DK Goel Solutions Chapter 3 Changing in Profit Sharing Ratio among the Existing Partners

Read below DK Goel Solutions Class 12 Chapter 3 Changing in Profit-Sharing Ratio among the Existing Partners. These solutions have been designed based on the latest Class 12 DK Goel Accountancy book used by commerce stream students issued for the current year and the questions given in each chapter.

When a partnership firm is formed there can be a requirement to change the profit-sharing ratio of various partners because of various events which can happen in the partnership firm.

In this chapter, you will be able to understand such kinds of reasons, as well as the related accounting practice that has to be followed to ensure that the updated profit sharing ratio is made applicable in the partnership firm as well as correct accounting is performed.

The chapter contains a lot of questions which can be very helpful for Class 12 commerce students of Accountancy and will also help build strong concepts which will be really helpful in your career.

DK Goel Solutions Class 12 Chapter 3 solutions are free and will help you to prepare for Class 12 Accountancy. Just scroll down and read through the answers provided below

Changing in Profit Sharing Ratio among the Existing Partners DK Goel Class 12 Accountancy Solutions

Students can refer below for solutions for all questions given in your DK Goel Accountancy Textbook for Class 12 in Chapter 3

Short Answer Questions for DK Goel Solutions Class 12 Chapter 3

Question 1. Mention the occasions on which reconstitution of partnership firm can take place.

Solution 1
A business is reconstituted on the following occasions:—
1.) Change in the profit sharing ratio among the existing partners.
2.) Admission of an existing partner.
3.) Retirement of an existing partner.
4.) Death of a partner.
5.) Amalgamation of two or more partnership firms.

Question 2. What adjustments are required at the time of reconstitution of a partnership firm?

Solution 2
At the time of the reconstitution of a relationship company, the following changes are required:
(i) Determination of the ratio for sacrifice and ratio for benefiting
(ii) Goodwill Accounting.
(iii) Assets and Net Earnings Tax Treatment
(iv) Assets and Obligations Revaluation Accounting.
(v) Capitals Adjustment.

Question 3. Who should compensate whom in case of a change in profit sharing ratio of existing partners?

Solution 3
The aim of the measurement of the sacrifice ratio is to assess the value of the fee to be paid to the sacrificing partner by the purchasing partner (i.e. the partner whose share has risen as a result of the change) (i.e. the partner whose share has decreased as a result of change). In addition, such fee is received on the grounds of an adequate amount of goodwill.

Question 4. Give any three features of goodwill.

Solution 4
The attributes of goodwill are below:-
1.) That is a commodity which is intangible.
2.) It doesn’t have a distinct life from that of an enterprise. Thus, as enterprise is sold, it has achievable worth.
3.) A subjective calculation of the worth is the value of goodwill.

Question 5. Write any four factors which affect the goodwill of a partnership firm.

Solution 5
The four factors that impact a relationship firm’s goodwill are below:—
1.) Desirable market position:- If the organization is situated in a comfortable or popular location, it can draw more buyers and therefore provide more goodwill.
2.) Management Efficiency:- Once the organization is managed by competent and effective management, the income will begin to grow, resulting in an increase in the valuation of goodwill.
3.) Essence of Goodwill:- If a corporation deals with everyday goods, it will get a steady profit as the market for these goods will be stable. Such an organization will have more goodwill.
4.) Capital Needed:- The valuation of goodwill would also affect the amount of capital required for a company. If the same rate of profit is received by two business companies, the business with a lower capital requirement may enjoy more goodwill.

Question 6. On what occasions does the need for valuation of goodwill arise?

Solution 6
In the following conditions, the need to valuate goodwill in cooperation arises:
1.) Where the benefit share ratio between the current parties varies.
2.) For the admission of a new partner.
3.) Whether a companion retires or dies.
4.) When they sell the business.
5.) Where the company is combined with another business.

Question 7. Explain any two methods of valuation of goodwill.

Solution 7
1.) Average Benefit Method:- This is a goodwill valuation process that is very basic and commonly practiced. Goodwill is measured in this system based on the amount of earnings over the previous year. To figure out the worth of goodwill, the average of all earnings is compounded by the accepted number of years. The formula is thus:
Goodwill worth = average benefit = amount of sales for the year.

2.) Super Benefit Method:- Goodwill is measured in this manner on the basis of the surplus profit received by a corporation relative to the average profit earned by all companies. When a corporation does not have any planned surplus profits, it would have no goodwill. The formula is thus:
(i) Normal Profit = (Capital Invested × Normal rate of return)/100
(ii) Super Profit = Actual profit – Normal Profit
(iii) Goodwill = Super profit × No. of years purchased

Question 8. What is meant by number of years’ purchase at the time of valuation of goodwill?

Solution 8
Number of year purchase is used to measure the value of goodwill at the time of appraisal of goodwill in the average benefit method and mega profit method.

Question 9. Explain capitalisation method of goodwill valuation with the help of imaginary figures.

Solution 9
Under this method first of all we calculate the average profit and then we assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is also called capitalised value of average profit. It is calculated as under:
Capitalised Value of Average Profit:-
Average Profit × 100/(Normal Rate of Return)

Capitalised Value of Super Profit:-
Super Profit × 100/(Normal Rate of Return)

Example:- If a firm earns a profit of Rs. 50,000 p.a. on an average basis and the normal rate of return is 10% p.a. Capital employed amount Rs. 4,00,000. Capitalised value of average profit will be:
Rs. 50,000 × 100/10 = Rs. 5,00,000
Goodwill = Rs. 5,00,000 – Rs. 4,00,000 = Rs. 1,00,000

Question 10. Distinguish between average profit and super profit method of valuation goodwill.

Solution 10

Class 12 Chapter 3 Change in Profit Sharing Ratio Among the Existing Partners — DK Goel Solutions Class 12 Chapter 3 Changing in Profit Sharing Ratio among the Existing Partners

Q11. How will you deal with goodwill when there is change in the profit sharing ratio among the existing partners? Illustrate with the help of imaginary figures.

Solution 11
A shift in the profit-sharing ratio simply means that one partner buys a portion of profit previously belonging to the latter from another partner. By spending the proportional sum of gratitude, the buying or receiving partner must reimburse the sacrificing partner. In other words, the winning partner should pay the partner who loses the share of goodwill equal to the share he receives.

Question 12. How will you deal with reserves and accumulated profits at the time of change in profit sharing ratio among the existing partners?

Solution 12
There are assets or cumulative profits/losses remaining in the company’s records at the time of the adjustment in the profit share ratio, which can be allocated to the Capital Accounts of the Partner or to Current Accounts in their old profit sharing ratio.

Question 13. Is it necessary to revalue the assets and liabilities if there is a change in profit sharing ratio of the existing partners? Give reason.

Solution 13
Yeah, it is essential to revalue the company’s assets and liabilities and it is also necessary to revalue the profit-sharing ratio of current shareholders at the time of the shift. The explanation for this is that the realisable valuation of the assets and liabilities which vary from that seen on the balance sheet. It is likely that certain of the assets may have appreciated in value over the course of time, whilst the value of some other assets may have diminished and no record has been made of those adjustments in the account books.

Question 14. Why are reserves and accumulated profits credited to the partner’s capital accounts in case of change in profit sharing ratio amongst the existing partners?

Solution 14
In their old benefit share mix, reserves and cumulative earnings are allocated to the capital accounts of both partners since they have been set aside from the profits received in the era before transition. If they are not already changed, their new benefit share ratio will be adjusted later, resulting in loss to the sacrificing partner and gain to the winning partner.

Question 15. Anand and Vikas were partners in a firm sharing profits and losses in the ratio of 2 : 1. With effect from 1st April 2019, they agreed to share the profits equally. On that date, the Balance Sheet of the firm showed Rs. 75,000 as Workmen Compensation Reserve against which there was no liability. Vikas expressed his opinion that it should be credited to the Capital account equally. However, Anand was of the opinion that it should be credited to the Capital accounts in the ratio of 2:1. Anand was able to convince Vikas. Explain what argument must have been put forward by Anand to which Villas agreed?

Solution 15
Anand may have claimed that since their profit-sharing ratio was 2: 1, the Workmen Benefit Pool was generated from earnings. It can then be compensated for in the old profit-sharing ratio.

Question 16. Priya and Rani were partners in a firm sharing profits and losses in the ratio of 2:1. With effect from 1st April 2019, they agreed to share the profits equally. They prepared a Revaluation Account on this date and an unrecorded asset (Motorbike) worth Rs. 40,000 was found not to have been recorded in the books. Priya was of the view that it should be Credited to Revaluation Account whereas Rani was of the view that it should be Credited to the Capital accounts in equal proportion. Rani agreed to the viewpoint of Priya. Explain what argument must have been put forward by Priya to which Rani agreed?

Solution 16
Priya may have claimed that while the profit share ratio was 2: 1, unrecorded assets belonged to old firms. It should then be attributed to the Revaluation Account in order to share 2:1 of the benefit on account of this asset.

Question 17. Chaman and Dinesh were partners in a firm sharing profits in 3:1. With effect from 1st April 2019, they agreed to share the profits in 2:1. They prepared a Revaluation Account on this date and it was found that an unrecorded liability towards salary of an employee of 50,000 existed. Dinesh was of the view that it should be debited to Revaluation Account whereas Chaman was of the could be recorded in the books of accounts at the time of its payment. Chaman agreed to the viewpoint of Dinesh. Explain what argument been put forward by Dinesh to which Chaman agreed?

Solution 17
Dinesh would have claimed that responsibility for wages connected to the old business was 3:1 while the profit-sharing figure was 3:1. It could then be debited to the Revaluation Account so that the deficit due to this obligation will be 3:1 bome. If it is reported at the time of actual payment, the 2:1 deficit would be shared by the spouses.

Numerical Questions

Question 1.(A). X and Y were partners in a firm sharing profits in the ratio of 5:3. With effect from 1st April, 2021 they agreed to share profits equally. Calculate the individual partner’s gain or sacrifice due to change in ratio.
Solution 1 (A). Old Ratio of X and Y = 5 : 3
New Ratio of X and Y = 1 : 1
Calculation of Sacrifice or Gaining Ratio =
X’s Ratio = 5/8-1/2
X’s Ratio = (5 – 4 )/8
X’s Sacrifice Ratio = 1/8
Y’s Ratio = 3/8-1/2
Y’s Ratio = (3 – 4 )/8
Y’s Gaining Ratio = -1/8
Thus, X has sacrificed 1/8th share whereas Y has gained 1/8th share.

Point of Knowledge:-
Here the negative value of is gaining and positive value is sacrificing.

Question 1 (B). A and B were in partnership sharing profits equally. With effect from1st April, 2021 they agreed to share profits in ratio of 4:3. Calculate the individual partner’s gain or sacrifice due to change in ratio.
Solution 1 (B). Old Ratio of A and B = 1 : 1
New Ratio of A and B = 4 : 3
Calculation of Sacrifice or Gaining Ratio =
A’s Ratio = 1/2-4/7
A’s Ratio = (7 – 8 )/14
A’s Gaining Ratio = 1/14
B’s Ratio = 1/2-3/7
B’s Ratio = (7 – 6 )/14
B’s Sacrificing Ratio = 1/14

Thus, B has sacrificed 1/14th share whereas A has Gained 1/14th share.

Point of Knowledge:- Here the negative value of is gaining and positive value is sacrificing.

Question 2. (A) A and B and C were in partnership sharing profits in the ratio of 4:3:1. The partners agreed to share future profits in the ratio of 5: 4 : 3. Calculate each partner’s gain or sacrifice due to change in ratio.
Solution 2 (A)
Old Ratio of A, B and C = 4 : 3 : 1
New Ratio of A, B and C = 5 : 4 : 3
Calculation of Sacrificing or Gaining Ratio =
A’s Ratio = 4/8-5/12
A’s Ratio = (12 – 10 )/24
A’s Sacrifice Ratio = 2/24

B’s Ratio = 3/8-4/12
B’s Ratio = (9 – 8 )/24
B’s Sacrificing Ratio = 1/14

C’s Ratio = 1/8-3/12
C’s Ratio = (3 – 6 )/24
C’s Gaining Ratio = 3/24

Thus, A has sacrifices 2/24th share, B has sacrifices 1/24th share and C gain 3/24th

Question 2. (B) Mahesh, Naresh and Om were partners sharing profits in the ratio of 2 : 3 : 4. With effect from 1^stApril, 2021 they agreed to share profits in the ratio of 1 : 2 : 3. Calculate each partner’s gain or sacrifice due to change in ratio
Solution 2 (B)
Old Ratio of Mahesh, Naresh and Om = 2 : 3 : 4
New Ratio of Mahesh, Naresh and Om = 1 : 2 : 3
Calculation of Sacrificing or Gaining Ratio =
Mahesh’s Ratio = 2/9-1/6
Mahesh’s Ratio = (4 – 3 )/18
Mahesh’s Sacrifice Ratio = 1/18

Naresh’s Ratio = 3/9-2/6
Naresh’s Ratio = (6 – 6 )/18
Naresh’s Sacrificing Ratio = 0

Om’s Ratio = 4/9-3/6
Om’s Ratio = (8 – 9 )/18
Om’s Gaining Ratio = 1/18

Thus, Mahesh has sacrifices 1/18th share, and Om gain 1/18th

Point of Knowledge:-
Here the negative value of is gaining and positive value is sacrificing.

Question 3. The goodwill of a firm is valued at 4 years’ purchase of average profits of a five years. The profits of the last five years were :

Year Profit (Rs.)
2013-14 : 2,00,000
2014-15 : -3,00,000
2015-16 : 4,50,000 (including an abnormal gain of Rs. 50,000)
2016-17 : 3,50,000 (after charging an abnormal loss of Rs. 90,000)
2017-18 : 2,60,000

Solution 3
Total Profit = Rs. 2,00,000 – Rs. 3,00,000 + (Rs. 4,50,000 – Rs. 50,000) + Rs. 3,50,000 + Rs. 2,60,000
Total Profit = Rs. 10,00,000

Average Profit = (Total Profit)/(Number of year)
Average Profit = 10,00,000/5
Average Profit = Rs. 2,00,000

Goodwill = Average Profit × Number of year purchases
Goodwill = 2,00,000 × 4
Goodwill = 8,00,000

Points of Students:
Goodwill:- Goodwill means the ‘good-name’ or the reputation earned by a firm through the hard work and honesty of its owners. If a firm renders goods service to the customers, the customers who feel satisfied will come again and the firm will be able to earn more profits in future.

