Change in Profit Sharing Ratio - TS Grewal Solution 2020-21

Chapter 4 – Change in Profit Sharing Ratio

TS Grewal Solution 2020-21

Sacrificing and Gaining Share

Question 1

A and B are sharing profits and losses equally. With effect from 1st April, 2020, they agree to share profits in the ratio of 4 : 3. Calculate individual partner's gain or sacrifice due to the change in ratio.

Answer

Old Ratio of Partners = 1 : 1

New Ratio of Partners = 4 : 3

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

A’s Share = 1/2-  4/7 = (7-8)/14  = -  1/14 (Gain)

B’s Share = 1/2-  3/7 = (7-6)/14  =   1/14  (Sacrifice)

Question 2

X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. With effect from 1st April, 2020, they decide to share profits and losses in the ratio of 5 : 2 : 3. Calculate each partner's gain or sacrifice due to the change in ratio

Answer

Old Ratio of Partners = 5 : 3 : 2

New Ratio of Partners = 5 : 2 : 3

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

X’s Share = 5/10-  5/10 = 0  

Y’s Share = 3/10-  2/10 = (3-2)/10  =   1/10  (Sacrifice)

Z’s Share = 2/10-  3/10 = (2-3)/10  = -  1/10  (Gain)

Question 3

X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. With effect from 1st April, 2020, they decide to share profits and losses equally. Calculate each partner's gain or sacrifice due to the change in ratio.

Answer

Old Ratio of Partners = 5 : 3 : 2

New Ratio of Partners = 1 : 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

X’s Share = 5/10-  5/10 = 0  

Y’s Share = 3/10-  2/10 = (3-2)/10  =   1/10  (Sacrifice)

Z’s Share = 2/10-  3/10 = (2-3)/10  = -  1/10  (Gain)

Question 4

A, B and C are partners sharing profits and losses in the ratio of 5 : 4 : 1. Calculate new profit-sharing ratio, sacrificing ratio and gaining ratio in each of the following cases:

Case 1. C acquires 1/5th share from A.

Case 2. C acquires 1/5th share equally form A and B.

Case 3. A, B and C will share future profits and losses equally.

Case 4. C acquires 1/10th share of A and 1/2 share of B.

Answer

Old Ratio of Partners = 5 : 4 : 1

 

Case. 1: C acquires 1/5^th shares from A

A sacrifice 1/5^th and C gains 1/5^th

A’s Share =   5/10  -  1/5 =   (5-2)/10 =   3/10

C’s share  =   1/10 +   1/5 =   (1+2)/10 =   3/10

B’s Share = 4/10

New Ratio of Partners = 3 : 4 : 3

Case. 2: C acquires 1/5^th shares equally from A & B

A sacrifices 1/10^th and A sacrifices 1/10^th,  C gains 2/10^th

A’s Share =   5/10 -1/10 =   (5-1)/10 =   4/10

B’s Share = 4/10 -1/10 =   (4-1)/10 =   3/10

C’s share  =   1/10 +   2/10 =   3/10

New Ratio of Partners = 4 : 3 : 3

Case. 3: New profit sharing ratio is 1 : 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

A  =   5/10 -1/3 =   (15-10)/30 =   5/30 (Sacrifice)

B = 4/10 -1/3 =   (12-10)/30 =   2/30 (Sacrifice)

C  Share =   1/10 -   1/3  =   (10-3)/30 = - 7/30 (Gain)

Case. 4: C acquires 1/10^th   shares from A & ½ share from B

A’s  sacrifice =   5/10 x 1/10 =   5/100 =   1/20

B’s sacrifice = 4/10 x  1/2=   4/20 = 2/10 = 4/20

A’s Share =   5/10 - 1/20 = (10-1)/20 =   9/20 

B’s sacrifice = 4/10 - 4/20 =   (8-4)/20 =   4/20

C’s share  =   1/10 +   1/20  +4/20 =   (2+1+4)/20 = 7/20

New Ratio of Partners = 9 : 4 : 7

Sacrificing Ratio of A & B = 1:4, C’s Gain = 5

 

Accounting for Goodwill

Question 5

A, B and C shared profits and losses in the ratio of 3 : 2 : 1 respectively. With effect from 1st April, 2020, they agreed to share profits equally. The goodwill of the firm was valued at Rs. 18,000. Pass necessary Journal entries when:

(a) Goodwill is adjusted through Partners' Capital Accounts; and

(b) Goodwill is raised and written off.

