Solve the following:
Q. P, Q and R are partners sharing profits and losses in the ratio of 5 : 3 : 2. From January 2006, they decided to share profits and losses in equal proportions. The partnership deed provides that in the event of any change in profit sharing ratio, the goodwill of the firm should be valued at 3 years purchase of the average of five years' profits. The profits and losses of the preceding five years are:
2001 Rs. 60,000, 2002 Rs. 1,50,000, 2003 Rs 1,70,000, 2004 Rs. l,90,000, 2005 (loss) Rs. 70,000
Give the necessary journal entry to record the above change.
Dear Student
Regards
| R's Capital A/c (3,00,000 x 4/30) | 40,000 | |||
| Q's Capital A/c (3,00,000 x 1/30) | 10,000 | |||
| To P's Capital A/c (3,00,000 x 5/30) | 50,000 | |||
| (Being goodwill adjustment done) |
| Calculation of Goodwill | |
| Calculation of Average profit | |
| Year | Amount |
| 1 | 60,000 |
| 2 | 150,000 |
| 3 | 170,000 |
| 4 | 190,000 |
| 5 | (70,000) |
| Total | 500,000 |
| Average profit | 100,000 |
| (500000 / 5) | |
| Goodwill | 300000 |
| (Number of Years of Purchase x Average profits) | (100000 x 3) |
| Calculation of Sacrificing and Gaining Partners | |||
| P | Q | R | |
| Old Ratio | 5/10 | 3/10 | 2/10 |
| Less : New Ratio | 1/3 | 1/3 | 1/3 |
| 5/30 | - 1/30 | - 4/30 | |
| Sacrificing | Gaining | Gaining | |
Regards