Question 4. X purchased the business of Y from 1st April, 2019. For this purpose goodwill is to be valued at 100% of the average annual profits of the last four years. The profits shown by Y’s business for the last four years were :

Verification of books of accounts revealed the following:
(i) During the year ended 31st March, 2017, a machine got destroyed in accident and Rs. 60,000 was written off as loss in Profit & Loss Account.
(ii) On 1st July 2017, Two Computers costing Rs. 40,000 each were purchased and
were debited to Travelling Expenses Account on which depreciation is to be charged @ 10% p.a. on Straight Line Method. Calculate the value of goodwill.
Solution 4
Calculation of Adjusted Profits

Total Profit = Rs. 1,50,000 – Rs. 10,000 + Rs. 2,24,000 + Rs. 1,92,000
Total profit = Rs. 5,56,000
Average Profit = (Rs. 5,56,000)/4
Average Profit = Rs. 1,39,000
Goodwill = 1,39,000 × 100% = Rs. 1,39,000

Working Note:-
Calculation of Depreciation:-
In 2018 = Rs. 80,000 × 10/100 × 9/12 = Rs. 6,000
In 2019 = Rs. 80,000 × 10/100 = Rs. 8,000

Points of Students:
Goodwill is an intangible asset since it has no physical existence and cannot be seen or touched. But it is not a fictitious asset because fictitious assets do not have a value whereas goodwill has a value in case of profit making concerns. It can be sold, though a sale will be’

Question 5. A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. They decide to take D into partnership for 1/4th share on 1st April, 2017. For this purpose, goodwill is to be valued at 3 times the average annual profits of the previous four or five years whichever is higher. The agreed profits for goodwill purpose of the past five years are as follows:

Rs.
Year ending on 31st March 2013 1,30,000
Year ending on 31st March 2014 1,20,000
Year ending on 31st March 2015 1,50,000
Year ending on 31st March 2016 1,10,000
Year ending on 31st March 2017 2,00,000
Calculate the value of Goodwill.

Solution 5
Based on 4 Years of Profit
Total Profit = Rs. 1,20,000 + Rs. 1,50,000 + Rs. 1,10,000 + Rs. 2,00,000
Total Profit = Rs. 5,80,000

Average Profit = (Total Profit)/(Number of year)
Average Profit = 5,80,000/4
Average Profit = Rs. 1,45,000
Based on 5 Years of Profit
Total Profit = Rs. 1,30,000 + Rs. 1,20,000 + Rs. 1,50,000 + Rs. 1,10,000 + Rs. 2,00,000
Total Profit = Rs. 7,10,000

Average Profit = (Total Profit)/(Number of year)
Average Profit = 7,10,000/5
Average Profit = Rs. 1,42,000

Four years average profit is more than 5 years average profit. Therefore the value of goodwill will be
Goodwill = Average Profit × Number of year purchases
Goodwill = 1,45,000 × 3
Goodwill = 4,35,000

Question 6. A, B and C are partners sharing profits and losses equally. They agree to admit D for equal share. For this purpose goodwill is to be valued at 3 year’s purchase of average profits of last 5 years which were as follows:
Rs.
Year ending on 31st March 2013 60,000 (Profit)
Year ending on 31st March 2014 1,50,000 (Profit)
Year ending on 31st March 2015 20,000 (Loss)
Year ending on 31st March 2016 2,00,000 (Profit)
Year ending on 31st March 2017 1,85,000 (Profit)
On 1st October, 2016 a computer costing Rs. 40,000 was purchased and debited to office expenses account on which depreciation is to be charged @25% p.a. Calculate the value of goodwill.

Solution 6
Calculation of Average Profits:-

	Rs.
31^st March 2013	Rs. 60,000 (Profit)
31^st March 2014	Rs. 1,50,000 (Profit)
31^st March 2015	Rs. 20,000 (Loss)
31^st March 2016	Rs. 2,00,000 (Profit)
31^st March 2017	Rs. 2,20,000 (Profit)
	Rs. 6,10,000

DK Goel Solutions Class 12 Chapter 3 Changing in Profit Sharing Ratio among the Existing Partners

Weight Average Profit = (Rs. 12,10,000)/10
Weight Average Profit = Rs. 1,21,000
Goodwill = Rs. 1,21,000 × 3 = Rs. 3,63,000

Question 7. The profits earned by a firm during the last four years were as follows:

Calculate the value of goodwill on the basis of three year’s purchase of weighted average profits. Weights to be used are 1,2,3, and 4 respectively to the profits for 2018, 2019, 2020 and 2021.

Solution 7

Points of Students:
This method is a modified version of average profit method. As per this method each year’s profit is assigned a weight. The highest weight is attached to the profit of the most recent year. Thus, if profits are given for 2018, 2019, 2020 and 2016 and weighted average profit is to be calculated then weights will be assigned as follows: 2014—1; 2015—2; 2016—3; 2021—4. Thereafter, each year’s profit is multiplied by the weight assigned to it in order to find out the products and the total of products is then divided by the total of weights in order to calculate the weighted average profits. After this, the weighted average profit is multiplied by the agreed number of year’s purchase to find out the value of goodwill. Thus, the formula is:
Weighted Average Profit = Total of Products of Profits Total of Weights
Goodwill = Weighted Average Profit × Number of Year’s of Purchase.

Question 8. Following information is available about the business of a firm :
(i) Profits : In 2019, Rs. 40,000; In 2020, Rs. 50,000; In 2021, Rs. 60,000
(ii) Non- recurring income of Rs.1,000 is included in the profits of 2014, (iii) Profits of 2019 have been reduced by Rs. 6,000 because goods were destroyed by fire, (iv) Goods have not been insured but it is thought to insure them in future. The insurance premium is estimated at Rs. 400 per year, (v) Reasonable remuneration of the proprietor of business is Rs. 6,000 per year, but it has not been taken into account for calculation of above mentioned profits. (vi) Profits of 2021 include Rs. 5,000 income on investment. Goodwill is agreed to be valued at two year’s purchase of the weighted average profits of the past three years. The appropriate weights to be used are : 2019 :-1; 2020: -2; 2021: -3.

Solution 8
Calculation of Adjusted Profits

Weight Average Profit = (Rs. 2,70,600)/6
Weight Average Profit = Rs. 45,100
Goodwill = Rs. 45,100 × 2 = Rs. 90,200

Question 9. Calculate the value of goodwill on the basis of three year’s purchase of the weighted average profits of the last five years. Profits to be weighted 1, 2, 3, 4 and 5, the greatest weightage to be given to last year. Profits of the last five years were :

Year ended		Rs.
31st March, 2015 :	Profit	80,000	(after considering abnormal loss of Rs. 41,500)
31st March, 2016 :	Profit	1,05,000	(after considering abnormal gain of Rs. 40,000)
31st March, 2017 :	Loss	20,000
31st March, 2018 :	Profit	1,80,000
31st March, 2019 :	Profit	2,00,000

Books of Accounts of the firm revealed that:
(i) Closing Stock as on 31st March, 2015 was overvalued by Rs. 40,000.
(ii) Repairs to Machinery Rs. 60,000 were wrongly debited to Machinery Account on 1st July, 2017. Depreciation was charged on Machinery 20% p.a. on diminishing balance method.

Calculation of Adjusted Profits

Weight Average Profit = (Rs. 18,00,000)/15
Weight Average Profit = Rs. 1,20,000
Goodwill = Rs. 1,20,000 × 3 = Rs. 3,60,000

Working Note:-
Calculation of Depreciation:-
In 2018 = Rs. 60,000 × 20/100 × 9/12 = Rs. 9,000
In 2019 = (Rs. 60,000 – Rs. 9,000) × 20/100 = Rs. 10,200

Points of Students:
As per this method each year’s profit is assigned a weight. The highest weight is attached to the profit of the most recent year. Thus, weighted average profit is to be calculated then weights will be assigned as follows: 2014—1; 2015—2; 2016—3; 2017—4. Thereafter, each year’s profit is multiplied by the weight assigned to it in order to find out the products and the total of products is then divided by the total of weights in order to calculate the weighted average profits. After this, the weighted average profit is multiplied by the agreed number of year’s purchase to find out the value of goodwill. The formula is: Weighted Average Profit = Total of Products of Profits Total of Weights
Goodwill = Weighted Average Profit × Number of Year’s of Purchase.

Question 10. A firm earned profits of Rs. 80,000, Rs. 1,00,000, Rs. 1,20,000 and Rs. 1,20,000 and Rs. 1,80,000 during 2010-11, 2011-12, 2012-13 and 2013-14 respectively. The firm has capital investment of Rs. 5,00,000. A fair rate of return on investment is 15% p.a. Calculate goodwill of the firm based on three years’ purchase of average super profits of last four years.
Solution 10
Total Profit = Rs. 80,000 + Rs. 1,00,000 + Rs. 1,20,000 + Rs. 1,80,000
Total Profit = Rs. 4,80,000

Average Profit = (Rs. 4,80,000)/4
Average Profit = Rs. 1,20,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 5,00,000 × 15/100
Normal Profit = Rs. 75,000

Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 1,20,000 – Rs. 75,000
Super Profit = Rs. 45,000

Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 45,000 × 3
Goodwill = Rs. 1,35,000

Points of Students:
In this method goodwill is calculated on the basis of surplus (excess) profits earned by a firm in comparison to average profits earned by other firms. If a business has no anticipation excess earnings, it will have no goodwill. Such excess profits are called super profits and the goodwill is calculated on the basis of super profits. For example, if the normal rate of earning applicable in a particular type of business is 15% and of our firm is also engaged in the same type of business and we have invested Rs.1,00,000 as capital and if we are earning Rs.25,000, as profit, the Normal Profits at the rate of 15% on Rs.1,00,000 should be 15,000, whereas, we are earning Actual Profits of Rs.25,000 – Rs.15,000, – Rs.10,000 are Super Profits. Goodwill is calculated by multiplying the Super Profits by a reasonable number of years, such as two years purchase or three years purchase etc.
Thus the formula is:
Normal Profit = Capital invested × Normal rate of return100
Super profit = Actual or Average profit – Normal profit
Goodwill = Super profit No. of years purchased

Question 11. Capital invested in a firm is Rs. 3,00,000. Normal rate of return is 10%. Average profits of the firm are Rs. 41,000 (after an abnormal loss of Rs. 2,000). Calculate goodwill at five times the super profits.
Solution 11
Calculation of Actual Average Profit:-
Actual Average Profit = Average Profit + Abnormal Loss
Actual Average Profit = Rs. 41,000 + Rs. 2,000
Actual Average Profit = Rs. 43,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 3,00,000 × 10/100
Normal Profit = Rs. 30,000

Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 43,000 – Rs. 30,000
Super Profit = Rs. 13,000

Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 13,000 × 5
Goodwill = Rs. 65,000

Points of Students:
Under this method first of all we calculate the average profits and then we assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is also called capitalised value of average profits. It is calculated as under:
Capitalised Value of Average Profits = Average Profits × 100Normal Rate of Return

Question 12. The capital of the firm of Anuj and Benu is Rs.10,00,000 and the market rate of interest is 15%. Annual salary to the partners is Rs. 60,000 each. The profit for the three years were Rs. 2,80,000, Rs. 3,80,000 and Rs. 4,20,000. Goodwill of the firm is to be valued on the basis of two years purchase of last three years average super profits. Calculate the goodwill of the firm.
Solution 12
Calculation of Actual Average Profit:-
Actual Average Profit = Average Profit – Remuneration to Partners
Actual Average Profit = Rs. 1,00,000 – Rs. 10,000
Actual Average Profit = Rs. 90,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 5,00,000 × 15/100
Normal Profit = Rs. 75,000

Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 90,000 – Rs. 75,000
Super Profit = Rs. 15,000

Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 15,000 × 2
Goodwill = Rs. 30,000

Points of Students:
This approach involves calculating average profits first, and then calculating the capital required to earn such average profits using a normal rate of return. The capitalised value of average earnings is another name for this type of capital. It’s computed as follows:
Average Profits x 100 = Return on Investment (ROI)

Question 13. Find out the capital employed from the following information:
Normal rate of return: 12%
Profits:
2017-18 Rs. 80,000
2018-19 Rs. 1,30,000
2019-20 Rs. 1,56,000
Goodwill valued at 3 years purchase of Super Profits Rs. 1,50,000
Solution 13
Goodwill = Super Profit × Number of year’s Purchases
Rs. 1,50,000 = Super Profit × 3
Super Profit = Rs. 1,50,000 ÷ 3
Super Profit = Rs. 50,000

Total Profit = Rs. 80,000 + Rs. 1,30,000 + Rs. 1,56,000
Total Profit = Rs. 3,66,000

Average Profit = (Rs. 3,66,000)/3
Average Profit = Rs. 1,22,000

Super Profit = Average Profit – Normal Profit
Rs. 50,000 = Rs. 1,22,000 – Normal Profit
Normal Profit = Rs. 1,22,000 – Rs. 50,000
Normal Profit = Rs. 72,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Rs. 72,000 = Capital Employed × 12/100
Rs. 72,000 × 100/12 = Capital Employed
Capital Employed = Rs. 6,00,000

Points of Students:
In this method first of all we calculate the average profits and then we assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is also called capitalised value of average profits. It is calculated as under:
Capitalised Value of Average Profits = Average Profits × 100Normal Rate of Return

Question 14. A and B are partners. They admit C for 1/4th share in profits. For this purpose goodwill is to be valued at three year’s purchase of super profits.
Following information is provided to you:
Rs.
A’s Capital 5,00,000
B’s Capital 4,00,000
General Reserve 1,50,000
Profit & Loss A/c (Cr.) 30,000
Sundry Assets 12,00,000
The normal rate of return is 15% p.a. Average Profits are Rs. 2,00,000 per year. You are required to calculate C’s share of goodwill.
Solution 14
Calculation of Capital Employed
Capital Employed = Rs. 5,00,000 + Rs. 4,00,000 + Rs. 1,50,000 + Rs. 30,000
Capital Employed = Rs. 10,80,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 10,80,000 × 15/100
Normal Profit = Rs. 1,62,000

Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 2,00,000 – Rs. 1,62,000
Super Profit = Rs. 38,000

Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 38,000 × 3
Goodwill = Rs. 1,14,000

C’s Share of Goodwill = Rs. 1,14,000 × 1/4
C’s Share of Goodwill = Rs. 28,500

Points for Students:-
As per accounting viewpoint, partnership firms are treated as a separate business entity distinct from its partners. However, as per legal viewpoint, a partnership firm is not a separate legal entity. In other words, it has no existence separate from its partners. It means that in case of bankruptcy of the partnership firm, private estates of the partners would be liable to meet the firm’s debts.