Answer

Old Ratio of Partners = 3 : 2 : 1

New Ratio of Partners = 1 : 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

A’s Share = 3/6-  1/3 = (3-2)/6  =   1/6 (Sacrifice)

B’s Share = 2/6-  1/3 = (2-2)/6  = 0 

C’s Share = 1/6-  1/3 = (1-2)/6  = -1/6  (Gain)

Value of goodwill of the firm = Rs. 18,000

A’s will receive Rs. 18,000 x  = Rs. 3,000

C’s will give to A, Rs. 18,000 x  = Rs. 3,000

 

Case. 1: When goodwill is adjusted through Partner’s Capital Accounts

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	C's Capital A/c	Dr.	3,000
	To A's Capital A/c			3,000
	(Being adjustment made for goodwill)

Case. 2: When goodwill is raised and written off

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Goodwill A/c	Dr.	18,000
	To A's Capital A/c			9,000
	To B's Capital A/c			6,000
	To C's Capital A/c			3,000
	(Being goodwill raised and credit to capital)
	A's Capital A/c	Dr.	6,000
	B's Capital A/c		6,000
	C's Capital A/c		6,000
	To Goodwill A/c			18,000
	(Being goodwill debited in new PSR)

Question 6

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2. From 1st April, 2018, they decided to share profits and losses equally. The Partnership Deed provides that in the event of any change in the profit-sharing ratio, the goodwill should be valued at two years' purchase of the average profit of the preceding five years. The profits and losses of the preceding years ended 31st March, are:

Year	2016	2017	2018	2019	2020
Profits ( Rs)	70,000	85,000	45,000	35,000	10,000 (Loss)

You are required to calculate goodwill and pass journal entry.

Answer

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Y's Capital A/c	Dr.	12,000
	Z's Capital A/c	Dr.	3,000
	To X's Capital A/c			15,000
	(Being adjustment made for goodwill as per new PSR)

 

Calculation for Sacrifices and Gains

Old Ratio of Partners = 5 : 3 : 2

New Ratio of Partners = 1 : 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

X’s Share = 5/10-  1/3 = (15-10)/30  =   5/30 (Sacrifice)

Y’s Share = 3/10-  1/3 = (9-10)/30  = = -1/30 (Gain)

Z’s Share = 2/10-  1/3 = (6-10)/30  = = -4/30 (Gain)

Value of goodwill of the firm = Rs. 90,000

X will receive Rs. 90,000 x 5/30 = Rs. 15,000

Y will give Rs. 90,000 x 4/30 = Rs. 12,000

Z will give Rs. 90,000 x 1/30 = Rs. 3,000

 

Calculation for goodwill

Goodwill be calculated on the basis of two year’s purchase of the average profits of last five years.

Total of 5 years’ Profit = 70,000 + 85,000 + 45,000 + 30,000 - 10,000 = 2,25,000

Average Profit = 2,25,000 / 5 = 45,000

Value of Goodwill = Average profit x No. of years of purchase = 45,000 x 2 =Rs.  90,000

Question 7

Mandeep, Vinod and Abbas are partners sharing profits and losses in the ratio of 3 : 2 : 1. From 1st April, 2020 they decided to share profits equally. The Partnership Deed provides that in the event of any change in profit-sharing ratio, goodwill shall be valued at three years' purchase of average profit of last five years. The profits and losses of past five years are:

Profit − Year ended 31st March, 2016 − Rs. 1,00,000; 2017 − Rs. 1,50,000; 2019 − Rs. 2,00,000; 2020 − Rs. 2,00,000.

