Question

Preet and Saral were partners sharing profits and losses in the ratio of 3:2. On 31st March, 2024 they decided to change their profit sharing ratio to 1:1. On the date of reconstitution goodwill of the firm was valued at Rs 1,00,000. The journal entry for treatment of goodwill on account of change in profit-sharing ratio will be:

• A. Preet's Capital A/c Dr. 1,00,000 To Saral's Capital A/c 1,00,000
• B. Saral's Capital A/c Dr. 1,00,000 To Preet's Capital A/c 1,00,000
• C. Preet's Capital A/c Dr. 10,000 To Saral's Capital A/c 10,000
• D. Saral's Capital A/c Dr. 10,000 To Preet's Capital A/c 10,000

Hint:

For adjustment of goodwill due to change in PSR (when goodwill is not raised and written off), the journal entry is always Gaining Partner(s) Capital A/c Dr. To Sacrificing Partner(s) Capital A/c. The amount is Firm's Goodwill multiplied by the fraction of share gained/sacrificed.

Answer 1

The Correct Option is D

In the given scenario, Preet and Saral are partners with an initial profit-sharing ratio of 3:2. They decide to modify their profit-sharing ratio to 1:1 on 31st March, 2024. At this point, the firm's goodwill is valued at Rs 1,00,000.

To adjust for the change in profit-sharing ratio, we need to calculate the gain or loss in share for each partner based on the goodwill valuation.

Step 1: Calculate the Gain or Loss in Share of Profit:

For Preet and Saral:

• Old Ratio: Preet (3/5) and Saral (2/5)
• New Ratio: Preet (1/2) and Saral (1/2)

Gain/Loss for Preet = New Share - Old Share = (1/2 - 3/5) = (5/10 - 6/10) = -1/10 (Loss)

Gain/Loss for Saral = New Share - Old Share = (1/2 - 2/5) = (5/10 - 4/10) = 1/10 (Gain)

Since Preet's share is decreasing, he is compensating Saral.

Step 2: Calculate the Adjustment on Goodwill:

Goodwill value is Rs 1,00,000. The adjustment amount is based on their gain or loss in share:

Adjustment Amount on Goodwill = Goodwill Value × Gain/Loss in Share = 1,00,000 × 1/10 = Rs 10,000

Step 3: Pass the Journal Entry:

The journal entry to adjust the goodwill based on the change in profit-sharing ratio is:

Saral's Capital A/c Dr. 10,000 To Preet's Capital A/c 10,000

Answer 2

To determine the correct journal entry for the change in profit-sharing ratio, we follow these steps:

1. Understanding the Problem:
Partners: Preet and Saral
Old Ratio: 3:2
New Ratio: 1:1 (equal)
Goodwill Value: ₹1,00,000

We need to adjust the partners' capital accounts to reflect the change in profit-sharing. A partner who is gaining in the new ratio will be debited (compensated), and the partner who is losing will be credited.

2. Calculating Gaining/Sacrificing Shares:
Preet's Old Share: 3/5
Preet's New Share: 1/2
Preet's Sacrifice/Gain: (3/5) - (1/2) = (6 - 5)/10 = 1/10 (Sacrifice)

Saral's Old Share: 2/5
Saral's New Share: 1/2
Saral's Sacrifice/Gain: (2/5) - (1/2) = (4 - 5)/10 = -1/10 (Gain)

3. Determining the Amount to Adjust:
Preet's sacrifice is 1/10 of the goodwill, so the amount is (1/10) * ₹1,00,000 = ₹10,000
Saral's gain is 1/10 of the goodwill, so the amount is (1/10) * ₹1,00,000 = ₹10,000

4. Journal Entry:
Since Saral is gaining, Saral's Capital Account is debited (to compensate for the gain)
Since Preet is sacrificing, Preet's Capital Account is credited (to acknowledge the sacrifice)

Final Answer:
The correct journal entry is:
(D) Saral's Capital A/c ....... Dr. 10,000
To Preet's Capital A/c 10,000