Question 15. On 1st April, 2014, a firm had assets of Rs. 1,00,000 excluding stock of Rs. 20,000. Partners’ capital Accounts showed a balance of Rs. 60,000. The current liabilities were Rs. 10,000 and the balance constituted the reserve. If the normal rate of return is 8%, the ‘Goodwill’ of the firm is valued at Rs. 60,000 at four year purchase of super profit, find the average profit of the firm.
Solution 15
Goodwill = Super Profit × Number of year Purchases
Rs. 60,000 = Super Profit × 4
Super Profit = (Rs. 60,000)/4
Super Profit = Rs. 15,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 1,10,000 × 8/100
Normal Profit = Rs. 8,800

Super Profit = Average Profit – Normal Profit
Rs. 15,000 = Average Profit – Rs. 8,800
Average Profit = Rs. 15,000 + Rs. 8,800
Average Profit = Rs. 23,800

Points for Students:-
Average profit method:- average of the profit of past few years.
Super Profit = Average Profit – Normal Profit
Average profit = super profit + Normal profit

Question 16. On April 1st 2020, an existing firm had assets of Rs. 5,00,000 including cash of Rs. 20,000. The firm had a General Reserve of Rs. 90,000, partner’s capital accounts showed a balance of Rs. 3,80,000 and creditors amounted to Rs. 30,000. If the normal rate of return is 20% and the goodwill of the firm is valued at Rs. 64,000 at 4 year’s purchase of super profit, find the average profits of the firm.
Solution 16
Goodwill = Super Profit × Number of year Purchases
Rs. 64,000 = Super Profit × 4
Super Profit = (Rs. 64,000)/4
Super Profit = Rs. 16,000

Working Note:-
Calculation of Capital Employed:-
Capital Employed = Total Assets – Current liabilities
Capital Employed = Rs. 1,20,000 – Rs. 10,000
Capital Employed = Rs. 1,10,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 4,70,000 × 20/100
Normal Profit = Rs. 94,000

Super Profit = Average Profit – Normal Profit
Rs. 16,000 = Average Profit – Rs. 94,000
Average Profit = Rs. 16,000 + Rs. 94,000
Average Profit = Rs. 1,10,000

Working Note:-
Calculation of Capital Employed:-
Capital Employed = Total Assets – Creditors
Capital Employed = Rs. 5,00,000 – Rs. 30,000
Capital Employed = Rs. 4,70,000

Points of Students:
Average profit method:- average of the profit of past few years.
Goodwill = Super Profit × Number of year Purchases
Super Profit = Average Profit – Normal Profit
Average profit = super profit + Normal profit

Question 17. The average profit of a firm is Rs. 48,000. The total assets of the firm are Rs. 8,00,000. Value of liabilities is Rs. 5,00,000. Average rate of return in the same business is 12%.
Calculate goodwill from capitalization of average profits method.
Solution 17
Capitalised Value of Average Profits = Average Profits × 100/(Normal Rate of Return)
Capitalised Value of Average Profits = Rs. 48,000 × 100/12
Capitalised Value of Average Profits = Rs. 4,00,000

Capital Employed = Assets – Liabilities
Capital Employed = Rs. 8,00,000 – Rs. 5,00,000
Capital Employed = Rs. 3,00,000

Goodwill = Capitalised Value of Average Profits – Capital Employed
Goodwill = Rs. 4,00,000 – Rs. 3,00,000
Goodwill = Rs. 1,00,000

Question 18. Anupma, Purnima and Ruchika are partners in a business. Balances in their Capital and Current Accounts as on 31st March, 2019 were :
Capital Account Current Account
Anupma 6,00,000 60,000 (Dr.)
Purnima 5,00,000 30,000 (Dr.)
Ruchika 5,00,000 10,000 (Cr.)
The firm earned an average profit of Rs. 2,40,000. If the normal rate of return is 12%, find the value of goodwill by Capitalization of Average Profit Method.
Solution 18
Capitalised Value of Average Profits = Average Profits × 100/(Normal Rate of Return)
Capitalised Value of Average Profits = Rs. 2,40,000 × 100/12
Capitalised Value of Average Profits = Rs. 20,00,000

Capital Employed = Assets – Liabilities
Capital Employed = Rs. 6,00,000 + Rs. 5,00,000 + Rs. 5,00,000 – Rs. 60,000 – Rs. 30,000 + Rs. 10,000
Capital Employed = Rs. 15,20,000

Goodwill = Capitalised Value of Average Profits – Capital Employed
Goodwill = Rs. 20,00,000 – Rs. 15,20,000
Goodwill = Rs. 4,80,000

Points of Students:
This is a very simple and widely followed method of valuation of goodwill. In this method, goodwill is calculated on the basis of the number of past years profits. Average of such profits is multiplied by the agreed number of years (such as two or three) to fing out the value of goodwill. Thus the formula is:
Value of Goodwill = Average Profit × Number of Years of purchase
Average profit method:- As per this method each year’s profit is assigned a weight. The highest weight is attached to the profit of the most recent year.
Capitalized value = Average future profit ×100 / Normal Rate of return

Question 19. Calculate the value of goodwill according to capitalization of Super Profits Method in the previous Q. 17.
Solution 19
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 8,00,000 – Rs. 5,00,000
Capital Employed = Rs. 3,00,000

Normal Profit = Rs. 3,00,000 × 12%
Normal Profit = Rs. 36,000

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 48,000 – Rs. 36,000
Super Profit = Rs. 12,000

Goodwill = Super Profit × 100/(Normal rate of return)
Goodwill = Rs. 12,000 × 100/12
Goodwill = Rs. 1,00,000

Question 20. The following information relates to a partnership firm :
(a) Profits/Losses for the last six years :
1st year Rs. 20,000 Profit 4th year Rs. 60,000 Profit
2nd year Rs. 60,000 Profit 5th year Rs. 50,000 Profit
3rd year Rs. 10,000 Loss 6th year Rs. 72,000 Profit
(b) Average Capital Employed is Rs. 2,00,000.
(c) Rate of normal profit is 15%.
Find out the value of goodwill on the basis of:
Four year’s purchase of average profits.
Four year’s purchase of super profits.
Capitalization of super profits.
Solution 20
Total Profit = Rs. 20,000 + Rs. 60,000 – Rs. 10,000 + Rs. 60,000 + Rs. 50,000 + Rs. 72,000
Total Profit = Rs. 2,52,000
Average Profit = (Rs. 2,52,000)/6
Average Profit = Rs. 42,000

(i) Four year’s purchase of average profits:
Value of goodwill at 4 year’s purchase of average profits = Rs. 42,000 × 4 = Rs 1,68,000

(ii) Four year’s purchases of super profits:
Normal Profit = Rs. 2,00,000 × 15%
Normal Profit = Rs. 30,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 42,000 – Rs. 30,000
Super Profit = Rs. 12,000

Value of Goodwill at 4 year’s Purchases of Super profit = Rs. 12,000 × 4 = Rs. 48,000

(iii) Capitalization of super profits:-
Goodwill = Super Profit × 100/(Normal Rate of Return)
Goodwill = Rs. 12,000 × 100/15
Goodwill = Rs. 80,000

Question 21. A and B are partners sharing profits and losses in the ratio of 3 : 1. It was decided that with effect from 1st April, 2021 the profit sharing ratio will be 5 : 3. Goodwill is to be valued at 2 year’s purchase of average of 3 year’s profits. The profits for the years ending 31st March 2019, 2020 and 2021 were Rs. 36,000, Rs. 32,000 and Rs. 40,000 respectively.
Pass the necessary journal entry for the treatment of goodwill
Solution 21
Total Profit = Rs. 36,000 + Rs. 32,000 + Rs. 40,000
Total Profit = Rs. 1,08,000
Average Profit = (Total Profit)/(Number of Year)

Average Profit = (Rs. 1,08,000)/3
Average Profit = Rs. 36,000

Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 36,000 × 2
Goodwill = Rs. 72,000

Calculation of Sacrificing and Gaining Ratio:-
A B
Old Ratio 3 : 1
New Ratio 5 : 3
A = 3/4-5/8 = (6 – 5)/8 = 1/8 (Sacrifice)
B = 1/4-3/8 = (2 – 3)/8 = -1/8 (Gain)
B’s Gained = Rs. 72,000 × 1/8 = Rs. 9,000
Hence, A has sacrificed Rs. 9,000 and B has gained Rs. 9,000.

Points of Students:
Under this method first of all we calculate the average profits and then we assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is also called Capitalized value of average profits. It is calculated as under:

Question 22. P, Q and R are partners sharing profits equally. They decided that in future R will get 1/7 share in profits. On the day of change, firm’s Goodwill is valued at Rs. 42,000. Give Journal Entries arising on account of change in profit sharing ratio.

Solution 22
Calculation of Sacrificing and Gaining Ratio:-
P Q R
Old Ratio 1 : 1 : 1
New Ratio 3 : 3 : 1

P = 1/3-3/7 = (7 – 9)/21 = -2/21 (Gain)
Q = 1/3-3/7 = (7 – 9)/21 = -2/21 (Gain)
R = 1/3-1/7 = (7 – 3)/21 = 4/21 (Sacrifice)
P’s Gained = Rs. 42,000 × 2/21 = Rs. 4,000
Q’s Gained = Rs. 42,000 × 2/21 = Rs. 4,000
R’s Sacrifice = Rs. 42,000 × 4/21 = Rs. 8,000

Points of Students:
(i) For Transfer of Reserve and Accumulated Profits:
Reserve A/c Dr.
Profit & Loss A/c Dr.
Workmen’s Compensation Reserve A/c Dr. (Excess of Reserve over Actual Liability)
Investment Fluctuation Reserve A/c Dr.
(Excess of Reserve over difference between Book value and Market value)
To Old Partner’s Capital or Current A/c (in Old Ratio)
(ii) For transfer of Accumulated Losses:
Old Partner’s Capital or Current A/c Dr. (in Old Ratio)
To Profit & Loss A/c
To Deferred Revenue Expenditure A/c (for example Advertisement Suspense A/c)

Question 23. A. B and C were partners sharing profits and losses in the ratio of 7:3:2 From 1st April 2021, they decided to share profits and losses in the ratio of 8:4:3 Goodwill is to be valued at the average of three year’s profits preceding the date of change in profit sharing ratio. The profits for the years ending 31st March 2018, 2019, 2020 and 2021 were Rs. 52,000, Rs. 48,000, Rs. 60,000 and Rs. 90,000 respectively. Give the necessary journal entry.
Solution 23
Total Profit = Rs. 48,000 + Rs. 60,000 + Rs. 90,000
Total Profit = Rs. 1,98,000
Average Profit = (Total Profit)/(Number of Year)
Average Profit = (Rs. 1,98,000)/3
Average Profit = Rs. 66,000

Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 7 : 3 : 2
New Ratio 8 : 4 : 3

A = 7/12-8/15 = (35 – 32)/60 = 3/60 (Sacrifice)
B = 3/12-4/15 = (15 – 16)/60 = -1/60 (Gain)
C = 2/12-3/15 = (10 – 12)/60 = -2/60 (Gain)

A’s Sacrifice = Rs. 66,000 × 3/60 = Rs. 3,300
B’s Gained = Rs. 66,000 × 1/60 = Rs. 1,100
C’s Gained = Rs. 66,000 × 2/60 = Rs. 2,200

Points of Students:
Calculation of Average Profit:-
Average Profit = Total Profit/Number of Year

Question 24. A and B are partners in a firm sharing profits in the ratio of 3: 2. They decided to share profits in the ratio of 3 : 4 w.e.f., April 1, 2021. On that date there was a credit balance of Rs. 70,000 in their Profit and Loss Account. Pass the necessary journal entry assuming that partners decide to distribute the profits.

Solution 24

Working Note:-
A’s Capital = Rs. 70,000 × 3/5 = Rs. 42,000
B’s Capital = Rs. 70,000 × 2/5 = Rs. 28,000

Points of Students:
Entries for transfer of Accumulated losses:-
Old Partner’s Capital A/c Dr.
To Profit and Loss A/c
To Deferred Revenue Expenditure A/c

Question 25. A, B and C are partners sharing profits and losses in the ratio of 1: 2: 3. From April 1, 2016, they decided to share the profit in the ratio of 2:3:4. On that date, Profit and Loss Account disclosed a debit balance of Rs. 90,000. Record the necessary journal entry for the distribution of the balance in the Profit and loss Account.
Solution 25

Working Note:-
A’s Capital = Rs. 90,000 × 1/6 = Rs. 15,000
B’s Capital = Rs. 90,000 × 2/6 = Rs. 30,000
C’s Capital = Rs. 90,000 × 3/6 = Rs. 45,000

Points of Students:
Entries for transfer of Accumulated Profit:-
Reserve A/c Dr.
Profit and Loss A/c Dr.
Workmen’s Compensation Reserve A/c Dr.
To Old Partner’s Capital A/c

Question 26. A and B sharing profits and losses in the ratio of 2:3, decide to share future profit and losses equally with effect from 1st April, 2021. An extract of their Balance Sheet as at 31^st March, 2021 is as follows:
Liabilities Rs. Assets Rs.
Workmen Compensation Reserve 40,000
Show the accounting treatment under the following alternative cases :
Case (i) If there is no other information.
Case (ii) If a claim on account of workmen’s compensation is estimated at Rs. 25,000.
Case (iii) If a claim on account of workmen’s compensation is estimated at Rs. 40,000.
Case (iv) If a claim on account of workmen’s compensation is estimated at Rs.50,000.

Solution 26

Question 27. P, Q and R were partners in a firm sharing profits in the ratio of 1:1:2. On 31st March, 2018, their balance sheet showed a debit balance of Rs. 9,000 in the profit and loss account and a Workmen Compensation Reserve of Rs. 64,000. From 1st April, 2018 they decided to share profits in the ratio of 2:2:1. For this purpose it was agreed that:
(a) Goodwill of the firm was valued at Rs. 4,00,000.
(b) A claim on account of workmen compensation of Rs. 30,000 was admitted.
Pass necessary journal entries on reconstitution of the firm.