Loss − Year ended 31st March, 2018 − Rs. 50,000.

Pass the Journal entry showing the working.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Abbas's Capital A/c	Dr.	60,000
	To Mandeep's Capital A/c			60,000
	(Being adjustment made for goodwill as per new PSR)

Calculation for Sacrifices and Gains

Old Ratio of Partners = 3 : 2 : 2

New Ratio of Partners = 1 : 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

Mandeep's Share = 3/6-  1/3 = (3-2)/6  =   1/6 (Sacrifice)

Vompd’s Share = 2/6-  1/3 = (2-2)/6  =  0

Abbas's Share = 1/6-  1/3 = (1-2)/6  = -1/6 (Gain)

Value of goodwill of the firm = Rs. 3,60,000

Mandeep will receive Rs. 3,60,000 x (1 )/6 = Rs. 60,000

Abbas will give Rs. 3,60,000 x (1 )/6 = Rs. 60,000

Calculation for goodwill

Goodwill be calculated on the basis of two year’s purchase of the average profits of last five years.

Total of 5 years’ Profit = 1,00,000 + 1,50,000 + 2,00,000 + 2,00,000 + (- 50,000) = 6,00,000

Average Profit = 6,00,000 / 5 = 1,20,000

Value of Goodwill = Average profit x No. of years of purchase = 1,20,000 x 3 =Rs.  3,60,000

Question 8

X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2, decided to share future profits and losses equally with effect from 1st April, 2020. On that date, the goodwill appeared in the books at Rs. 12,000. But it was revalued at Rs. 30,000. Pass Journal entries assuming that goodwill will not appear in the books of account.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	X's Capital A/c	Dr.	6,000
	Y's Capital A/c		3,600
	Z's Capital A/c		2,400
	To Goodwill A/c			12,000
	(Being existing goodwill written off)

 

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Y's Capital A/c	Dr.	4,000
	Z's Capital A/c	Dr.	1,000
	To X's Capital A/c			5,000
	(Being adjustment made for goodwill as per new PSR)

 

Calculation for Sacrifices and Gains

Old Ratio of Partners = 5 : 3 : 2

New Ratio of Partners = 1 : 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

X’s Share =  =   =  (Sacrifice)

Y’s Share =  =   = =  (Gain)

Z’s Share =  =   = =  (Gain)

Value of goodwill of the firm = Rs. 30,000

X will receive Rs. 30,000 x  = Rs. 5,000

Y will give Rs. 30,000 x  = Rs. 4,000

Z will give Rs. 30,000 x  = Rs. 1,000

Question 9

A and B are partners in a firm sharing profits in the ratio of 2 : 1. They decided with effect from 1st April, 2019, that they would share profits in the ratio of 3 : 2. But, this decision was taken after the profit for the year ended 31st March, 2020 of Rs. 90,000 was distributed in the old ratio.

The profits for the year ended 31st March, 2018 and 2019 were Rs. 60,000 and Rs. 75,000 respectively. It was decided that Goodwill Account will not be opened in the books of the firm and necessary adjustment be made through Capital Accounts which on 31st March, 2020 stood at Rs. 1,50,000 for A and Rs. 90,000 for B.

