12th | Change in Profit Sharing Ratio Among the Existing Partner | Question No. 6 To 10 | Ts Grewal Solution 2023-2024

Asha, Nisha and Disha shared profits and losses in the ratio of 3 : 2 : 1 respectively. With effect from 1st April, 2023, they agreed to share profits equally. The goodwill of the firm was valued at  ` 18,000. Pass necessary Journal entries when:

 

Answer:

 

Calculation of Gain/Sacrifice made by the partners:

Particulars	Asha	Nisha	Disha
Old Ratio	3/6	2/6	1/6
New Ratio	1/3	1/3	1/3
Gain/Sacrifice	1/6 (Sacrifice)	Nil	-1/6 (Gain)

 

 

Journal
Date	Particular		L.F.	Debit ( `)	Credit ( `)
2023 April 1	Disha’s Capital A/c (18,000×1/6)	Dr.		3,000
	To Asha’s Capital A/c (18,000×1/6)				3,000
	(Being Adjustment for goodwill)

 

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2023, 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	2023
Profits ( `)	70,000	75,000	55,000	35,000	10,000 (Loss)

You are required to calculate goodwill and pass journal entry.

 

Answer:

Journal
Date	Particulars		L.F.	Debit `	Credit `
2023 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)

 Ram,Laxman and Bharat who were sharing profits and losses in the ratio of 5 :3: 2, decide to share profits and losses equally with effect from 1st April, 2023. Goodwill of the firm is valued at Rs. 4,50,000. Goodwill is appearing in the books is at 75,000.

Pass necessary Journal entries to record the above change.

Answer:

Journal
Date	Particulars		L.F.	Debit    `	Credit    `
	Ram's Capital A/c	Dr.		37,500
	Laxman's Capital A/c			22,500
	Bharat's Capital Ac			15,000
	To Goodwill A/c				75,000
	(goodwill written off)
	Laxman's Capital A/c	Dr.		15,000
	Bharat's Capital A/c	Dr.		60,000
	To Ram's Capital A/c by				75,000
	(For Adjustment of Goodwill)

 

Working notes:

 

1. Gaining and sacrificing ratio;

Ram	= 5/10-1/3 =15+10/30 =5/30
Laxman	= 3/10-1/3 =9+10/30 = -1/30
Bharat	=2/10-1/3 =6-10/30 = -4/30

 

2. Share of each partner in goodwill for compensating;

Ram = 4,50,000×5/30 =75,000

Laxman =4,50,000×1/30 = 15,000

Bharat =4,50,000×4/30 = 60,000

 

 

Adjustment of Goodwill by Raising and Writing off Goodwill

A and B are partners in a firm sharing profits in the ratio of 2 : 1. They decided with effect from 1st April, 2022, 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, 2021 and 2022 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, 2023 stood at  ` 1,50,000 for A and  ` 90,000 for B.
Pass necessary Journal entries and prepare Capital Accounts. 

Answer:

Journal
Date	Particulars		L.F.	Debit  ( `)	Credit  ( `)
2023 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)

 . Arun, Varun and Tarun are partners sharing profts and losses in the ratio of 3 :2:1. They decide to share prof

and losses equally with effect from 1st April, 2023. Goodvwill of the firm is valued at 1,20,000.

Pass Journal entries when goodwill is raised and written off.

 

Answer:

Journal
Date	Particulars		L.F.	Debit    `	Credit    `
	Goodwill A/c	Dr.		1,20.000
	To Arun's Capital A/c				60,000
	To Varuns Capital A/c				40,000
	To Tarun's Capital A/c				20,000
	(Being Goodwill is Raised)
	Arun's Capital A/c			40,000
	Varuns Capital A/c			40,000
	Tarun's Capital A/c			40,000
	To Goodwill A/c				1,20,000
	(Being Goodwill is written off)

Working Note;

1.  Goodwill is raised as follow

Arun= 1,20.000×3/6 =60,000

Varun=1,20.000×2/6 =40,000

Tarun=1,20.000×1/6 =20,000

 

2. When Goodwill is written off as follow

Arun= 1,20.000×1/3 =40,000

Varun= 1,20.000×1/3 =40,000

Tarun= 1,20.000×1/3 =40,000