Solution 27

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
P Q R
Old Ratio 1 : 1 : 2
New Ratio 2 : 2 : 1

P = 1/4-2/5 = (5 – 8)/20 = -3/20 (Gain)
Q = 1/4-2/5 = (5 – 8)/20 = -3/20 (Gain)
R = 2/4-1/5 = (10 – 4)/20 = 6/20 (Sacrifice)

Goodwill = Rs. 4,00,000
P’s Gained = Rs. 4,00,000 × 3/20 = Rs. 60,000
Q’s Gained = Rs. 4,00,000 × 3/20 = Rs. 60,000
R’s Sacrifice = Rs. 4,00,000 × 6/20 = Rs. 1,20,000

Points for Students:-
As per accounting viewpoint, partnership firm is treated as a separate business entity distinct from its partners. However, as per legal viewpoint, a partnership firm is not a separate legal entity. In other words, it has no existence separate from its partners. It means that in case of bankruptcy of the partnership firm, private estates of the partners would be liable to meet the firm’s debts.

Question 28. A, B and C sharing profits and losses in the ratio of 4:3:2, decide to share profit and losses in the ratio of 2:3:4 with effect from 1st April, 2021. Following is an extract of their Balance Sheet as at 31st March, 2021:
Liabilities Rs. Assets Rs.
Investment Fluctuation Reserve 54,000 Investments (at cost) 6,00,000

Show the accounting treatment under the following alternative cases :
Case (i) If there is no other information.
Case (ii) If the market value of Investments is Rs. 6,00,000.
Case (iii) If the market value of Investments is Rs. 5,91,000.
Case (iv) If the market value of Investments is Rs. 5,28,000.
Case (v) If the market value of Investments is Rs. 6,60,000.
Solution 28

Points for Students:-
When Reserve and Accumulated Profits/Losses are not to be transferred to Capital Accounts: If in Case of change in profit sharing ratio, there are reserves and accumulated profits appearing in the Balance Sheet and the partners decide to leave the reserve and accumulated profits undistributed, it will be necessary to pass an adjusting entry for the same. This is, because, at present the partners are entitled to share such reserves and profits in the old profit sharing ratio whereas in future they will be entitled to share such reserve and profit sharing ratio whereas in future they will be entitled to share such reserves and profits in the new profits sharing ratio.

Question 29 (new). Samiksha, Ash and Divya were partners in a firm sharing profits and losses in the ratio of 5:3:2. With effect from 1^st April, 2019, they agreed to share future profits and losses in the ratio of 2:5:3. Their Balance sheet showed a debit balance of Rs. 50,000 in the profit and loss account and a balance of Rs. 40,000 in the investment fluctuation reserve. For this purpose, it was agreed that:
(i) Goodwill of the firm be valued at Rs. 3,00,000.
(ii) Investments of book value of Rs. 5,00,000 be valued at Rs. 4,80,000. Pass the necessary journal entries to record the above transactions in the books of the firm.

Solution 29 (new).

Question 29. A and B are partners in a firm sharing profits in the ratio of 3:2. On March 31, 2016, their Balance Sheet showed a general reserve of Rs. 54,000. On that date decided to admit C as a new partner. The new profit sharing ratio between A, B and C will be 4: 3:2. Record the necessary journal entry in the books of the firm under the following circumstances:
(i) When they want to transfer the general reserve in their capital accounts.
(ii) When they don’t want to transfer general reserve in their capital accounts and prefer to record an adjustment entry for the same.

Solution 29
(i) When they want to transfer the general reserve in their capital accounts.

(ii) When they don’t want to transfer general reserve in their capital accounts and prefer to record an adjustment entry for the same.
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 3 : 2 : –
New Ratio 4 : 3 : 2

A = 3/5-4/9 = (27 – 20)/45 = -7/45 (Sacrifice)
Q = 2/5-3/9 = (18 – 15)/45 = -3/45 (Sacrifice)
R = 2/9 or 10/45 (Gain)

Points for Students:-
Assets and liabilities of a firm must also be revalued at the time of change in profit sharing ratio of existing partners. The reason is that the realizable or actual value of assets and liabilities may be different from those shown in the balance sheet. It is possible that with the passage of time some of the assets might have appreciated in value while the value of certain other assets might have decreased and no record has been made of such changes in the books of accounts. Revaluation of assets and liabilities becomes necessary because the change in the value of assets and liabilities belong to the period prior to change in profit sharing ratio and hence must be shared by the partners in their old profit sharing ratio.
Entries for transfer of Accumulated Profit:-
Reserve A/c Dr.
Profit and Loss A/c Dr.
Workmen’s Compensation Reserve A/c Dr.
To Old Partner’s Capital A/c

Question 30. A, B and C are partners sharing profits equally. From 1st April, 2017, they decided to share profits in the ratio of 3:4:5. On that date, Profit and Loss Account showed a credit balance of Rs.90,000. Partners do not want to distribute the Profit and Loss Account balance but prefer to record the change by an adjustment entry. You are required to give the adjusting entry.

Solution 30

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 1 : 1 : 1
New Ratio 3 : 4 : 5

A = 1/3-3/12 = (4 – 3)/12 = 1/12 (Sacrifice)
B = 1/3-4/12 = (4 – 4)/12 = 0
C = 1/3-5/12 = (4 – 5)/12 = 1/12 (Gain)
C’s Capital = Rs. 90,000 × 1/12 = Rs. 7,500
A’s Capital = Rs. 90,000 × 1/12 = Rs. 7,500

Points of Students:
As a result of change in profit sharing ratio, one or more of the existing partners gain some portion of other partner’s share of profit. The ratio of gain of profit sharing ratio is called gaining ratio. It is calculated as follows:
Gaining Ratio = New Ratio – Old Ratio

Question 31. X, Y and Z were sharing profits and losses in the ratio of 5: 3:2. They decided to share future profits and losses in the ratio of 2 : 3 : 5 with effect from 1.4.2017. They decided to record the effect of the following, without effecting their book values:-
(i) Profit and Loss Account Rs. 24,000
(ii) Advertisement Suspense Account Rs. 12,000
Pass the necessary adjusting entry.

Solution 31

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
X Y Z
Old Ratio 5 : 3 : 2
New Ratio 2 : 3 : 5

X = 5/10-2/10 = (5 – 2)/10 = 3/10 (Sacrifice)
Y = 3/10-3/10 = 0
Z = 2/10-5/10 = (2 – 5)/10 = 3/10 (Gain)

Calculation of Net Profit:-
Profit and Loss Account Rs. 24,000
Less: Advertisement Suspense Account Rs. 12,000
Rs. 12,000

Z’s Capital = Rs. 12,000 × 3/10 = Rs. 3,600
X’s Capital = Rs. 12,000 × 3/10 = Rs. 3,600

Points of Students:
Gaining Partners a/c Dr.
To Sacrificing Partner’s A/c
(Adjustment for profit and loss account balance and advertisement suspense account on change in profit sharing ratio)

Question 32.(A) A, B, C and D are partners in a firm sharing profits and losses in the ratio of 2:2:1:1 They decided to share future profits and losses in the ratio of 3:2:2:3. For This purpose goodwill of the firm valued at Rs. 1,50,000. There was also a reserve of Rs. 60,000 in the books of the firm.
Find out sacrifice ratio and gaining ratio and pass necessary journal entry assuming that reserve is not to be distributed.
Solution 32 (A)

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C D
Old Ratio 2 : 2 : 1 : 1
New Ratio 3 : 2 : 2 : 3
A = 2/6-3/10 = (10 – 9)/30 = 1/30 (Sacrifice)
B = 2/6-2/10 = (10 – 6)/30 = 4/30 (Sacrifice)
C = 1/6-2/10 = (5 – 6)/10 = 1/30 (Gain)
D = 1/6-3/10 = (5 – 9)/30 = 4/30 (Gain)

Value of Goodwill Rs. 1,50,000
Less: Reserve Rs. 60,000
Rs. 2,10,000

A’s Capital = Rs. 2,10,000 × 1/30 = Rs. 7,000 (Sacrifice)
B’s Capital = Rs. 2,10,000 × 4/30 = Rs. 28,000 (Sacrifice)
C’s Capital = Rs. 2,10,000 × 1/30 = Rs. 7,000 (Gain)
D’s Capital = Rs. 2,10,000 × 4/30 = Rs. 28,000 (Gain)

(A) Points of Students:
For Transfer of Reserve and Accumulated Profits:
Reserve A/c Dr.
Profit & Loss A/c Dr.
Workmen’s Compensation Reserve A/c Dr. (Excess of Reserve over Actual Liability)
Investment Fluctuation Reserve A/c Dr.
(Excess of Reserve over difference between Book value and Market value)
To Old Partner’s Capital or Current A/c (in Old Ratio)

Question 32.B (new). Arun and Varun were in partnership sharing profits in the ratio of 2 : 3. With effect from 1st May 2021 they agreed to share in the ratio of 1: 2. For this purpose the goodwill of the firm is to be valued at two year’s purchase of the average profits of last three years, which were Rs. 1,50,000, Rs. 1,40,000 and Rs. 52,20,000 respectively. Reserves appear in the books at Rs. 1,10,000. Partners do not want distribute the reserves. You are required to give effect to the change by passing a single journal entry.

Solution 32 B (new).

Value of Goodwill = Rs. 1,70,000 × 2 = Rs. 3,40,000
Value of Goodwill Rs. 3,40,000
Add: Reserve Rs. 1,10,000
Rs. 4,50,000

Calculation of Sacrificing and Gaining Ratio:-
A B
Old Ratio 2 : 3
New Ratio 1 : 2

Question 32. (B)
Arun and Varun were in partnership sharing profits in the ratio of 2 : 3. With effect from 1st May 2016 they agreed to share in the ratio of 1: 2. For this purpose the goodwill of the firm is to be valued at two year’s purchase of the average profits of last three years, which were Rs. 1,50,000, Rs. 1,40,000 and Rs. 52,20,000 respectively. Reserves appear in the books at Rs. 1,10,000. Partners do not want distribute the reserves. You are required to give effect to the change by passing a single journal entry.

Solution 32 (B)

Working Note:-
Average Profit = (Total Profit)/(Number of Year)

Total Profit = Rs. 1,50,000 + Rs. 1,40,000 + Rs. 2,20,000 = Rs. 5,10,000

Average Profit = (Rs. 5,10,000)/3
Average Profit = Rs. 1,70,000

Value of Goodwill = Rs. 1,70,000 × 2 = Rs. 3,40,000

Value of Goodwill Rs. 3,40,000
Add: Reserve Rs. 1,10,000
Rs. 4,50,000

Calculation of Sacrificing and Gaining Ratio:-
A B
Old Ratio 2 : 3
New Ratio 1 : 2

Arun = 2/5-1/3 = (6 – 5)/15 = 1/15 (Sacrifice)
Varun = 3/5-2/3 = (9 – 10)/15 = 1/15 (Gain)
Arun will Sacrifice for Varun = Rs. 4,50,000 × 1/15 = Rs. 30,000

B). Points of Students:
For transfer of Accumulated Losses:
Old Partner’s Capital or Current A/c Dr. (in Old Ratio)
To Profit & Loss A/c
To Deferred Revenue Expenditure A/c (for example Advertisement Suspense A/c)

Question 33. (new). X,Y and Z are partners sharing profits and losses in the ratio of 7:5:4. Their balance sheet as at 31st March 2021 stood as follows:

Liabilities	Rs.	Assets	Rs.
Capital Accounts: X 2,00,000 Y 1,50,000 Z 1,20,000	4,70,000	Sundry Assets	6,00,000
General Reserve	75,000
Profit & Loss A/c (Profits)	15,000
Creditors	40,000
	6,00,000		6,00,000

Partners decided that with effect from 1st April 2021, they will share profits and losses in the ratio of 3 : 2 : 1. For this purpose goodwill of the firm was valued at Rs. 1,50,000. The partners do not want to distribute the general reserve and profits. Pass a single journal entry to record the change and prepare a revised balance sheet

Solution 33 (new).

Working Note:-
Value of Goodwill Rs. 1,50,000
General Reserve Rs. 75,000
Profit and Loss Rs. 15,000
Rs. 2,40,000

Calculation of Sacrificing and Gaining Ratio:-
X Y Z
Old Ratio 7 : 5 : 4
New Ratio 3 : 2 : 1

Question 33. X,Y and Z are partners sharing profits and losses in the ratio of 7:5:4. Their balance sheet as at 31st March 2016 stood as follows:

Partners decided that with effect from 1st April 2016, they will share profits and losses in the ratio of 3 : 2 : 1. For this purpose goodwill of the firm was valued at Rs. 1,50,000. The partners do not want to distribute the general reserve and profits.
Pass a single journal entry to record the change and prepare a revised balance sheet.

Solution 33

Working Note:-
Value of Goodwill Rs. 1,50,000
General Reserve Rs. 75,000
Profit and Loss Rs. 15,000
Rs. 2,40,000
Calculation of Sacrificing and Gaining Ratio:-
X Y Z
Old Ratio 7 : 5 : 4
New Ratio 3 : 2 : 1

X = 7/16-3/6 = (21 – 24)/48 = 3/48 (Gain)
Y = 5/16-2/6 = (15 – 16)/48 = 1/48 (Gain)
Z = 4/16-1/6 = (12 – 8)/48 = 4/48 (Sacrifice)

X’s Gain = Rs. 2,40,000 × 3/48 = Rs. 15,000
Y’s Gain = Rs. 2,40,000 × 1/48 = Rs. 5,000
Z’s Sacrifice = Rs. 2,40,000 × 4/48 = Rs. 20,000

Points of Students:
If there is no claim against Workmen Compensation Reserve: In such a case, the entire amount of Workmen Compensation Reserve is credited to the Capital Account of partners in their old profit sharing ratio.
The Journal Entry passed is:
Workmen Compensation Reserve A/c Dr.
To Partner’s Capital A/c
(Workmen Compensation Reserve credited to partner’s Capital Accounts in their old profit ratio)
Gaining Partners a/c Dr.
To Sacrificing Partner’s A/c
(Adjustment for profit and loss account balance and advertisement suspense account on change in profit sharing ratio)

Question 34. A, B & C were partners in a firm sharing profits & losses in the ratio of 2:2:1. On March 31. 2018, their Balance Sheet was as follows:

From April 1, 2018, they decided to share future profits in the ratio of 1:2:3. For this purpose the following were agreed upon :
(i) Goodwill of the firm was valued at Rs. 4,50,000.
(ii) Land & Building will be appreciated by 20%.
(iii) Capitals of the partners will be in proportion to their new profit sharing ratio.
For this purpose Current Accounts will be opened.
Pass necessary Journal entries for the above transactions in the books of the firm.
Solution 34

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 2 : 2 : 1
New Ratio 1 : 2 : 3

A = 2/5-1/6 = (12 – 5)/30 = 7/30 (Sacrifice)
B = 2/5-2/6 = (12 – 10)/30 = 2/30 (Sacrifice)
C = 1/5-3/6 = (6 – 15)/30 = 9/30 (Gain)

Points of Students:
Revolution of assets and liabilities is done with the help of a new account called Revaluation Account. Sometimes this account is called Profit and Loss Adjustment A/c. This account is a nominal account in nature. Hence, if there is a loss due to revaluation, revaluation account is debited and if the revaluation results in a profit, the revaluation account is credited.