Pass necessary Journal entries and prepare Capital Accounts.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	A's Capital A/c		6,000
	To B's Capital A/c			6,000
	(Being adjustment of profit for  2019-20)

 

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	B's Capital A/c	Dr.	9,000
	To A's Capital A/c			9,000
	(Being adjustment made for goodwill as per new PSR)

 

Partners' Current Account
Dr.					Cr.
Particulars	A (Rs)	B (Rs)	Particulars	A (Rs)	B (Rs)
To B's Capital A/c	6,000		BY Balance b/d	1,50,000	90,000
(Adjustment for profit)			By A's Capital A/c	-	6,000
To A's Capital A/c	-	9,000	(Adjustment for profit)
(Adjustment for Goodwill)			By B's Capital A/c	9,000	-
To Balance C/d	1,53,000	87,000	(Adjustment for Goodwill)
	1,59,000	96,000		1,59,000	96,000

  Calculation for Sacrifices and Gains

Old Ratio of Partners = 2 : 1

New Ratio of Partners = 3 : 2

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

A will receive Rs. 1,35,000 x  = Rs. 9,000

C will give Rs. 1,35,000 x  = Rs. 9,000

Adjustment of profit for 2019-20

Extra amount taken by A = 90,000 x 1/15 = Rs. 6,000

Less amount taken by B = 90,000 x 1/15 =  Rs. 6,000

Calculation for goodwill

Goodwill be calculated on the basis of aggregate of two years’ profit

Value of Goodwill = 60,000 + 75 ,000 = Rs. 1,35,000

A will receive Rs. 1,35,000 x (1 )/15 = Rs. 9,000

C will give Rs. 1,35,000 x (1 )/15 = Rs. 9,000

 

Accounting for Reserves, Accumulated Profits and Losses

Question 10

X and Y are partners in a firm sharing profits and losses in the ratio of 3 : 2. With effect from 1st April, 2020, they decided to share future profits equally. On the date of change in the profit-sharing ratio, the Profit and Loss Account showed a credit balance of Rs. 1,50,000. Record the necessary Journal entry for the distribution of the balance in the Profit and Loss Account immediately before the change in the profit-sharing ratio.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Profit and Loss A/c (Cr. Balance)	Dr.	1,50,000
	To X's Capital A/c			90,000
	To Y's Capital A/c			60,000
	(Being distribution  of accumulated profit)

Distribution of Profit

X’s Share Rs. 1,50,000 x (3 )/5 = Rs. 90,000

Y’s Share Rs. 1,50,000 x (2 )/5 = Rs. 60,000

Question 11

A and B are partners in a firm sharing profits in the ratio of 4 : 1. They decided to share future profits in the ratio of 3 : 2 w.e.f. 1st April, 2020. On that day, Profit and Loss Account showed a debit balance of Rs. 1,00,000. Pass Journal entry to give effect to the above.

Answer

Distribution of Profit

A’s Share Rs. 1,00,000 x (4 )/5 = Rs. 80,000

B’s Share Rs. 1,00,000 x 1/5 = Rs. 20,000

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	A's Capital A/c	Dr.	80,000
	B's Capital A/c	Dr.	20,000
	To Profit and Loss A/c (Dr. Balance)			1,00,000
	(Being distribution  of accumulated Loss)

Question 12

A, B and C who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide to share future profits and losses in the ratio of 2 : 3 : 5. Give the Journal entry to distribute 'Workmen Compensation Reserve' of Rs. 1,20,000 at the time of change in profit-sharing ratio, when:

(i) no information is given; (ii) there is no claim against it.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Workmen Compensation Reserve A/c	Dr.	1,20,000
	To A's Capital A/c			60,000
	To B's Capital A/c			36,000
	To C's Capital A/c			24,000
	(Being distribution  of Workmen Compensation Reserve in old PSR)

Note : In both case the Workmen Compensation Reserve will be distributed in the ratio of 5:3:2

Question 13

X, Y and Z who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide to share future profits and losses in the ratio of 2 : 3 : 5. Give the journal entry to distribute 'Workmen Compensation Reserve' of Rs. 1,20,000 at the time of change in profit-sharing ratio, when there is a claim of Rs. 80,000 against it.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Workmen Compensation Reserve A/c	Dr.	1,20,000
	To Workmen Compensation Claim A/c			80,000
	To X's Capital A/c			20,000
	To Y's Capital A/c			12,000
	To Z's Capital A/c			8,000
	(Being adjustment and distribution of Workmen Compensation Reserve in old PSR)

