our next step will be the adjustment. We have to pass separate entries for the separate given situation.
1. When goodwill account is opened:- As we have to open a goodwill account, any entry needs to be passed through the goodwill account. So, in this case first we will distribute goodwill among the partners in old ratio and then write off the goodwill in the new ratio.
Goodwill A/c 90,000
To X' capital A/c 45,000
To Y' capital A/c 27,000
To Z' capital A/c 18,000
( Goodwill distributed in ratio 5:3:2)
X' capital A/c 30,000
Y's capital A/c 30,000
Z's capital A/c 30,000
To Goodwill A/c 90,000
( Goodwill written off in 1:1:1)
2. When Goodwill account is not opened:- In this case we have to pass journal entries through the capital accounts of the partners. As there is change in profit sharing ratio, it means one or more partner is purchasing from another partner. So, there is loss to some and gain for some partner.
So, first we need to find the gaining ratio of the partners.
Gaining Ratio = New ratio - Old ratio
X = 1/3 - 5/10 = -5/30
Y = 1/3 - 3/10 = 1/30
Z=1/3 - 2/10 = 4/30
X is the sacrificing partner and Y and Z are the gaining partner. So, Y and Z needs to compensate X.
Goodwill = 90,000 * 5/30= 15,000. So, now 15,000 amount of goodwill will be compensated to X by Y and Z in the ratio of 1:4 i.e gaining ratio.
Y's capital A/c 3000
Z's Capital A/c 12,000
To X's capital A/c 15,000
HOPE IT WILL
divisible profit ₹66413, commission payable to Z ₹3321 i.e. (69734×5/105) Capital balnaces X—₹117228, Y—₹94446, Z—₹66626