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Class 12 Math Chapter 2 Change in Profit Sharing Ratio Among the Existing Partners DK Goel Solutions
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Chapter 2 Change in Profit Sharing Ratio Among the Existing Partners DK Goel Class 12 Solved Exercises
Chapter 2: Change in Profit Sharing Ratio Among the Existing Partners
Complete Step-by-Step Solutions | Q1 to Q66
💡 Quick Concept Summary
Numerical Questions and Solutions
X and Y were partners in a firm sharing profits in the ratio of 5:3. With effect from 1st April, 2023 they agreed to share profits equally. Calculate the individual partner's gain or sacrifice due to change in ratio.
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 1/8thshare.
Here the negative value of is gaining and positive value is sacrificing.
A and B were in partnership sharing profits equally. With effect from1st April, 2023 they agreed to share profits in ratio of 4:3. Calculate the individual partner’s gain or sacrifice due to change in ratio.
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 1/14thshare.
Here the negative value of is gaining and positive value is sacrificing.
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.
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 = 1/24
C’s Ratio = 1/8-3/12
C’s Ratio = (3 – 6)/24
C’s Gaining Ratio = 3/24
Thus, A has sacrifices2/24th share, B has sacrifices1/24thshare and C gain 3/24th
Here the negative value of is gaining and positive value is sacrificing.
Mahesh, Naresh and Om were partners sharing profits in the ratio of 2 : 3:4. With effect from 1st April, 2016 they agreed to share profits in the ratio of 1 : 2 : 3. Calculate each partner's gain or sacrifice due to change in ratio.
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
Here the negative value of is gaining and positive value is sacrificing.
Madhu & Co. Acquired the business of Vishu for a purchase consideration of Rs. 11,00,000 which was paid by cheque. The assets and liabilities taken over was as follows:
| Particulars | Book Value | Agreed Value |
|---|---|---|
| Furniture | 50,000 | 40,000 |
| Debtors | 2,50,000 | Subject to Provision for Doubtful Debts 4% |
| Stock | 10,00,000 | 7,20,000 |
| Bank Overdraft | 20,000 | 20,000 |
| Creditors | 1,80,000 | 1,80,000 |
You are required to ascertain the value of goodwill and pass necessary Journal entries.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Furniture A/c | Dr. | 40,000 | |||
| Debtors A/c | Dr. | 2,40,000 | |||
| Stock A/c | Dr. | 7,20,000 | |||
| Goodwill A/c | Dr. | 3,00,000 | |||
| To Bank Overdraft A/c | 20,000 | ||||
| To Creditor A/c | 1,80,000 | ||||
| To Vishu’s A/c | 11,00,000 | ||||
| (Being business taken over and the difference amount treated as goodwill) | |||||
| Vishu’s A/c | Dr. | 11,00,000 | |||
| To Bank A/c | 11,00,000 | ||||
| (Being amount of purchases consideration paid by cheque) | |||||
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.)
2018-19 : 2,00,000
2019-20 : (3,00,000)
2020-21 : 4,50,000 (including an abnormal gain of Rs. 50,000)
2021-22 : 3,50,000 (after charging an abnormal loss of Rs. 90,000)
2022-23 : 2,60,000
Calculate the amount of goodwill.
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. 9,10,000
Average Profit = Total Profit/Number of year
Average Profit = 9,10,000/5
Average Profit = Rs. 1,82,000
Goodwill = Average Profit × Number of year purchases
Goodwill = 1,82,000 × 4
Goodwill = Rs. 7,28,000
X purchased the business of Y from 1st April, 2026. 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 :
| Year ended | (Rs.) | ||
|---|---|---|---|
| 31st March, 2023 | Profit | 1,00,000 | (after debiting loss of stock by fire Rs. 50,000) |
| 31st March, 2024 | Loss | 1,50,000 | (includes voluntary retirement compensation paid Rs. 80,000) |
| 31st March, 2025 | Profit | 1,50,000 | |
| 31st March, 2026 | Profit | 2,00,000 |
Verification of books of accounts revealed the following:
During the year ended 31st March, 2021, a machine got destroyed in accident and Rs. 60,000 was written off as loss in Profit & Loss Account.