Question 14

X, Y and Z who are sharing profits in the ratio of 5 : 3 : 2, decide to share profits in the ratio of 2 : 3 : 5 with effect from 1st April, 2020. Workmen Compensation Reserve appears at Rs. 1,20,000 in the Balance Sheet as at 31st March, 2020 and Workmen Compensation Claim is estimated at Rs. 1,50,000. Pass Journal entries for the accounting treatment of Workmen Compensation Reserve.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
2020	Workmen Compensation Reserve A/c	Dr.	1,20,000
Apr 1	Revaluation A/c	Dr.	30,000
	To Workmen Compensation Claim A/c			1,50,000
	(Being transfer of Workmen Compensation Claim to revaluation A/c)
	X's Capital A/c	Dr.	15,0000
	Y's Capital A/c	Dr.	9,000
	Z's Capital A/c	Dr.	6,000
	To Revaluation A/c			30,000
	(Being transfer of loss on revaluation in old PSR)

 

Question 15

A, B and C who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide to share future profits and losses in the ratio of 2 : 3 : 5. Give the journal entry to distribute 'Investments Fluctuation Reserve' of Rs. 20,000 at the time of change in profit-sharing ratio, when investment (market value Rs. 95,000) appears in the books at Rs. 1,00,000.

Answer

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Investment Fluctuation Reserve A/c	Dr.	20,000
	To Investment A/c			5,000
	To A's Capital A/c			7,500
	To B's Capital A/c			4,500
	To C's Capital A/c			3,000
	(Being adjustment and distribution of Investment Fluctuation Reserve in old PSR)

 

Question 16

Nitin, Tarun and Amar are partners sharing profits equally and decide to share profits in the ratio of 2 : 2 : 1 w.e.f. 1st April, 2020. The extract of their Balance Sheet as at 31st March, 2020 is as follows:

Liabilities	Amount (Rs)	Assets	Amount (Rs)
Investment Fluctuations Reserve	60,000	Investments (At Cost)	4,00,000

Pass the Journal entries in each of the following situations:

(i)      When its Market Value is not given;

(ii)    When its Market Value is Rs. 4,00,000;

(iii)   When its Market Value is Rs. 4,24,000;

(iv)   When its Market Value is Rs. 3,70,000;

(v)    When its Market Value is Rs. 3,10,000.

Answer

Case. 1: When its Market Value is not given.

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Investment Fluctuation Reserve A/c	Dr.	60,000
	To Nitin's Capital A/c			20,000
	To Tarun's Capital A/c			20,000
	To Amar's Capital A/c			20,000
	(Being distribution of Investment Fluctuation Reserve in old PSR)

Case. 2: When its Market Value is Rs. 4,00,000

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Investment Fluctuation Reserve A/c	Dr.	60,000
	To Nitin's Capital A/c			20,000
	To Tarun's Capital A/c			20,000
	To Amar's Capital A/c			20,000
	(Being distribution of Investment Fluctuation Reserve in old PSR)

Case. 3: When its Market Value is Rs. 4,24,000

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Investment Fluctuation Reserve A/c	Dr.	60,000
	To Nitin's Capital A/c			20,000
	To Tarun's Capital A/c			20,000
	To Amar's Capital A/c			20,000
	(Being distribution of Investment Fluctuation Reserve in old PSR)
	Investment A/c	Dr.	24,000
	To Revaluation A/c			24,000
	(Being profit on investment is transferred to revaluation A/c)
	Revaluation A/c	Dr.	24,000
	To Nitin's Capital A/c			8,000
	To Tarun's Capital A/c			8,000
	To Amar's Capital A/c			8,000
	(Being distribution of profit on revaluation in old PSR)

