Question

Madhu, Raj, Atul, and Prachi were partners in a firm sharing profit and losses in the ratio of 3:2:4:1. With effect from 1st April, 2023, they decided to share profits and losses equally. Their Balance Sheet showed a General Reserve of ₹1,00,000. The goodwill of the firm was valued at ₹20,00,000. Pass necessary journal entries for the above on account of change in the profit-sharing ratio. Show your working clearly.

Hint:

Goodwill adjustments during a change in profit-sharing ratio are made based on the sacrificing or gaining ratios of the partners.

Answer 1

Step 1: Calculate the old and new profit-sharing ratios. \[ \text{Old Ratio} = 3:2:4:1 \] \[ \text{New Ratio} = 1:1:1:1 \] Step 2: Calculate the sacrifice or gain for each partner. \[ \text{Sacrificing Ratio} = \text{Old Share} - \text{New Share} \] Step 3: Distribute the goodwill. The goodwill of ₹20,00,000 is distributed based on the sacrificing ratio (Madhu:Atul = 2:6): \[ \text{Madhu's Share of Goodwill} = ₹20,00,000 \times \frac{2}{8} = ₹5,00,000 \] \[ \text{Atul's Share of Goodwill} = ₹20,00,000 \times \frac{6}{8} = ₹15,00,000 \] Step 4: Distribute the General Reserve. The General Reserve of ₹1,00,000 is distributed in the old profit-sharing ratio (3:2:4:1): \[ \text{Madhu's Share} = ₹1,00,000 \times \frac{3}{10} = ₹30,000 \] \[ \text{Raj's Share} = ₹1,00,000 \times \frac{2}{10} = ₹20,000 \] \[ \text{Atul's Share} = ₹1,00,000 \times \frac{4}{10} = ₹40,000 \] \[ \text{Prachi's Share} = ₹1,00,000 \times \frac{1}{10} = ₹10,000 \] Step 5: Journal Entries: \[ \begin{array}{|l|l|c|c|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Debit (₹)} & \textbf{Credit (₹)} \\ \hline 1^{\text{st}} \text{April, 2023} & \text{Raj's Capital A/c Dr.} & 5,00,000 & -- \\ & \text{Prachi's Capital A/c Dr.} & 15,00,000 & -- \\ & \text{To Madhu's Capital A/c} & -- & 5,00,000 \\ & \text{To Atul's Capital A/c} & -- & 15,00,000 \\ & \text{(Being the adjustment of goodwill in the sacrificing ratio)} & & \\ \hline 1^{\text{st}} \text{April, 2023} & \text{General Reserve A/c Dr.} & 1,00,000 & -- \\ & \text{To Madhu's Capital A/c} & -- & 30,000 \\ & \text{To Raj's Capital A/c} & -- & 20,000 \\ & \text{To Atul's Capital A/c} & -- & 40,000 \\ & \text{To Prachi's Capital A/c} & -- & 10,000 \\ & \text{(Being the General Reserve distributed in the old ratio)} & & \\ \hline \end{array} \]