On 1st July 2025, 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.
Calculation of Adjusted Profits
| Particulars | 31.03.2023 | 31.03.2024 | 31.03.2025 | 31.03.2026 |
|---|---|---|---|---|
| Profit | 1,00,000 | (1,50,000) | 1,50,000 | 2,00,000 |
| Add: Loss of Stock by fire | 50,000 | - | - | - |
| Add: Voluntary retirement Compensation | - | 80,000 | - | - |
| Add: Loss by Accident | - | 60,000 | - | - |
| Add: Cost of Computers wrongly charged to P&L | - | - | 80,000 | - |
| Less: Depreciation on Computer | 6,000 | 8,000 | ||
| 1,50,000 | (10,000) | 2,24,000 | 1,92,000 |
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
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
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, 2022. 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 2018 1,30,000
Year ending on 31st March 2019 1,20,000
Year ending on 31st March 2020 1,50,000
Year ending on 31st March 2021 1,10,000
Year ending on 31st March 2022 2,00,000
Calculate the value of Goodwill.
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
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 2018 60,000 (Profit)
Year ending on 31st March 2019 1,50,000 (Profit)
Year ending on 31st March 2020 20,000 (Loss)
Year ending on 31st March 2021 2,00,000 (Profit)
Year ending on 31st March 2022 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.
Calculation of Average Profits:-
| Rs. | |
|---|---|
| 31st March 2018 | Rs. 60,000 (Profit) |
| 31st March 2019 | Rs. 1,50,000 (Profit) |
| 31st March 2020 | Rs. 20,000 (Loss) |
| 31st March 2021 | Rs. 2,00,000 (Profit) |
| 31st March 2022 | Rs. 2,20,000 (Profit) |
| Rs. 6,10,000 |
Average Profit = Total Profit/Number of year
Average Profit = Rs. 6,10,000/5
Goodwill = Average Profit × number of year’s purchases
Goodwill = Rs. 1,22,000 × 3
Goodwill = Rs. 3,66,000
Cost of Computer was wrongly debited to office expenses account. So the profit of 2017 will increase by Rs. 40,000.
Calculation of Depreciation on Computer:-
Depreciation = Rs. 40,000 ×25/100×6/12
Depreciation = Rs. 5,000
Profit for the year 2022 = Rs. 1,85,000 + Rs. 40,000 – Rs. 5,000 = Rs. 2,20,000
The profits earned by a firm during the last four years were as follows:
| Year ended 31st March | Profits (Rs.) |
|---|---|
| 2021 | 80,000 |
| 2022 | 1,00,000 |
| 2023 | 1,10,000 |
| 2024 | 1,50,000 |
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 2021, 2022, 2023 and 2024.
| Year | Profit (Rs.) | Weight | Products |
|---|---|---|---|
| 2021 | 80,000 | 1 | 80,000 |
| 2022 | 1,00,000 | 2 | 2,00,000 |
| 2023 | 1,10,000 | 3 | 3,30,000 |
| 2024 | 1,50,000 | 4 | 6,00,000 |
| 10 | 12,10,000 |
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
Following information is available about the business of a firm :
(i) Profits: In 2022, Rs. 40,000; In 2023, Rs. 50,000; In 2024, Rs. 60,000.
(ii) Non- recurring income of Rs.1,000 is included in the profits of 2023, (iii) Profits of 2022 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 2024 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: 2022:-1; 2023: -2; 2024: -3.