Case. 4: When its Market Value is Rs. 3,70,000

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Investment Fluctuation Reserve A/c	Dr.	60,000
	To Investment A/c			30,000
	To Nitin's Capital A/c			10,000
	To Tarun's Capital A/c			10,000
	To Amar's Capital A/c			10,000
	(Being adjustment and distribution of Investment Fluctuation Reserve in old PSR)

Case. 5: When its Market Value is Rs. 3,10,000

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Investment Fluctuation Reserve A/c	Dr.	60,000
	Revaluation A/c	Dr.	30,000
	To Investment A/c			90,000
	(Being loss on Investment transferred to Revaluation Account)
Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Nitin's Capital A/c	Dr.	10,000
	Tarun's Capital A/c	Dr.	10,000
	Amar's Capital A/c	Dr.	10,000
	To Revaluation A/c			30,000
	(Being Loss on revaluation transferred in old PSR)

Question 17

X and Y are partners sharing profits in the ratio of 2 : 1. On 31st March, 2020, their Balance Sheet showed General Reserve of Rs. 60,000. It was decided that in future they will share profits and losses in the ratio of 3 : 2. Pass necessary Journal entry in each of the following alternative cases:

(i)      When General Reserve is not to be shown in the new Balance Sheet.

(ii)    When General Reserve is to be shown in the new Balance Sheet.

Answer

Case. 1: When General Reserve is not to be shown in the new Balance Sheet

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	General Reserve A/c	Dr.	60,000
	To X's Capital A/c			40,000
	To Y's Capital A/c			20,000
	(Being distribution of General Reserve in old PSR)

 

Case. 2: When General Reserve is to be shown in the new Balance Sheet

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Y's Capital A/c	Dr.	4,000
	To X's Capital A/c			4,000
	(Being adjustment of General Reserve through Partner’s Capital A/c)

Calculation for Sacrifices and Gains

Old Ratio of Partners = 2 : 1

New Ratio of Partners = 3 : 2

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

X’s Share = 2/3-  3/5 = (10-9)/15  =   1/15 (Sacrifice)

Y’s Share = 1/3-  2/5 = (5-6)/15  = -1/15 (Gain) 

Adjustment for General Reserve

X will be compensate by  = 60,000 x 1/15 = Rs. 4,000

Y  will provide = 60,000 x 1/15 =  Rs. 4,000

Question 18

Mita, Gopal and Farhan were partners sharing profits and losses in the ratio 3:2:1. On 31st March, 2018 they decided to change the profit-sharing ratio to 5:3:2. On this date, the Balance Sheet showed deferred advertisement expenditure 30,000 and contingency reserve 9,000.

Goodwill was valued at 4,80,000. Pass the necessary Journal entries for the above transactions in the books of the firm on its reconstitution.

Answer

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
2018	Mita's Capital A/c	Dr.	15,000
Mar 31	Gopal's Capital A/c	Dr.	10,000
	Farahn's Capital A/c	Dr.	5,000
	To Deferred Advertisement Exp. A/c			30,000
	(Being Deferred Revenue Expense adjusted on change in profit ratio)
	Contingency Reserve A/c	Dr.	9,000
	To Mita's Capital A/c			4,500
	To Gopal's Capital A/c			3,000
	To Farahn's Capital A/c			1,500
	(Being Contingency Reserve adjusted on change in profit ratio)
	To Farahn's Capital A/c	Dr.	16,000
	To Gopal's Capital A/c			16,000
	(Being Goodwill adjusted on change in profit ratio)

 

Calculation for Sacrifices and Gains

Old Ratio of Partners = 3 : 2 : 1

New Ratio of Partners = 5 : 3 : 2

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

Mita = 3/6-  5/10 =  (15-15)/30  =  0 

Gopal  = 2/6-  3/10 =  (10-9)/30  =   1/10  (Sacrifice) 

Farahn = 1/6-  2/10 =  (5-6)/30  = -1/10    (Gain)  

 