Question 35. A, B and C are partners in a firm sharing profits in the ratio of 3:2:1. Their Balance Sheet as at 31st March, 2017 is as under:

From 1st April, 2017, the partners agreed to share future profits in the ratio on 4:3 :3 and make the following adjustments :
(i) Premises will be appreciated by 10% and stock by Rs. 10,000.
(ii) A provision for doubtful debts is to be made on debtors @4%
(iii)Sundry Creditors be reduced by Rs. 15,000
(iv)Machinery will be depreciated by 5%.
(v) Goodwill of the firm is valued at Rs. 48,000.
Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet of the reconstituted firm.
Solution 35

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 3 : 2 : 1
New Ratio 4 : 3 : 3

A = 3/6-4/10 = (15 – 12)/30 = 3/30 (Sacrifice)
B = 2/6-3/10 = (10 – 9)/30 = 1/30 (Sacrifice)
C = 1/6-3/10 = (5 – 9)/30 = 4/30 (Gain)
A’s Sacrifice = Rs. 48,000 × 3/30 = Rs. 4,800
B’s Sacrifice = Rs. 48,000 × 1/30 = Rs. 1,600
C’s Gain = Rs. 48,000 × 4/30 = Rs. 6,400

Points of Students:
Following entries are passed for the purpose of revaluation:-
(i) For decrease in the value of assets:
Revaluation A/c Dr.
To Assets A/c
(Decrease in the value of assets)
(ii) For increase in the value of assets:
Assets A/c Dr.
To Revaluation A/c
(Increase in the value of assets)

Question 36. S, T, U and V were partners in a firm sharing profits in the ratio of 4:3:2:1. On 1-4-2016 their Balance Sheet was as follows:

From the above date partners decided to share the future profits in 3:1:2:4 ratio. For this purpose, the goodwill of the firm was valued at Rs. 90,000. The partners also agreed for the following:
(i) The claim for workmen compensation has been estimated at Rs.70,000.
(ii) To adjust the capitals of the partners according to new profit sharing ratio by opening partners current accounts.
Prepare Revolution Account, Partners’ Capital Accounts and the Balance Sheet of the reconstituted firm.

Solution 36

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
S T U V
Old Ratio 4 : 3 : 2 : 1
New Ratio 3 : 1 : 2 : 4

S = 4/10-3/10 = (4 – 3)/10 = 1/10 (Sacrifice)
T = 3/10-1/10 = (3 – 1)/10 = 2/10 (Sacrifice)
U = 2/10-2/10 = (2 – 2)/10 = 0
V = 1/10-4/10 = (1 – 4)/10 = 3/30 (Gain)

S’s Capital = Rs. 4,90,000 × 3/10 = Rs. 1,47,000
T’s Capital = Rs. 4,90,000 × 1/10 = Rs. 49,000
U’s Capital = Rs. 4,90,000 × 2/10 = Rs. 98,000
V’s Capital = Rs. 4,90,000 × 4/10 = Rs. 1196,000

Points of Students:
Following entries are passed for the purpose of revaluation:-
(i) For increase in the value of liabilities:-
Revaluation A/c Dr.
To Liabilities A/c
(Increase in the value of liabilities)
(ii) For decrease in the value of liabilities:-
Liabilities A/c Dr.
To Revaluation A/c
(Decrease in the value of liabilities)

Question 37. P, Q and R were partners sharing profits in the ratio of 1:3:2. Following was their Balance Sheet as at 31st March, 2018 :

On 1st April, 2018 they decided to share future profits in the ratio of 4:6:5. It was agreed that:
(i) Claim for Workmen Compensation has been estimated at Rs. 1,00,000
(ii) A motorcycle valued at Rs. 30,000 was unrecorded and is now to be now to be recorded in the books.
(iii) Outstanding expenses were not payable anymore.
(iv) Value of stock be increased to Rs. 2,90,000.
(v) A provision for doubtful debts be created @ 5% on Sundry Debtors
(vi) Goodwill is valued at Rs. 1,00,000.
(vii) The work of reconstitution was assigned to firm’s auditors. They were paid Rs. 20,000 for this work.
Pass journal entries and prepare Revaluation Account.

Solution 37

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
P Q R
Old Ratio 1 : 3 : 2
New Ratio 4 : 6 : 5

P = 1/6-4/15 = (5 – 8)/30 = 3/30 (Gain)
Q = 3/6-6/15 = (15 – 12)/30 = 3/30 (Sacrifice)
R = 2/6-2/15 = (10 – 10)/30 = 0

Points for Students:-
Revaluation of assets and liabilities may be given effect to in two different ways:
(a) When revised values are to be recorded in the books.
(b) When revised values are not to be recorded in the books.

Question 38. A, B and C are partners sharing profits and losses in the ratio of 2 : 2:1 From 1st April, 2019 they decided to share future profits and losses equally.
Following balances appeared in their books:
Profit and Loss A/c (Cr.) 20,000
Advertisement Suspense A/c (Dr.) 15,000
Workmen Compensation Reserve 60,000
It was agreed that :
(i) Goodwill should be valued at two year’s purchase of super profits. Firm’s average profits. Firm’s average profits are Rs. 75,000. Capital invested in the business is Rs. 6,00,000 and normal rate of return is 10%.
(ii) Furniture (book value of Rs. 50,000) be reduced to Rs. 30,000.
(iii) Computers (book value of Rs. 40,000) be reduced by Rs. 10,000.
(iv) Claim on account of Workmen’s Compensation amounted to Rs. 50,000.
(v) Investments (book value of Rs. 30,000) were revalued at Rs. 25,000.
Pass necessary journal entries for the above.
Solution 38

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 2 : 2 : 1
New Ratio 1 : 1 : 1

A = 2/5-1/3 = (6 – 5)/15 = 1/15 (Sacrifice)
B = 2/5-1/3 = (6 – 5)/15 = 1/15 (Sacrifice)
C = 1/5-1/3 = (3 – 5)/15 = 2/15 (Gain)

Points for Students:-
On this basis of above entries a Revaluation Account or Profit and Loss Adjustment A/c is prepared. It the credit side of this account is in excess, it reveals a profit and if the debit side is in excess, it will reveal a loss.
Such profit or loss will be divided between all the partners in their old profit sharing ratio. Following entries are passed for this purpose:
(A) When revaluation account shows profit:
Revaluation A/c Dr.
To Partner’s Capital A/c
(Profit on revaluation credited to partners capital a/c)

Question 39. Aman, Bobby and Chandani were partners in a firm sharing profits and losses in the ratio of 5:4:1. From 1st April, 2018 they decided to share profits equally. The revaluation of assets and re-assessment of liabilities resulted in a loss of Rs. 5,000. The goodwill of the firm on its reconstitution was valued at Rs. 1,20,000. The firm had a balance of Rs. 20,000 in General Reserve.
Showing your working clearly pass necessary journal entries on the reconstitution of the firm.
Solution 39

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
Aman Boddy Chandani
Old Ratio 5 : 4 : 1
New Ratio 1 : 1 : 1
Aman = 5/10-1/3 = (15 – 10)/30 = 5/30 (Sacrifice)
Boddy = 4/10-1/3 = (12 – 10)/30 = 2/30 (Sacrifice)
Chandani = 5/10-1/3 = (15 – 10)/30 = 7/30 (Gain)

Points for Students:-
If there is no claim against Workmen Compensation Reserve: In such a case, the entire amount of Workmen Compensation Reserve is credited to the Capital Account of partners in their old profit sharing ratio.
The Journal Entry passed is:
Workmen Compensation Reserve A/c Dr.
To Partner’s Capital A/c
(Workmen Compensation Reserve credited to partner’s Capital Accounts in their old profit ratio)

Question 40 (new). Asha, Rina and Chahat were partners in a firm sharing profits and losses in the ratio of 2:2:1. Their Balance Sheet as at 31^st March, 2019 was as follows:

Asha, Rina and Chahat decided to share future profits equally with effect from 1^st April, 2019. For this, it was agreed that:
(i) Goodwill of the firm be valued at Rs. 1,50,000.
(ii) Bad debts amounted to Rs. 40,000. A provision for doubtful debts was to be made @ 5% on debtors. Pass the necessary journal entries to record the above transactions in the books of the firm.

Solution 40 (new).

Question 40. X and Y are partners sharing profits and losses in the ratio of 4: 3. Their Balance Sheet as at 31 st March, 2016 stood as follows:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	28,000	Cash	20,000
Reserve	42,000	Sundry Debtors	1,20,000
Capital Accounts:		Stock	1,40,000
X 2,40,000		Fixed Assets	1,50,000
Y 1,20,000	3,60,000
	4,30,000		4,30,000

They decided that with effect from 1st April, 2016, they will share profits and losses in the ratio of 2:1. For this purpose they decided that :
(1) Fixed assets are to be depreciated by 10%.
(2) A provision of 6% be made on debtors for doubtful debts.
(3) Stock be valued at Rs.1,90.000.
(4) An amount of Rs. 3,700 included in creditors is not likely to be claimed.
Partners decided to record the revised values in the books. However, they do not want to disturb the reserves. You are required to prepare journal entries, capital accounts of the partners and the revised balance sheet.
Solution 40

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
X Y
Old Ratio 4 : 3
New Ratio 2 : 1

X = 4/7-2/3 = (12 – 14)/21 = 2/21 (Gain)
Y = 3/7-1/3 = (9 – 7)/21 = 2/21 (Sacrifice)

Question 41. P, Q and R are in partnership sharing profits and losses in the ratio of 5:4:3. On 31st March 2019, their balance sheet was as follows:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	50,000	Cash at Bank	40,000
Outstanding Expenses	5,000	Sundry Debtors	2,10,000
General Reserve	75,000	Stock	3,00,000
Capital Accounts:		Furniture	60,000
P 4,00,000		Plant & Machinery	4,20,000
Q 3,00,000
R 2,00,000	9,00,000
	10,30,000		10,30,000

It was decided that with effect from 1st April 2019, the profit sharing ratio will be 4:3:2. For this purpose the following revaluations were made :
(i) Furniture be taken at 80% of its value.
(ii) Stock be appreciated by 20%.
(iii) Plant & Machinery be valued at Rs. 4,00,000.
(iv) Create provision for doubtful debts for Rs. 10,000 on debtors
(v) Outstanding expenses be increased by Rs. 3,000.
Partners agreed that altered values are not to be recorded in the books and they also do not want to distribute the general reserve.
You are required to post a single journal entry to give effect to the above. Also prepare the revised Balance Sheet.
Solution 41

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
P Q R
Old Ratio 5 : 4 : 3
New Ratio 4 : 3 : 2

P = 5/12-4/9 = (15 – 16)/36 = 1/36 (Gain)
Q = 4/12-3/9 = (12 – 12)/36 = 0/36 (nil)
R = 3/12-2/9 = (9 – 8)/36 = 1/36 (Sacrifice)

Average Profit = ((Rs.20,000) – Rs. 48,000 + Rs. 60,000 + Rs. 80,000)/4
Average Profit = Rs. 42,000

Goodwill = Rs. 42,000 × 2 = 84,000
Reserve and Surplus = Rs. 42,000

Total = Rs. 21,000 + Rs. 84,000 + Rs. 42,000 = Rs. 1,47,000
P’s Gain = Rs. 90,000 × 1/36 = Rs. 2,500|
R’s Sacrifice = Rs. 90,000 × 1/36 = Rs. 2,500

Question 42 (new). X and Y are partners sharing profits and losses in the ratio of 4: 3. Their Balance Sheet as at 31st March, 2021 stood as follows:

They decided that with effect from 1st April, 2021, they will share profits and losses in the ratio of 2:1. For this purpose they decided that :
(1) Fixed assets are to be depreciated by 10%.
(2) A provision of 6% be made on debtors for doubtful debts.
(3) Stock be valued at Rs.1,90.000.
(4) An amount of Rs. 3,700 included in creditors is not likely to be claimed.
Partners decided to record the revised values in the books. However, they do not want to disturb the reserves. You are required to prepare journal entries, capital accounts of the partners and the revised balance sheet.

Solution 42 (new).

