Page 81 - DEBKVOL-1

Chapter 4 Change in Profit-Sharing Ratio Among the Existing Partners 4.13
.
Solution:
Adjustments made are:
(i) Value of Computers is reduced by ` 10,000.
(ii) A claim on account of Workmen Compensation is estimated at ` 50,000.
(iii) Value of Stock is reduced by ` 10,000.
(iv) Value of Land and Buildings is increased by ` 15,000.
(v) Provision for Doubtful Debts amounting to ` 5,000 is written back.
(vi) Balance of Profit and Loss Account of ` 20,000 is credited to Partners’ Capital Accounts
in their old profit-sharing ratio.
(vii) Nimrat is the Gaining Partner. Her Capital Account is debited by ` 10,000 (i.e., 2/15 of
` 75,000) and Neha’s Capital Account and Alka’s Capital Account is credited by ` 5,000
each for goodwill in their sacrificing ratio, i.e., 1 : 1.
Illustration 8 (Change in Profit-sharing Ratio and Valuation of Goodwill).

Sohan and Ram are partners sharing profits and losses in the ratio of 3 : 1. Their capitals
were ` 60,000 and ` 40,000 respectively. From 1st April, 2018, it was agreed to change the
profit-sharing ratio to 3 : 2. According to the Partnership Deed, goodwill is to be valued at
three years’ purchase of the average of five years’ profits. The profits of the previous five
years were: 2013–14—` 30,000; 2014–15—` 40,000; 2015–16—` 50,000; 2016–17—` 60,000 and
2017–18 —` 70,000 respectively.
Pass necessary Journal entry to give effect to the above arrangement through Capital Accounts.
Solution:
(i) Valuation of Goodwill:
` 30,000 + ` 40,000 + 50,000 + ` 60,000 + 70,000
`
`
Average Profit = = ` 50,000
5
Goodwill = Average Profit × Number of Years’ Purchase
= ` 50,000 × 3 = ` 1,50,000.
Effect of Change in Profit-sharing Ratio (i.e., Gain or Sacrifice of partners):

Sacrifice/(Gain) = Old Share – New Share
Sohan = 3/4 – 3/5 = 3/20 (Sacrifice)
Ram = 1/4 – 2/5 = –3/20 (being negative, it is a gain).
Compensation (Goodwill) payable by Ram to Sohan = 3/20 of ` 1,50,000 = ` 22,500.
(ii) The Journal Entry to adjust Goodwill is:

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2018 Ram’s Capital A/c ...Dr. 22,500
April 1 To Sohan’s Capital A/c 22,500
(Amount of goodwill credited to Sohan for his sacrificed share)