Calculation of Adjusted Profits
| Particulars | 2022 | 2023 | 2024 |
|---|---|---|---|
| Profit | 40,000 | 50,000 | 60,000 |
| Less: Non-recurring income | - | 1,000 | - |
| Add: Goods destroyed by fire | 6,000 | - | - |
| Less: Insurance Premium | 400 | 400 | 400 |
| Less: Remuneration to the Proprietor | 6,000 | 6,000 | 6,000 |
| Less: Income on Investment | - | - | 5,000 |
| 39,400 | 42,600 | 48,600 |
| Year | Profit (Rs.) | Weight | Products |
|---|---|---|---|
| 2022 | 39,600 | 1 | 39,600 |
| 2023 | 42,600 | 2 | 85,200 |
| 2024 | 48,600 | 3 | 1,45,800 |
| 6 | 2,70,600 |
Weight Average Profit = Rs. 2,70,600/6
Weight Average Profit = Rs. 45,100
Goodwill = Rs. 45,100 × 2 = Rs. 90,200
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, 2019 : | Profit | 80,000 | (after considering abnormal loss of Rs. 41,500) |
| 31st March, 2020 : | Profit | 1,05,000 | (after considering abnormal gain of Rs. 40,000) |
| 31st March, 2021 : | Loss | 20,000 | |
| 31st March, 2022 : | Profit | 1,80,000 | |
| 31st March, 2023 : | Profit | 2,00,000 |
Books of Accounts of the firm revealed that:
(i) Closing Stock as on 31st March, 2019 was overvalued by Rs. 40,000.
(ii) Repairs to Machinery Rs. 60,000 were wrongly debited to Machinery Account on 1st July, 2021. Depreciation was charged on Machinery 20% p.a. on diminishing balance method.
Calculation of Adjusted Profits
| Particulars | 31.03.2019 | 31.03.2020 | 31.03.2021 | 31.03.2022 | 31.03.2023 |
|---|---|---|---|---|---|
| Profit | 80,000 | 1,05,000 | (20,000) | 1,80,000 | 2,00,000 |
| Less: Closing Stock overvalued | (40,000) | - | - | - | - |
| Less: Abnormal Gain | - | (40,000) | - | - | - |
| Less: Repair Expenses | - | - | - | (60,000) | - |
| 40,000 | 65,000 | (20,000) | 1,20,000 | 2,00,000 | |
| Add: Opening Stock overvalued | - | 40,000 | - | - | - |
| Add: Abnormal Loss | 41,500 | - | - | - | - |
| Add: Depreciation | - | - | - | 9,000 | 10,200 |
| Adjusted Profit | 81,500 | 1,05,000 | (20,000) | 1,29,000 | 2,10,200 |
Weight Average Profit = Total of Products/Total of Weights
| Year | Profit (Rs.) | Weight | Products |
|---|---|---|---|
| 2019 | 81,500 | 1 | 81,500 |
| 2020 | 1,05,000 | 2 | 2,10,000 |
| 2021 | (20,000) | 3 | (60,000) |
| 2022 | 1,29,000 | 4 | 5,16,000 |
| 2023 | 2,10,200 | 5 | 10,51,000 |
| 15 | 17,98,500 |
Weight Average Profit = Rs. 17,98,500/15
Weight Average Profit = Rs. 1,19,900
Goodwill = Rs. 1,19,900 × 3 = Rs. 3,59,700
Calculation of Depreciation:-
In 2022 = Rs. 60,000 ×20/100×9/12= Rs. 9,000
In 2023 = (Rs. 60,000 - Rs. 9,000)×20/100= Rs. 10,200
📌 Correction note: the abnormal loss of Rs. 41,500 relates to the year ended 31.03.2019 and the abnormal gain of Rs. 40,000 relates to the year ended 31.03.2020, as stated in the question — both are now adjusted against the correct year above, which changes the Weighted Average Profit and Goodwill figures.
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.
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
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.
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
The capital of the firm of Rajat and Karan is Rs. 15,00,000 and the market rate of interest is 12%. Annual salary of Rajat and Karan is Rs. 20,000 and Rs. 30,000 respectively. The profit for the three years were Rs. 2,40,000, Rs. 2,80,000 and Rs. 3,20,000.
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.