Question 42. L, M and N are partners sharing profits and losses in equal proportion. On 31st March 2016, their balance sheet was as follows:

Liabilities	Rs.	Assets	Rs.
Creditors	58,000	Cash	8,000
Reserve and Surplus Capital Accounts: L 2,00,000 M 1,00,000 N 80,000	42,000 3,80,000	Debtors 75,000 Less : Pro. for Doubtful debts 3,000 Stock Fixed Assets	72,000 1,80,000 2,20,000
	4,80,000		4,80,000

The partners decided that with effect from 1st April 2016, they will share and losses in the ratio of 4:2:1. For this purpose goodwill is to be valued at 2 year’s purchase of the average profits of the last four years, which were:
Year ending 31st March 2013 20,000 (Loss)
Year ending 31st March 2014 48,000 (Profit)
Year ending 31st March 2015 60,000 (Profit)
Year ending 31st March 2016 80,000 (Profit)
They further agreed that:
(i) Provision for doubtful debts be increased by Rs. 2,000.
(ii) Stock be appreciated by 20% and fixed assets be depreciated by 10%.
(iii) Creditors be taken at Rs. 49,000.
Partners do not desire to record the revised values of assets and liabilities in the books. They also desire to leave the reserve and surplus undisturbed.
You are required to give effect to the change in profit sharing ratio by passing a single journal entry. Also prepare the revised balance sheet.
Solution 42

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
L M N
Old Ratio 1 : 1 : 1
New Ratio 4 : 2 : 1

L = 1/3-4/7 = (7 – 12)/21 = 5/21 (Gain)
M = 1/3-2/7 = (7 – 6)/21 = 1/21 (Sacrifice)
N = 1/3-1/7 = (7 – 3)/21 = 4/36 (Sacrifice)

L’s Gain = Rs. 1,47,000 × 5/21 = Rs. 35,000
M’s Sacrifice = Rs. 1,47,000 × 1/21 = Rs. 7,000
N’s Sacrifice = Rs. 1,47,000 × 4/21 = Rs. 28,000

Points of Students:
On this basis of above entries a Revaluation Account or Profit and Loss Adjustment A/c is prepared. It the credit side of this account is in excess, it reveals a profit and if the debit side is in excess, it will reveal a loss.
Such profit or loss will be divided between all the partners in their old profit sharing ratio. Following entries are passed for this purpose:
(B) When revaluation account shows loss:
Partner’s Capital A/c Dr.
To Revaluation A/c
(loss on revaluation credited to partners capital a/c)

Question 43. Amit, Archit and Akshat are partners in a firm in the ratio of 3:2:1. On 1st April, 2019 they decided to share the profits in future in the ratio of 7:5:4. On this date General Reserve is Rs. 38,000 and profit on revaluation of assets and liabilities Rs. 34,000. It was decided that adjustment should be made without altering the figures in the Balance Sheet. Make adjustment by one single journal entry.
Solution 43

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
Amit Archit Akshat
Old Ratio 3 : 2 : 1
New Ratio 7 : 5 : 4

Amit = 3/6-7/16 = (24 – 21)/48 = 3/48 (Sacrifice)
Archit = 2/6-5/16 = (16 – 15)/48 = 1/48 (Sacrifice)
Akshat = 1/6-4/16 = (8 – 12)/48 = 4/48 (Gain)

Total Distributed Revenue = General Reserve + Profit on Revaluation
Total Distributed Revenue = Rs. 38,000 + Rs. 34,000
Total Distributed Revenue = Rs. 72,000

Amit’s Sacrifice = Rs. 72,000 × 3/48 = Rs. 4,500
Archit’s Sacrifice = Rs. 72,000 × 1/48 = Rs. 1,500
Akshat’s Gain = Rs. 72,000 × 4/48 = Rs. 6,000

Points of Students:
For Transfer of Reserve and Accumulated Profits:
Reserve A/c Dr.
Profit & Loss A/c Dr.
Workmen’s Compensation Reserve A/c Dr.
Investment Fluctuation Reserve A/c Dr.
To Old Partner’s Capital or Current A/c (in Old Ratio)

Question 44 (new). L, M and N are partners sharing profits and losses in equal proportion. On 31st March 2021, their balance sheet was as follows:

The partners decided that with effect from 1st April 2016, they will share and losses in the ratio of 4:2:1. For this purpose goodwill is to be valued at 2 year’s purchase of the average profits of the last four years, which were:
Year ending 31st March 2018 20,000 (Loss)
Year ending 31st March 2019 48,000 (Profit)
Year ending 31st March 2020 60,000 (Profit)
Year ending 31st March 2021 80,000 (Profit)
They further agreed that:
(i) Provision for doubtful debts be increased by Rs. 2,000.
(ii) Stock be appreciated by 20% and fixed assets be depreciated by 10%.
(iii) Creditors be taken at Rs. 49,000.
Partners do not desire to record the revised values of assets and liabilities in the books. They also desire to leave the reserve and surplus undisturbed.
You are required to give effect to the change in profit sharing ratio by passing a single journal entry. Also prepare the revised balance sheet.

Solution 44 (new).

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
L M N
Old Ratio 1 : 1 : 1
New Ratio 4 : 2 : 1

Question 44. Anshu, Anju and Anupma are partners in a firm sharing profit in the ratio of 2:2:1. Their Balance Sheet as at March 31, 2019 was as follows:

Anju and Anupma decided to share the profit equally, w.e.f. April 1, 2019. For this purpose it was agreed that:
(i) The goodwill of the firm should be valued at Rs. 60,000.
(ii) Land should be revalued at Rs. 3,00,000 and building and plant should be depreciated by 5%. Stock be valued at Rs. 2,25,000.
(iii) Creditors amounting to Rs. 2,000 were not likely to be claimed and hence should be written off. You are required to :
(a) Record the necessary journal entries to give effect to the above agreement, without opening revaluation account;
(b) Prepare the capital accounts of the partners; and
(c) Prepare the balance sheet of the firm after reconstitution.
Partners decide that General Reserve is to be transferred to Capital Accounts whereas revised values of assets and liabilities are not to be recorded in the books.
Solution 44

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
Anshu Anju Anupma
Old Ratio 2 : 2 : 1
New Ratio 1 : 1 : 1

Anshu = 2/5-1/3 = (6 – 5)/15 = 1/15 (Sacrifice)
Anju = 2/5-1/3 = (6 – 5)/15 = 1/15 (Sacrifice)
Anupma = 1/5-1/3 = (3 – 5)/15 = 2/15 (Gain)

Total = Rs. 1,05,000 + Rs. 60,000 = Rs. 1,65,000
Anshu’s Sacrifice = Rs. 1,65,000 × 1/15 = Rs. 11,000
Anshu’s Sacrifice = Rs. 1,65,000 × 1/15 = Rs. 11,000
Anupma’s Gain = Rs. 1,65,000 × 2/15 = Rs. 22,000

Points of Students:
(i) For Transfer of Reserve and Accumulated Profits:
Reserve A/c Dr.
Profit & Loss A/c Dr.
Workmen’s Compensation Reserve A/c Dr.
Investment Fluctuation Reserve A/c Dr.
To Old Partner’s Capital or Current A/c (in Old Ratio)
(ii) For transfer of Accumulated Losses:
Old Partner’s Capital or Current A/c Dr. (in Old Ratio)
To Profit & Loss A/c
To Deferred Revenue Expenditure A/c (for example Advertisement Suspense A/c)

Question 45. The average profit earned by a firm is Rs. 75,000 which includes undervaluation of stock of Rs.5,000 on an average basis. The capital Invested in the business is Rs. 7,00,000 and the normal rate of return is 7%. Calculate goodwill of the firm on the basis of 5 times the super profit.
Solution 45
Normal Profit = Capita Employed × Normal Rate of Return
Normal Profit = Rs. 7,00,000 × 7/100
Normal Profit = Rs. 49,000

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 80,000 – Rs. 49,000
Super Profit = Rs. 31,000

Goodwill = Super Profit × Number of Year’s Purchase
Goodwill = Rs. 31,000 × 5
Goodwill = Rs. 1,55,000

Working Note:-
Adjustment Profit = Average Profit earned by the firm + Under Valuation of Stock
Adjustment Profit = Rs. 75,000 + Rs. 5,000
Adjustment Profit = Rs. 80,000

Points of Students:
Goodwill = Capitalised Value – Net Assets of Business
Calculate Average future maintainable profits
Calculate the Capitalised value of business on the basis of the Average Profits

Question 46. Calculate the value of goodwill as on 1st April, 2015, on the basis of 21/2 year’s purchase of the average profits of the last five years. The profits and losses for the years ending 31st March were: 2010 Rs. 80,000; 2011 Rs. 1,00,000; 2012 Loss Rs. 30,000; 2013 Rs. 1,70,000; 2014 Rs. 1,60,000 and 2015 Rs. 1,80,000. You are informed that the profits of the year ending 31st March 2014 included profit on sale of a fixed asset amounting to Rs. 50,000 and the profits for the year 2015 were effected by a loss due to fire amounting to Rs. 20,000.
Solution 46

Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 1,00,000 – Rs. 30,000 + Rs. 1,70,000 + Rs. 1,10,000 + Rs. 2,00,000
Total Profit = Rs. 5,50,000
Average Profit = (Rs. 5,50,000)/(5 )
Average Profit = Rs. 1,10,000
Goodwill = Rs. 1,10,000 × 2.5 = Rs. 2,75,000

Points of Students:
The weighted average profit is multiplied by the agreed number of year’s purchase to find out the value of goodwill. Thus, the formula is:
Weighted Average Profit = Total of Products of ProfitsTotal of Weights
Goodwill = Weighted Average Profit × Number of Year’s of Purchase

Question 47. Calculate the value of goodwill at 2 year’s purchase of the average profits of the last 3 years. The profit for the first year was Rs. 50,000, for second year twice the profit of first year and for the third year one and half times the profit of the second year.
Solution 47

Average Profit = (Total Profit)/(Number of Purchases )
Average Profit = (Rs. 3,00,000)/3
Average Profit = Rs. 1,00,000
Goodwill = Rs. 1,00,000 × 2 = Rs. 2,00,000

Question 48. (new). Calculate the value of goodwill as on 1st April, 2021, on the basis of 2(1/2) year’s purchase of the average profits of the last five years. The profits and losses for the years ending 31st March were: 2016 Rs. 80,000; 2017 Rs. 1,00,000; 2018 Loss Rs. 30,000; 2019 Rs. 1,70,000; 2020 Rs. 1,60,000 and 2021 Rs. 1,80,000. You are informed that the profits of the year ending 31st March 2020 included profit on sale of a fixed asset amounting to Rs. 50,000 and the profits for the year 2021 were effected by a loss due to fire amounting to Rs. 20,000.
Solution 48 (new).

Question 48. A firm earns a profit of Rs. 37,000 per year. In the same business a 10% return is generally expected. The total assets of the firm are Rs. 4,00,000. The value of the liabilities is Rs. 90,000. Find out the value of goodwill.
Solution 48
Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 3,10,000 × 10/100
Normal Profit = Rs. 31,000

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 37,000 – Rs. 31,000
Super Profit = Rs. 6,000

Goodwill = Super Profit × 100/(Normal Rate of Return)
Goodwill = Rs. 6,000 × 100/10
Goodwill = Rs. 60,000

Working Note:-
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 4,00,000 – Rs. 90,000
Capital Employed = Rs. 3,10,000

Points of Students:
Super profit method first of all we calculate the super profits and then we assess the capital needed for earning such super profits on the basis of normal rate of return. Such capital is actually the amount of goodwill. Following formula is used to calculate goodwill:

Question 49. An existing firm had assets of Rs. 4,00,000 including cash of Rs. 15,000. The partner’s capital accounts showed a balance of Rs. 3,00,000 and reserves constituted the rest. If the normal rate of return is 12% and the goodwill of the firm is valued at Rs. 50,000 at 21/2year’s purchase of super profits, find the average profits of the firm.
Solution 49
Goodwill = Super Profit × Number of year purchases
50,000 = Super Profit × 2.5
Super Profit = 50,000/2.5
Super Profit = Rs. 20,000

Capital Employed = Assets – Liabilities
Capital Employed = Rs. 4,00,000 – Rs. 20,000
Capital Employed = Rs. 3,80,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 3,80,000 × 10/100
Normal Profit = Rs. 38,000

Super Profit = Average Profit – Normal Profit
Rs. 25,000 = Average Profit – Rs. 38,000
Average Profit = Rs. 25,000 + Rs. 38,000
Average Profit = Rs. 63,000

Question 50. An existing firm had assets of Rs. 4,00,000 including cash of Rs. 15,000. Its creditors amounted to Rs. 20,000 on that date. The partner’s capital accounts showed a balance of Rs. 3,00,000 and reserves amounted to Rs. 80,000. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs. 75,000 at 3 year’s purchase of super profits, find the average profits of the firm.
Solution 50
Goodwill = Super Profit × Number of year purchases
75,000 = Super Profit × 3
Super Profit = 75,000/3
Super Profit = Rs. 25,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 4,00,000 × 12/100
Normal Profit = Rs. 48,000

Super Profit = Average Profit – Normal Profit
Rs. 20,000 = Average Profit – Rs. 48,000
Average Profit = Rs. 48,000 + Rs. 20,000
Average Profit = Rs. 68,000

Question 51. A partnership firm earned net profits during the last three years as follows:
Years Net Profit
2007-2008 1,90,000
2008-2009 2,20,000
2009-2010 2,50,000
The capital employed in the fire throughout the above mentioned period has been Rs. 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of all the partners during this period is estimated to be Rs.1,00,000 per annum
Calculate the value of goodwill on the basis of (i) two year’s purchase of super profits earned on average basis during the above mentioned three years and (ii) by capitalisation of average profits method.
Solution 51
(i) Value of Goodwill on the basis of two year’s purchase of Super profits:
Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 1,90,000 + Rs. 2,20,000 + Rs. 2,50,000
Total Profit = Rs. 6,60,000

Average Profit = (Rs. 6,60,000)/(3 )
Average Profit = Rs. 2,20,000

Average Profit for Goodwill = Average Profit – Partners Remuneration
Average Profit for Goodwill = Rs. 2,20,000 – Rs. 1,00,000
Average Profit for Goodwill = Rs. 1,20,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 4,00,000 × 15/100
Normal Profit = Rs. 60,000

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,20,000 – Rs. 60,000
Super Profit = Rs. 60,000
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 60,000 × 2
Goodwill = Rs. 1,20,000

(ii) Value of Goodwill by Capitalisation of Average Profit method:-
Capitalised Value of Average Profit = Average Profit × 100/(Noramal Rate of Return)
Capitalised Value of Average Profit = Rs. 1,20,000 × 100/15
Capitalised Value of Average Profit = Rs. 8,00,000

Goodwill = Capitalised Value of Average Profit – Net Assets
Goodwill = Rs. 8,00,000 – Rs. 4,00,000
Goodwill = Rs. 4,00,000

Question 52. Average profit of the firm is Rs. 3,00,000. Total assets of the firm are Rs. 24,00,000 whereas Partner’s Capital is Rs. 20,00,000. If normal rate of return in a similar business is 12% of the capital employed, what is the value of goodwill by Capitalisation of Super Profit?
Solution 52
Normal Profit = Rs. 20,00,000 × 12% = Rs. 2,40,000

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 3,00,000 – Rs. 2,40,000
Super Profit = Rs. 60,000

