Question

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

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

Hint:

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

Answer 1

The Correct Option is D

Preet and Saral, initially sharing profits in a 3:2 ratio, altered their profit-sharing ratio to 1:1 effective March 31, 2024. The firm's goodwill was valued at Rs 1,00,000 on this date.

To account for this change, each partner's gain or loss concerning goodwill must be determined.

Step 1: Determine Partner's Gain or Loss:

For Preet and Saral:

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

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

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

As Preet's share has decreased, he will compensate Saral.

Step 2: Calculate Goodwill Adjustment:

The total goodwill is Rs 1,00,000. The adjustment for each partner is calculated as follows:

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

Step 3: Record Journal Entry:

The journal entry to adjust goodwill for the revised profit-sharing ratio is:

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