Calculation for goodwill

Value of Goodwill = = Rs. 4,80,000

Gopal share of Goodwill = Rs. 4,80,000 x (2 )/6 = Rs. 1,60,000

Gopal will receive from Farahn for his sacrifice

Share of goodwill x Sacrifice ratio = Rs. 1,60,000 x (1 )/10 = Rs. 16,000

Question 19

Bhavya and Sakshi are partners in a firm, sharing profits and losses in the ratio of 3 : 2. On 31st March, 2018 their Balance Sheet was as under:

BALANCE SHEET OF BHAVYA AND SAKSHI
as at 31st Mar 2018
Liabilities		Assets	Amount (Rs.)
Sundry Creditors	13,800	Furniture	16,000
General Reserve	23,400	Land and Buildings	56,000
Invest Fluctuation Funds	20,000	Investments	30,000
Bhavya's Capital	50,000	Trade Receivables	18,500
Sakshi's Capital	40,000	Cash in Hand	26,700
	1,47,200		1,47,200

 

The partners have decided to change their profit sharing ratio to 1 : 1 with immediate effect. For the purpose, they decided that:

(i)      Investments to be valued at Rs. 20,000.

(ii)    Goodwill of the firm be valued at Rs. 24,000.

(iii)   General Reserve not to be distributed between the partners.

You are required to pass necessary Journal entries in the books of the firm. Show workings.

Answer

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
2018	Investment Fluctuation Reserve A/c	Dr.	20,000
Mar. 31	To Investment A/c			10,000
	To Bhavya's Capital A/c			6,000
	To Sakshi's Capital A/c			3,000
	(Being Investment Fluctuation Reserve adjusted and distributed on change in profit ratio)
	Sakshi's Capital A/c	Dr.	2,400
	To Bhavya's Capital A/c			2,400
	(Being goodwill on change in profit ratio)
	Sakshi's Capital A/c	Dr.	2,340
	To Bhavya's Capital A/c			2,340
	(Being General Reserve adjusted on change in profit ratio)

Calculation for Sacrifices and Gains

Old Ratio of Partners = 3 : 2

New Ratio of Partners = 1 : 1

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

Bhavya  = 3/5-  1/2 = (6-5)/10  =   1/10 (Sacrifice)

Sakshi = 2/5-  1/2 = (4-5)/10  = -1/10 (Gain) 

Adjustment of General Reserve

Bhavya will get for her sacrifice = 23,400 x 1/10 = 2,340

Sakshi  will give for her gain =  23,400 x 1/10 = 2,340

 Question 20

X, Y and Z are sharing profits and losses in the ratio of 5 : 3 : 2. They decide to share future profits and losses in the ratio of 2 : 3 : 5 with effect from 1st April, 2020. They also decide to record the effect of the following accumulated profits, losses and reserves without affecting their book values by passing a single entry.

	Amount (Rs)
General Reserve	6,000
Profit & Loss A/c (Cr)	24,000
Advertisement Suspense A/c	12,000

Pass an Adjustment Entry.

Answer

Journal Entries

Date	Particulars		Dr Amt. (Rs.)	Cr. Amt. (Rs)
	Z's Capital A/c	Dr.	5,400
	To X's Capital A/c			5,400
	(Being adjustment on change in profit ratio)

Working Notes

Calculation for Sacrifices and Gains

Old Ratio of Partners = 5 : 3 : 2

New Ratio of Partners = 2 : 3 : 5

Sacrificing (Gaining) Ratio = Old Ratio – New Ratio

X  = 5/10-  2/10 =   3/10 (Sacrifice)

Y = 3/10-  3/10 = 0  

Z  = 2/10-  5/10 = -3/10 (Gain)

Net value of Accumulated profits, losses and reserves

General Reserve + Accumulated Profit - Advertisement Suspense A/C = 6,000 + 24,000 -12,000 = 18,000

Amount X’s will receive from Z = 18,000 x   3/10 = Rs. 5,400