Ownclasses

Arjun, Bhim and Nakul are partners sharing profits & losses in the ratio of 14:5:6 respectively.
Bhim retires and surrenders his 5/25th share in favour of Arjun. The goodwill of the firm is valued at 2 years purchase of super profits based on average profits of last 3 years. The profits for the last 3 years are Rs 50,000, Rs 55,000 & Rs 60,000 respectively. The normal profits for the similar firm are Rs 30,000. Goodwill already appears in the books of the firm at Rs 75,000.
The profit for the first year after Bhim's retirement was Rs 1,00,000. Give the necessary Journal Entries to adjust Goodwill and distribute profits showing your workings.

Answer

                                     Journal Entries

Date

Particulars

LF

Debit ( Rs)

Credit (Rs)

 

Arjun’s  capital a/c          Dr

Bhim’s capital a/c            Dr

Nakul’s capital a/c           Dr

                To Goodwill a/c

(being decrease in the value of goodwill adjusted to the partners capital in their old profit sharing ratio)

 

14,000

5,000

6,000

 

 

 

 

1,00,000

 

 

 

25,000

 

 

 

 

76,000

24,000

 

Profit and loss appropriation a/c Dr

                To Arjun’s capital a/c

                To Nakul’s capital a/c

(Being new profit shared between remaining partners in their new profit sharing ratio)

 

 

Old profit sharing ratio =14:5:6

Computation of Goodwill:
Average profit =(50000+55000+60000)/3=55000/-
Normal profit = 30000
Super profit =25000
Good will = super profit *2 years purchase= 25000*2=50000/-
Good will already in the book= 75000
Difference in present and book value of goodwill to be adjusted=75000-50000=25000
Good will to be debited in old profit sharing ratio 14:5:6

Arjun 25000*14/25=14000
Bhim 25000* 5/25=5000
Nakul 25000*6/25=6000

Computation of new profit sharing ratio:
Arjun’s new share =14/25+5/25 =19/25
Nakuls new share= 6/25
New profit sharing ratio= 19:6
Appropriation of new profit
Arjun: (100000*19)/25=76,000
Nakul: (100000*6)/25=24,000