Question

Isha and Manish were partners in a firm sharing profits and losses in the ratio of 3 : 2. With effect from 1st April, 2023, they agreed to share profits equally. On this date the goodwill of the firm was valued at |3,00,000. The necessary journal entry for the treatment of goodwill without opening Goodwill Account will be:

• A.
• B.
• C.
• D.

Hint:

When partners agree to change their profit-sharing ratio, goodwill adjustments are made based on the sacrificing and gaining ratios without opening a goodwill account.

Answer 1

The Correct Option is A

The prior ratio between Isha and Manish was 3:2, changing to a new ratio of 1:1. The sacrificing ratio is determined by subtracting the new ratio from the old ratio: \[ \text{Sacrificing Ratio} = \text{Old Ratio} - \text{New Ratio} \] For Isha, the calculation is: \[ \frac{3}{5} - \frac{1}{2} = \frac{6}{10} - \frac{5}{10} = \frac{1}{10} \] For Manish, the calculation is: \[ \frac{2}{5} - \frac{1}{2} = \frac{4}{10} - \frac{5}{10} = -\frac{1}{10} \] The goodwill adjustment amounts to: \[ rupee3,00,000 \times \frac{1}{10} = rupee30,000 \]

The relevant journal entry is illustrated by the following image: