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Question 06 Chapter 4 of +2-A
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6. 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 ended 31st March, are:
| Year Ended | 2013-14 | 2014-15 | 2015-16 | 2016-17 | 2017-18 |
| Profit/(Loss) | 70,000 | 85,000 | 45,000 | 35,000 | 10,000 (Loss) |
You are required to calculate goodwill and pass journal entry.
The solution of Question 06 Chapter 4 of +2-A:
| Old Ratio of X, Y, & Z | = | 5 : 3 : 2 |
| New Ratio of X, Y, & Z | = | 1 : 1 : 1 |
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Calculate the Sacrificing or Gaining Ratio of Partners
Sacrificing or Gaining Ratio = Old Ratio – New Ratio
| X’s Share Sacrificing/Gaining | = | 5 | – | 1 |
| 10 | 3 |
| 15- 10 | ||
| = | 30 |
| = | 5 | Sacrificing | |
| 30 |
| Y’s Share Sacrificing/Gaining | = | 3 | – | 1 |
| 10 | 3 |
| = | 9 – 10 | |
| 30 |
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| = | -1 | Gain | |
| 30 |
| Z’s Share Sacrificing/Gaining | = | 2 | – | 1 |
| 10 | 3 |
| = | 6 -10 | |
| 30 |
| = | -4 | Gaining | |
| 6 |
Calculation of Goodwill : –
| Average Profit | = | Total Profit for past given years |
| Number of years |
| Average Profit | = | 70,000 + 85,000 + 45,000 + 35,000 + (-)10,000 |
| 5 |
| Average Profit | = | 2,25,000 |
| 5 | ||
| = | 45,000 |
Number of years’ purchase = 2
| Goodwill | = | Average Profit x Number of years of purchase |
| = | 45,000 x 2 | |
| = | 90,000 |
Adjustment of Goodwill
| Amount of Goodwill Credited to X’s Capital | = | 90,000 | X | 5 |
| 30 | ||||
| = | 15,000 |
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| Amount of Goodwill Credited to Y’s Capital | = | 90,000 | X | 1 |
| 30 | ||||
| = | 3,000 |
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| Amount of Goodwill Credited to Z’s Capital | = | 90,000 | X | 4 |
| 30 | ||||
| = | 12,000 |
| In the Books of _______________ | |||||
| Date | Particulars | L.F. | Debit | Credit | |
| 2019 | |||||
| April 1 | 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 through capital account) | |||||
T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)
- Chapter No. 1 – Financial Statement of Not-For-Profit Organisations
- Chapter No. 2 – Accounting for Partnership Firms – Fundamentals
- Chapter No. 3 – Goodwill: Nature and Valuation
- Chapter No. 4 – Change in Profit-Sharing Ratio Among the Existing Partners
- Chapter No. 5 – Admission of a Partner
- Chapter No. 6 – Retirement/Death of a Partner
- Chapter No. 7 – Dissolution of a Partnership Firm
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 8 – Company Accounts – Accounting for Share Capital
- Chapter No. 9 – Company Accounts – Issue of Debentures
- Chapter No. 10 – Redemption of Debentures
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 1 – Financial Statements of a Company
- Chapter No. 2 – Financial Statement Analysis
- Chapter No. 3 – Tools of Financial Statement Analysis – Comparative Statements and Common- Size Statements
- Chapter No. 4 – Accounting Ratios
- Chapter No. 5 – Cash Flow Statement
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