Question

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:
You are required to calculate goodwill and pass journal entry.

Answer 1

Solution:

                                                 Journal  

Particulars                                           Debit Rs.            Credit Rs.

Y's Capital A/c                     Dr.            3,000

Z's Capital A/c                     Dr.            12,000

To X's Capital A/c                                                            15,000

(Being amount of goodwill adjusted on change in profit sharing ratio)  

Working Notes:

1. Calculation of Sacrificing (or Gaining) Ratio

Old Ratio ( X. Y and Z) = 5 :3 :2

New Ratio ( X, Y and Z) = 1 : 1 : 1

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

X' s Share= $\frac{5}{10} - \frac{1}{3}$ = $\frac{15-10}{30}$ = $\frac{5}{30}$  (Sacrifice)

Y's Share= $\frac{3}{10} - \frac{1}{3}$ = $\frac{9-10}{30}$ = $\frac{-1}{30}$ (Gain)  

Z's Share = $\frac{2}{10} - \frac{1}{3}$ = $\frac{6-10}{30}$ =  $\frac{-4}{30}$ (Gain)  

2. Calculation of Goodwill  

Average profit = $\frac{70000 + 85, 000 + 45,000 + 35,000 - 10, 000}{5}$ =  45, 000

Goodwill = Average Profit x Number of Year' s Purchase

Goodwill = 45,000 x 2 = 90,000

3. Adjustment of Goodwill  

Credited to X's Capital A/c =90,000 x $\frac{5}{30}$ (sacrifice) =15,000

Debited to Y's Capital A/c =90,000 x $\frac{1}{30}$ ( gain) = 13, 000  

Debited to Z's Capital A/c =90,000 x $\frac{4}{30}$ (gain) = 12, 000

Answer 2

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