12th | Change in Profit-Sharing Ratio Among the Existing Partner | Question No.  6 To 10 |  Ts Grewal Solution 2022-2023

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2022, 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	2018	2019	2020	2021	2022
Profits ( `)	70,000	75,000	55,000	35,000	10,000 (Loss)

You are required to calculate goodwill and pass journal entry.

 

Journal
Date	Particulars		L.F.	Debit `	Credit `
2022 April 1	Y’sCapitalA/c	Dr.		3,000
	Z’s Capital A/c	Dr.		12,000
	To X’s Capital A/c				15,000
	(Amount of goodwill adjusted on change in profit sharing ratio)

Working Notes:

WN 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= 5/10-1/3= 15-10/30= 5/30 (Sacrifice)

Y’s share= 3/10-1/3= 9-10/30= -1/30 (gain)

Z’s share= 1/10-1/3= 6-10/30= -4/30 (gain)

WN 2 Calculation of Goodwill

Goodwill=  average × purchase years

Average profit= 70,000+75,000+55,000+35,000-10,000/5=45,000

Goodwill= 45,000×2=90,000

WN 3 Adjustment of Goodwill

Amount to be Credited to X’s capital= 90,000×5/30 = 15,000 (sacrifice)

Amount to be Credited to Y’s capital= 90,000×1/30 = 3,000 (Gain)

Amount to be Credited to Z’s capital= 90,000×4/30 = 12,000 (Gain)

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1. From 1st April, 2022 they decided to share profits equally. The Partnership Deed provides that in the event of any change in profit-sharing ratio, goodwill shall be valued at three years' purchase of average profit of last five years. The profits and losses of past five years are:
Profit − Year ended 31st March, 2018 −  ` 1,00,000; 2019 −  ` 1,50,000; 2021 −  ` 2,00,000; 2022 −  ` 2,00,000.
Loss − Year ended 31st March, 2020 −  ` 50,000.
Pass the Journal entry showing the working.

Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
2022
April 1	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:

WN1: Calculation of Sacrifice or Gain

Mandeep :Vinod :Abbas=3:2:1(Old Ratio)

Mandeep :Vinod :Abbas=1:1:1(New Ratio)

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

Mandeep's share=36−13=3−26=1/6 (Sacrifice)

Vinod's share=26−13=2−26=0

Abbas's share=16−13=1−2/6=−1/6(Gain)

WN2: Valuation of Goodwill

Goodwill=Average Profit×No. of years' Purchase               

=1,20,000×3= ` 3,60,000

Average Profit=Total Profits of past years given/Number of years                        

=1,00,000+1,50,000+2,00,000+2,00,000−50,000÷5= ` 1,20,000

WN3: Adjustment of  Goodwill

Amount debited to Abbas's Capital A/c=3,60,000×1÷ 6 = ` 60,000 (share of gain)

Amount credited to Mandeep's Capital A/c=3,60,000×1÷ 6= ` 60,000 (share of sacrifice)

A and B are partners in a firm sharing profits in the ratio of 2 : 1. They decided with effect from 1st April, 2021, that they would share profits in the ratio of 3 : 2. But, this decision was taken after the profit for the year ended 31st March, 2022 of  ` 90,000 was distributed in the old ratio.
The profits for the year ended 31st March, 2020 and 2021 were  ` 60,000 and  ` 75,000 respectively. It was decided that Goodwill Account will not be opened in the books of the firm and necessary adjustment be made through Capital Accounts which on 31st March, 2022 stood at  ` 1,50,000 for A and  ` 90,000 for B.
Pass necessary Journal entries and prepare Capital Accounts. 

Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
2022 April 1	A’s Capital A/c	Dr.		6,000
	To B’s Capital A/c				6,000
	(Being Adjustment of profit for 2018-19 on change in profit sharing ratio)
April 1	B’s Capital A/c	Dr.		9,000
	To A’s Capital A/c				9,000
	(Being Adjustment of goodwill made on change in profit sharing ratio)

 

Partners’ Capital Accounts
Dr.					Cr.
Particulars	A	B	Particulars	A	B
B's Capital A/c	6,000	–	Balance b/d	1,50,000	90,000
(Adjustment of profit)			A's Capital A/c	–	6,000
A's Capital A/c	–	9,000	(Adjustment Profit)
(Adjustment of Goodwill)			B's Capital A/c	9,000	–
Balance c/d	1,53,000	87,000	(Adjustment of Goodwill)
	1,59,000	96,000		1,59,000	96,000

Working Notes:

WN 1 Calculation of Sacrificing (or Gaining) Ratio

Old Ratio (A and B) = 2 : 1

New Ratio (A and B) = 3 : 2

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

A’s share= 2/3-3/5= 10-9/15= 1/15 (Sacrifice)

A’s share= 2/3-3/5= 5-6/15= -1/15 (gain)

WN 2 Adjustment of Profit for 2016-17

Profit to be debited  to A’c capital=90,000×1/15=6,000

Profit to be credited  to B’c capital=90,000×1/15=6,000

WN 3 Calculation of New Goodwill

Goodwill=Profit of 2020 + Profit of 2021

=60,000+75,000= ` 1,35,000

WN 4 Adjustment of Goodwill

Goodwill to be debited  to A’c capital=1,35,000×1/15=9,000 (share of sacrifice)

Goodwill to be credited  to B’c capital=1,35,000×1/15=9,000 (share of Gain)

Nitya and Anand are partners in a firm sharing profits and losses in the ratio of 3 : 2. With effect from 1st April, 2022, they decided to share future profits equally. On the date of change in the profit-sharing ratio, the Profit and Loss Account showed a credit balance of  ` 1,50,000. Record the necessary Journal entry for the distribution of the balance in the Profit and Loss Account immediately before the change in the profit-sharing ratio.  

Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
2022 April 1	Profit & Loss A/c	Dr.		1,50,000
	To Nitya’s Capital A/c				90,000
	To Anand’s Capital A/c				60,000
	(Being Adjustment of balance in P&L A/c in old ratio)

Working Notes:

WN1 Calculation of Share of Profit and Loss A/c

Nisha's share=1,50,000×3÷5=90,000

Anand's share=1,50,000×2÷5=60,000
 

Om and Shiv are partners in a firm sharing profits in the ratio of 4 : 1. They decided to share future profits in the ratio of 3 : 2 w.e.f. 1st April, 2022. On that day, Profit and Loss Account showed a debit balance of  ` 1,00,000. Pass Journal entry to give effect to the above.

Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
2022
April 1	Om’s Capital A/c	Dr.		80,000
	Shiv’s Capital A/c	Dr.		20,000
	To Profit & Loss  A/c				1,00,000
	(Being Profit & Loss  distributed)