Value of Goodwill = Super Profit × 100/(Normal Rate of Return)
Value of Goodwill = Rs. 60,000 × 100/12
Value of Goodwill = Rs. 5,00,000

Question 53 (new). Yash and Karan were partners in an interior designer firm. Their fixed capitals were Rs. 6,00,000 and Rs. 4,00,000 respectively. There were credit balances in their current accounts of Rs. 4,00,000 and Rs. 5,00,000 respectively. The firm had a balance of Rs. 1,00,000 in General Reserve. The firm did not have any liability. They admitted Radhika into partnership for 1/4^th share in the profits of the firm. The average profits of the firm for the last five years were Rs. 5,00,000. Calculate the value of goodwill of the by capitalization of average profit method. The normal rate of return in the business is 10%.
Solution 53 (new). Calculation of Goodwill:-
Average profit of the firm = Rs. 5,00,000
Capitalised value of business = Average Profit × 100/Rate
Capitalised value of business = Rs. 5,00,000 × 100/10
Capitalised value of business = Rs. 50,00,000
Net Assets = All Assets – Outside liabilities
Net Assets = Rs. 6,00,000 + Rs. 4,00,000 + Rs. 4,00,000 + Rs. 5,00,000 + Rs. 1,00,000
Net Assets = Rs. 20,00,000
Capitalisation of average profit method:-
Goodwill = Capitalised value of business – Net Assets
Goodwill = Rs. 50,00,000 – Rs. 20,00,000
Goodwill = Rs. 30,00,000

Question 53. The following information relates to a partnership firm:
(a) Sundry Assets of the firm Rs. 6,80,000. Outside Liabilities Rs. 60,000.
(b) Profits and losses for the past years: Profit 2013 Rs. 50,000; Loss 2014 Rs. 10,000; Profit 2015 Rs.1,64,000 and Profit 2016 Rs.1,80,000.
(c) The normal rate of return in a similar type of business is 12%.
Calculate the value of goodwill on the basis of:
1. Three year’s purchase of average profits.
2. Three year’s purchase of super profits.
3. Capitalisation of average profits, and
4. Capitalisation of super profits.
Solution 53
Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 50,000 – Rs. 10,000 + Rs. 1,64,000 + Rs. 1,80,000
Total Profit = Rs. 3,84,000

Average Profit = (Rs. 3,84,000)/(4 )
Average Profit = Rs. 96,000

(i) Three year’s purchase of average profit:-
Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 96,000 × 3
Goodwill = Rs. 2,88,000

(ii) Three year’s purchase of super profit:-
Normal Profit = Rs. 6,20,000 × 12% = Rs. 74,400

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 96,000 – Rs. 74,400
Super Profit = Rs. 21,600
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 21,600 × 3
Goodwill = Rs. 64,800

(iii) Capitalisation of average profit:-
Capitalised value of Average Profit = Average Profit × 100/(Normal Rate of Return)
Capitalised value of Average Profit = Rs. 96,000 × 100/12
Capitalised value of Average Profit = Rs. 8,00,000
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 6,80,000 – Rs. 60,000
Capital Employed = Rs. 6,20,000
Goodwill = Capitalised value of Average Profit – Capital Employed
Goodwill = Rs. 8,00,000 – Rs. 6,20,000
Goodwill = Rs. 1,80,000

(iv) Capitalisation of super profits:-
Goodwill = Super Profit × 100/(Normal rate of Return)
Goodwill = Rs. 21,600 × 100/12
Goodwill = Rs. 1,80,000

Points for Students:-
1. Goodwill = Average Profit × Number of year purchases
2. Goodwill = Super Profit × Number of year purchases
3. Goodwill = Capitalised value of Average Profit – Capital Employed

Question 54 (new). A partnership firm earned net profits during the last three years as follows: Years                                     Net Profit
2018-2019                            1,90,000
2019-2020                            2,20,000
2020-2021                            2,50,000

The capital employed in the fire throughout the above mentioned period has been Rs. 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of all the partners during this period is estimated to be Rs.1,00,000 per annum Calculate the value of goodwill on the basis of
(i) two year’s purchase of super profits earned on average basis during the above mentioned three years and
(ii) by capitalisation of average profits method.

Solution 54 (new). (i) Value of Goodwill on the basis of two year’s purchase of Super profits:
Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 1,90,000 + Rs. 2,20,000 + Rs. 2,50,000
Total Profit = Rs. 6,60,000

Average Profit = (Rs. 6,60,000)/(3 )
Average Profit = Rs. 2,20,000

Average Profit for Goodwill = Average Profit – Partners Remuneration
Average Profit for Goodwill = Rs. 2,20,000 – Rs. 1,00,000
Average Profit for Goodwill = Rs. 1,20,000

Normal Profit = Capital Employed × (Normal Rate of Return)/100
Normal Profit = Rs. 4,00,000 × 15/100
Normal Profit = Rs. 60,000

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,20,000 – Rs. 60,000
Super Profit = Rs. 60,000

Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 60,000 × 2
Goodwill = Rs. 1,20,000

(ii) Value of Goodwill by Capitalisation of Average Profit method:-
Capitalised Value of Average Profit = Average Profit × 100/(Noramal Rate of Return)
Capitalised Value of Average Profit = Rs. 1,20,000 × 100/15
Capitalised Value of Average Profit = Rs. 8,00,000

Goodwill = Capitalised Value of Average Profit – Net Assets
Goodwill = Rs. 8,00,000 – Rs. 4,00,000
Goodwill = Rs. 4,00,000

Question 54. X, Y and Z are partners sharing profits in the ratio of 5 : 4 : 1. It is now agreed that they will share future profits in the ratio of 3:3:4. Goodwill is valued at Rs. 1,00,000. You are required to pass a single journal entry for the treatment of goodwill.
Solution 54

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
X Y Z
Old Ratio 5 : 4 : 1
New Ratio 3 : 3 : 4

X = 5/10-3/10 = (5 – 3)/10 = 2/10 (Sacrifice)
Y = 4/10-3/10 = (4 – 3)/10 = 1/10 (Sacrifice)
Z = 1/10-4/10 = (1 – 4)/10 = 3/10 (Gain)

X’s Sacrifice = Rs. 1,00,000 × 2/10 = Rs. 20,000
Y’s Sacrifice = Rs. 1,00,000 × 1/10 = Rs. 10,000
Z’s Gain = Rs. 1,00,000 × 3/10 = Rs. 30,000

Question 55. Charu and Dinesh have been sharing profits in the ratio of 3 : 1. The net profits for the past four years have been Rs. 60,000; Rs. 50,000; Rs. 90,000 and Rs. 1,20,000 respectively. It is now agreed that in future Dinesh is to have 2/5th share in profits and for that purpose goodwill is to be valued on the basis of 21/2 year’s purchase of average profits of the past four years. Give journal entry for the treatment of goodwill.
Solution 55

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
Dinesh Charu
Old Ratio 3 : 1
New Ratio 3 : 2

Dinesh = 3/4-3/5 = (15 – 12)/20 = 3/20 (Sacrifice)
Charu = 1/4-2/5 = (5 – 8)/20 = 3/20 (Gain)

Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 60,000 + Rs. 50,000 + Rs. 90,000 + Rs. 1,20,000
Total Profit = Rs. 3,20,000

Average Profit = (Rs. 3,20,000)/(4 )
Average Profit = Rs. 80,000

Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 80,000 × 2.5
Goodwill = Rs. 2,00,000

Dinesh’s Sacrifice = Rs. 2,00,000 × 3/20 = Rs. 30,000
Charu’s Gain = Rs. 2,00,000 × 3/20 = Rs. 30,000

Points of Students:
Gaining Partners a/c Dr.
To Sacrificing Partner’s A/c
(Adjustment for profit and loss account balance and advertisement suspense account on change in profit sharing ratio)

Question 56 (new). The following information relates to a partnership firm:
(a) Sundry Assets of the firm Rs. 6,80,000. Outside Liabilities Rs. 60,000.
(b) Profits and losses for the past years: Profit 2018 Rs. 50,000; Loss 2019 Rs. 10,000; Profit 2020 Rs.1,64,000 and Profit 2021 Rs.1,80,000.
(c) The normal rate of return in a similar type of business is 12%.
Calculate the value of goodwill on the basis of:
(1) Three year’s purchase of average profits.
(2) Three year’s purchase of super profits.
(3) Capitalisation of average profits, and
(4) Capitalisation of super profits.
Solution 56 (new). Average Profit = (Total Profit)/(Number of Purchases )
Total Profit = Rs. 50,000 – Rs. 10,000 + Rs. 1,64,000 + Rs. 1,80,000
Total Profit = Rs. 3,84,000

Average Profit = (Rs. 3,84,000)/(4 )
Average Profit = Rs. 96,000

(i) Three year’s purchase of average profit:-
Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 96,000 × 3
Goodwill = Rs. 2,88,000

(ii) Three year’s purchase of super profit:-
Normal Profit = Rs. 6,20,000 × 12% = Rs. 74,400
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 96,000 – Rs. 74,400
Super Profit = Rs. 21,600
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 21,600 × 3
Goodwill = Rs. 64,800

Capital Employed = Assets – Liabilities
Capital Employed = Rs. 6,80,000 – Rs. 60,000
Capital Employed = Rs. 6,20,000

Goodwill = Capitalised value of Average Profit – Capital Employed
Goodwill = Rs. 8,00,000 – Rs. 6,20,000
Goodwill = Rs. 1,80,000

(iv) Capitalisation of super profits:-
Goodwill = Super Profit × 100/(Normal rate of Return)
Goodwill = Rs. 21,600 × 100/12
Goodwill = Rs. 1,80,000

Question 56. A, B and C are partners sharing profits in the ratio of 5 :3: 2.It is now agreed that they will share profits in the ratio of 5: 4: 3. Goodwill is valued at Rs. 1,20,000. Pass a single journal entry for the treatment of goodwill.
Solution 56

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 5 : 3 : 2
New Ratio 5 : 4 : 3

A = 5/10-5/12 = (30 – 25)/60 = 5/60 (Sacrifice)
B = 3/10-4/12 = (18 – 20)/60 = 2/60 (Gain)
C = 2/10-3/12 = (12 – 15)/60 = 3/60 (Gain)

A’s Sacrifice = Rs. 2,00,000 × 3/20 = Rs. 30,000
B’s Gain = Rs. 2,00,000 × 3/20 = Rs. 30,000
C’s Gain = Rs. 2,00,000 × 3/20 = Rs. 30,000

Question 57. P, Q and R are partners sharing profits and losses in the ratio of 5: 3: 2 From 1st April, 2016, they decide 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 should be valued at three year’s purchase of the average of five year’s profits. The profits and losses of the preceding five years ending 31st March are:
Profits: 2012: Rs. 60,000, 2013 : Rs. 1,50,000, 2014: Rs.1,70,000, 2015: Rs. 1,90,000
Loss : 2016: Rs. 70,000.
Give the necessary journal entry to record the above change.
Solution 57

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
P Q R
Old Ratio 5 : 3 : 2
New Ratio 1 : 1 : 1

P = 5/10-1/3 = (15 – 10)/30 = 5/30 (Sacrifice)
Q = 3/10-1/3 = (18 – 20)/30 = 1/30 (Gain)
R = 2/10-1/3 = (6 – 10)/30 = 4/30 (Gain)

Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 60,000 + Rs. 1,50,000 + Rs. 1,70,000 + Rs. 1,90,000 – Rs. 70,000
Total Profit = Rs. 5,00,000

Average Profit = (Rs. 5,00,000)/5
Average Profit = Rs. 1,00,000

Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 1,00,000 × 3
Goodwill = Rs. 3,00,000

P’s Sacrifice = Rs. 3,00,000 × 5/30 = Rs. 50,000
Q’s Gain = Rs. 3,00,000 × 1/30 = Rs. 10,000
R’s Gain = Rs. 3,00,000 × 4/30 = Rs. 40,000

Question 58. A and B have been carrying on business in partnership with fixed capitals of Rs. 2,40,000 and Rs.1,20,000 respectively and sharing profits in the same proportion. They decided that with effect from April 1, 2016 they would share profits and losses in the ratio of 3: 2. For this purpose goodwill is to be valued at three year’s purchase of the average of preceding three year’s profits. The profits for the years ending 31st March were 2013: Rs. 75,000; 2014: Rs. 60,000; 2015 Rs. 80,000 and 2016 Rs. 1,30,000. Give the necessary journal entry.
Solution 58

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B
Old Ratio 2 : 1
New Ratio 3 : 2

A = 2/3-3/5 = (10 – 9)/15 = 1/15 (Sacrifice)
B = 1/3-2/5 = (5 – 6)/15 = 1/15 (Gain)

Average Profit = (Total Profit)/(Number of Purchases )

Total Profit = Rs. 60,000 + Rs. 80,000 + Rs. 1,30,000
Total Profit = Rs. 1,80,000

Average Profit = (Rs. 1,80,000)/3
Average Profit = Rs. 90,000

Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 90,000 × 3
Goodwill = Rs. 2,70,000

A’s Sacrifice = Rs. 3,00,000 × 1/15 = Rs. 18,000
B’s Gain = Rs. 3,00,000 × 1/15 = Rs. 18,000

Question 59. A. B and C were partners in a firm sharing profits in the ratio of 1:3:2. They decided that with effect from 1st April, 2016, they will share profits in the ratio of 4: 6:5. For this purpose the goodwill of the firm is valued at the total of preceding three year’s profits. The profits were:
Rs.
2011-12 40,000
2012-13 10,000 (Loss)
2013-14 80,000 (Loss)
2014-15 1,20,000
2015-16 1,40,000
Reserves and Profits appeared in the balance sheet at Rs. 40,000 and Rs. 30,000 respectively. Partners do not want to distribute the reserves and profits appearing in the balance sheet. Pass a single journal entry to record the change.
Solution 59

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 1 : 3 : 2
New Ratio 4 : 6 : 5

A = 1/6-4/15 = (5 – 8)/30 = 3/30 (Gain)

B = 3/6-6/15 = (15 – 12)/30 = 3/30 (Sacrifice)

C = 2/6-5/15 = (10 – 10)/30 = 0 (Nil)

Goodwill = (Rs. 80,000) + Rs. 1,20,000 + Rs. 1,40,000 = Rs. 1,80,000

Total Distributable Amount = Goodwill + Reserve + Profit
Total Distributable Amount = Rs. 1,80,000 + Rs. 40,000 + Rs. 30,000
Total Distributable Amount = Rs. 2,50,000

A’s Gain = Rs. 2,50,000 × 3/30 = Rs. 25,000
B’s Sacrifice = Rs. 2,50,000 × 3/30 = Rs. 25,000

Points of Students:
Under this method first of all we calculate the average profits and then we assess the capital needed for earning such average profits on the basis of normal rate of return. Such capital is also called Capitalized value of average profits. It is calculated as under:

Question 60 (new). P, Q and R are partners sharing profits and losses in the ratio of 5: 3: 2 From 1^st April, 2021, they decide 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 should be valued at three year’s purchase of the average of five year’s profits. The profits and losses of the preceding five years ending 31st March are:
Profits: 2017: Rs. 60,000, 2018 : Rs. 1,50,000, 2019: Rs.1,70,000, 2020: Rs. 1,90,000
Loss : 2021: Rs. 70,000.
Give the necessary journal entry to record the above change.
Solution 60 (new).

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
P Q R
Old Ratio 5 : 3 : 2
New Ratio 1 : 1 : 1

P = 5/10-1/3 = (15 – 10)/30 = 5/30 (Sacrifice)
Q = 3/10-1/3 = (18 – 20)/30 = 1/30 (Gain)
R = 2/10-1/3 = (6 – 10)/30 = 4/30 (Gain)

Average Profit = (Total Profit)/(Number of Purchases )
Total Profit = Rs. 60,000 + Rs. 1,50,000 + Rs. 1,70,000 + Rs. 1,90,000 – Rs. 70,000
Total Profit = Rs. 5,00,000

Question 60. X, Y and Z are partners sharing profits and losses in the ratio of 5: 3 : 2. Their position as at 31st March 2019 was as follows:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	44,000	Cash in Hand	8,000
Outstanding Expenses	10,000	Cash at Bank	22,000
Capitals : X 2,80,000 Y 2,80,000 Z 1,00,000	6,60,000	Debtors 56,000 Less : Provision 6,000 Stock Machinery	50,000 2,80,000 1,54,000
		Building	2,00,000
	7,14,000		7,14,000

It was decided that with effect from 1st April 2019, profit and loss sharing ratio will be 3:3:1. They agreed on the following terms:
(i) Goodwill of the firm be valued at two year’s purchase of the average super profits of last three years. Average profits of the last three years are Rs. 1,08,000, while the normal profits may be taken at Rs. 66,000.
(ii) Provision on debtors be reduced by Rs. 2,000.
(iii) Value of stock be increased by 10% and machinery be valued at Rs.1,00,000.
(iv) An item of Rs. 3,000 included in sundry creditors is not likely to be claimed.
Partners do not want to record the altered values of assets and liabilities in the books. Pass an entry to give effect to the above and prepare the revised balance sheet.
Solution 60

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
X Y Z
Old Ratio 5 : 3 : 2
New Ratio 3 : 3 : 1

X = 5/10-3/7 = (35 – 30)/70 = 5/70 (Sacrifice)
Y = 3/10-3/7 = (21 – 30)/70 = 9/70 (Gain)
Z = 2/10-1/7 = (14 – 10)/70 = 4/70 (Sacrifice)

Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,08,000 – Rs. 66,000
Super Profit = Rs. 42,000

Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 42,000 × 2
Goodwill = Rs. 84,000

Distributable Profit = Goodwill – Loss on Revaluation
Distributable Profit = Rs. 84,000 – Rs. 21,000
Distributable Profit = Rs. 63,000

X’s Sacrifice = Rs. 63,000 × 5/70 = Rs. 4,500
Y’s Gain = Rs. 63,000 × 9/70 = Rs. 8,100
Z’s Sacrifice = Rs. 63,000 × 4/70 = Rs. 3,600

Question 61 (new). A and B have been carrying on business in partnership with fixed capitals of Rs. 2,40,000 and Rs.1,20,000 respectively and sharing profits in the same proportion. They decided that with effect from April 1, 2021 they would share profits and losses in the ratio of 3: 2. For this purpose goodwill is to be valued at three year’s purchase of the average of preceding three year’s profits. The profits for the years ending 31^st March were 2018: Rs. 75,000; 2019: Rs. 60,000; 2020 Rs. 80,000 and 2021 Rs. 1,30,000. Give the necessary journal entry.
Solution 61 (new).

Calculation of Sacrificing and Gaining Ratio:-
A B
Old Ratio 2 : 1
New Ratio 3 : 2

A = 2/3-3/5 = (10 – 9)/15 = 1/15 (Sacrifice)
B = 1/3-2/5 = (5 – 6)/15 = 1/15 (Gain)

Average Profit = (Total Profit)/(Number of Purchases )
Total Profit = Rs. 60,000 + Rs. 80,000 + Rs. 1,30,000
Total Profit = Rs. 1,80,000

Average Profit = (Rs. 1,80,000)/3
Average Profit = Rs. 90,000

Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 90,000 × 3
Goodwill = Rs. 2,70,000

A’s Sacrifice = Rs. 3,00,000 × 1/15 = Rs. 18,000
B’s Gain = Rs. 3,00,000 × 1/15 = Rs. 18,000

Question 61. The following is the balance sheet of a firm as at 31st March, 2019:

Liabilities	Rs.	Assets	Rs.
Capital Accounts: A 4,00,000 B 4,00,000 C 3,00,000 D 3,00,000	14,00,000	Building Plant and Machinery Stock Debtors Bills Receivable	6,50,000 5,00,000 3,00,000 2,40,000 10,000
Reserves	1,50,000	Cash at bank	20,000
Profit & Loss A/c (Profits)	90,000
Creditors	80,000
	17,20,000		17,20,000

DK Goel Solutions Class 12 Chapter 3 Changing in Profit Sharing Ratio among the Existing Partners

On 1st April, 2019, the assets and liabilities were revalued as under: Rs.
Building 8,00,000
Plant and Machinery 3,20,000
Stock 2,60,000
Creditors 84,000
A provision of 5% was required on debtors. Goodwill of the firm is valued at Rs. 1,70,000. Partners agreed that from 1st April, 2019 they will share profits in the ratio of 4:3:2:1 instead of their former ratio of 5 : 4:2:1. They do not want to record the revised values of assets and liabilities in the books. They also do not want to disturb the reserves and Profit & Loss A/C. Pass a single journal entry to give effect to the above.
Solution 61

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C D
Old Ratio 5 : 4 : 2 : 1
New Ratio 4 : 3 : 2 : 1

A = 5/12-4/10 = (25 – 24)/60 = 1/60 (Sacrifice)
B = 4/12-3/10 = (20 – 18)/60 = 2/60 (Sacrifice)
C = 2/12-2/10 = (10 – 12)/60 = 2/60 (Gain)
D = 1/12-1/10 = (5 – 6)/60 = 1/60 (Gain)

Distributable Profit = Goodwill + Reserves + Profit and Loss (Profit) – Loss on Revaluation
Distributable Profit = Rs. 1,70,000 + Rs. 1,50,000 + Rs. 90,000 – Rs. 86,000
Distributable Profit = Rs. 3,24,000

A’s Sacrifice = Rs. 3,24,000 × 1/60 = Rs. 5,400
B’s Sacrifice = Rs. 3,24,000 × 2/60 = Rs. 10,800
C’s Gain = Rs. 3,24,000 × 2/60 = Rs. 10,800
D’s Gain = Rs. 3,24,000 × 1/60 = Rs. 5,400

Points of Students:
1. If there is no claim against Workmen Compensation Reserve: In such a case, the entire amount of Workmen Compensation Reserve is credited to the Capital Account of partners in their old profit sharing ratio.
The Journal Entry passed is:
Workmen Compensation Reserve A/c Dr.
To Partner’s Capital A/c
(Workmen Compensation Reserve credited to partner’s Capital Accounts in their old profit ratio)
2. We can Calculate Distributable Profit:-
Distributable Profit = Goodwill + Reserves + Profit and Loss (Profit) – Loss on Revaluation

Question 62 (new). A. B and C were partners in a firm sharing profits in the ratio of 1:3:2. They decided that with effect from 1st April, 2021, they will share profits in the ratio of 4: 6:5. For this purpose the goodwill of the firm is valued at the total of preceding three year’s profits. The profits were:
Rs.
2016-17 40,000
2017-18 10,000 (Loss)
2018-19 80,000 (Loss)
2019-20 1,20,000
2020-21 1,40,000
Reserves and Profits appeared in the balance sheet at Rs. 40,000 and Rs. 30,000 respectively. Partners do not want to distribute the reserves and profits appearing in the balance sheet. Pass a single journal entry to record the change.

Solution 62 (new).

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
A B C
Old Ratio 1 : 3 : 2
New Ratio 4 : 6 : 5

A = 1/6-4/15 = (5 – 8)/30 = 3/30 (Gain)
B = 3/6-6/15 = (15 – 12)/30 = 3/30 (Sacrifice)
C = 2/6-5/15 = (10 – 10)/30 = 0 (Nil)

Goodwill = (Rs. 80,000) + Rs. 1,20,000 + Rs. 1,40,000 = Rs. 1,80,000
Total Distributable Amount = Goodwill + Reserve + Profit
Total Distributable Amount = Rs. 1,80,000 + Rs. 40,000 + Rs. 30,000
Total Distributable Amount = Rs. 2,50,000

A’s Gain = Rs. 2,50,000 × 3/30 = Rs. 25,000
B’s Sacrifice = Rs. 2,50,000 × 3/30 = Rs. 25,000

Question 62. Hari, Kunal and Uma are partners in a firm sharing profits and losses in the ratio of 5:3:2. From 1st April, 2018 they decided to share future profits and losses in the ratio of 2 : 5 : 3. Their Balance Sheet showed a balance of Rs. 75,000 in the Profit and Loss Account and a balance of Rs. 15,000 in Investment Fluctuation Fund. For this purpose, it was agreed that:
(i) Goodwill of the firm was valued at Rs. 3,00,000.
(ii) That investments (having a book value of Rs. 50,000) were valued at Rs.35,000.
(iii) That stock having a book value of Rs. 50,000 be depreciated by 10%
Pass the necessary journal entries for the above in the books of the firm.
Solution 62

Working Note:-
Calculation of Sacrificing and Gaining Ratio:-
Hari Kunal Uma
Old Ratio 5 : 3 : 2
New Ratio 2 : 5 : 3

Hari = 5/10-2/10 = (5 – 2)/10 = 3/60 (Sacrifice)
Kunal = 3/10-5/10 = (3 – 5)/10 = 2/60 (Gain)
Uma = 2/10-3/10 = (2 – 3)/10 = 1/60 (Gain)

Question 63 (new). L, M and N were partners in a firm sharing profits in the ratio of 2:3:5. From 1^st April, 2018 they decided to share the profits in the ratio of 1:2:2. On this date, the Balance Sheet showed a credit balance of Rs. 1,17,000 in General Reserve and a debit balance of Rs. 35,000 in Profit and Loss account. The goodwill of the firm was valued at Rs. 5,00,000. The revaluation of assets and reassessment of liabilities resulted into a gain of Rs. 30,000. Pass necessary journal entries for the above transactions on the reconstitution of the firm.

Solution 63 (new).

Working Note:-
Sacrificing Ratio = Old Ratio – New Ratio
L’s Sacrificing Ratio = 2/10-1/5 = Nil
M’s Sacrificing Ratio = 3/10- 2/5=-1/10 (Gain)
N’s Sacrificing Ratio = 5/10 – 2/5=1/10 (Sacrifice)

Question 64 (new). Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses in the ratio of 3:3:2. From 1^st April, 2018 they decided to share the future profits equally. On this date, the General Reserve showed a balance of Rs. 1,60,000; Revaluation of fixed assets resulted into a gain of Rs. 1,02,000 and stock resulted into a loss of Rs. 22,000. On this date the goodwill of the firm was valued at Rs. 3,60,000. Pass necessary journal entries for the above transactions on reconstitution of the firm.
Solution 64 (new).

What do you mean by ‘Sacrificing Ratio’?

Sacrificing ratio is a ratio of pre-existing profit of the old partners. The existing partners surrender a significant portion of this profit to the newly admitted partners. The share grab by the new partner is usually supplied by some of the existing partners or all the partners of the firm.

What is the formula of sacrificing ratio?

Sacrificing ratio can be calculated as the difference between the old profit ratio and the new ratio.
Sacrifice Ratio = Old Profit-Sharing Ratio – New Profit-Sharing Ratio

What is the Gaining Ratio?

The gaining ratio is usually a tool to measure the distribution of the share of a retired or dead partner of a firm among the existing partners. It is basically used when a partner dies or retires from the business. By the gaining ratio, the other active partners of the firm can squeeze out the share of those partners.

What is the formula of gaining ratio?

Gaining Ratio can be defined as the difference between the old profit-sharing ratio and the new profiting-sharing ratio between the partners of a firm.
Gaining Ratio = New Profit-Sharing Ratio – Old Profit-Sharing Ratio

When should the gaining ratio be calculated?

The gaining ratio is generally calculated on the admission, Retirement, death of any partner into the firm. However, there are certain pre-defined criteria for calculating the gaining ratio, which is as follows –
● When the partnership agreement does not specify about the new profit-sharing proportion.
● In case when the partnership contract defines unequal or inappropriate gains of the partners.

Mention the key points when a firm reconstitutes.?

Here are the most important points when a firm reconstitutes –
● Admission of one or more new partners in the firm.
● Death or Retirement of one or more partners.
● Change in the profit-sharing ratio among the partners of the firm.

Why must the students prefer the DK Goel Solutions to learn more about Change in Profit Sharing Ratio Among the Existing Partners?

DK Goel Solutions are the most dedicated study resource to score well in the Class 12 Accountancy examination. The solutions are clear to understand and curated by experts to make learning easier and more interesting for the students. The precise solutions teach the students to deal with difficult questions and play a major role in their preparation for the exams.

Also refer to TS Grewal Solutions for Class 12

DK Goel Solutions

DK Goel Solutions Chapter 3 Changing in Profit Sharing Ratio among the Existing Partners

Changing in Profit Sharing Ratio among the Existing Partners DK Goel Class 12 Accountancy Solutions

Short Answer Questions for DK Goel Solutions Class 12 Chapter 3

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