Calculation of Actual Average Profit:-
Actual Average Profit = Average Profit – Remuneration to Partners
Actual Average Profit = Rs. 2,40,000 + Rs. 2,80,000 + Rs. 3,20,000/3- Rs.50,000
Actual Average Profit = Rs. 2,80,000 – Rs. 50,000
Actual Average Profit = Rs. 2,30,000
Normal Profit = Capital Employed ×Normal Rate of Return/100
Normal Profit = Rs. 15,00,000 ×12/100
Normal Profit = Rs. 1,80,000
Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 2,30,000 – Rs. 1,80,000
Super Profit = Rs. 50,000
Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 50,000 × 2
Goodwill = Rs. 1,00,000
Find out the capital employed from the following information:
Normal rate of return: 12%
Profits:
2021-22 Rs. 80,000
2022-23 Rs. 1,30,000
2023-24 Rs. 1,56,000
Goodwill valued at 3 years purchase of Super Profits Rs. 1,50,000
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
Value of Goodwill of a firm at 3 years’ purchase of Super Profit is Rs. 3,75,000. Average capital Employed in the firm is Rs. 15,00,000. Profits of the last 3 years are:
| 2022-23 | Rs. 1,00,000 | (Loss) |
|---|---|---|
| 2023-24 | Rs. 5,35,000 | Profit |
| 2024-25 | Rs. 4,80,000 | Profit |
Find out the Normal Rate of Return.
Goodwill = Super Profit × Number of year’s Purchases
Rs. 3,75,000 = Super Profit × 3
Super Profit = Rs. 3,75,000 ÷ 3
Super Profit = Rs. 1,25,000
Total Profit = (Rs. 1,00,000) + Rs. 5,35,000 + Rs. 4,80,000
Total Profit = Rs. 9,15,000
Average Profit = Rs. 9,15,000/3
Average Profit = Rs. 3,05,000
Super Profit = Average Profit – Normal Profit
Rs. 1,25,000 = Rs. 3,05,000 – Normal Profit
Normal Profit = Rs. 3,05,000 – Rs. 1,25,000
Normal Profit = Rs. 1,80,000
Normal Profit = Capital Employed ×Normal Rate of Return/100
Rs. 1,80,000 = Rs. 15,00,000 ×Normal Rate of Return/100
Rs. 1,80,000 = Rs. 15,000 × Normal Rate of Return
Capital Employed = 1,80,000/15,000
Capital Employed = Rs. 12%
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.
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
On April 1st 2024, 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.
Goodwill = Super Profit × Number of year Purchases
Rs. 64,000 = Super Profit × 4
Super Profit = Rs. 64,000/4
Super Profit = Rs. 16,000
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
Calculation of Capital Employed:-
Capital Employed = Total Assets – Creditors
Capital Employed = Rs. 5,00,000 – Rs. 30,000
Capital Employed = Rs. 4,70,000
Following balance appeared in the books of a partnership firm:
| Capital Accounts | Current Account | |
|---|---|---|
| Monica | Rs. 5,50,000 | 30,000 |
| Nusrat | Rs. 6,40,000 | 20,000 (Dr.) |
Profit and Loss A/c (Dr.) balance existed at Rs. 3,00,000. The normal rate of return for similar business is 10%. In the goodwill of the firm is Rs. 60,000 at 4 years’ purchases of super profit, find the average profits of the firm.
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. 9,00,000 ×10/100
Normal Profit = Rs. 90,000
Super Profit = Average Profit – Normal Profit
Rs. 15,000 = Average Profit – Rs. 90,000
Average Profit = Rs. 15,000 + Rs. 90,000
Average Profit = Rs. 1,05,000
Calculation of Capital Employed:-
Capital Employed = Total Capital – Profit and Loss (Dr.)
Capital Employed = Rs. 12,00,000 – Rs. 3,00,000
Capital Employed = Rs. 9,00,000
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.
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
A firm’s average net profit of last four years were Rs. 2,50,000. It includes an abnormal gain of Rs. 19,000 each year. The firm had assets of Rs. 15,50,000 including cash of Rs. 20,000, Debtors Rs. 2,35,000 and Stock Rs. 1,15,000. Its creditors were Rs. 3,00,000 and outstanding expenses Rs. 50,000. The value of the goodwill as per the capitalization of average profit method was valued at Rs. 4,50,000. Find out the Normal Rate of Return.
It is given that, Average Profit = Rs. 2,50,000
Abnormal Gain = Rs. 19,000 × 4
Abnormal Gain = Rs. 76,000
Normal Profit = Average Profit – Abnormal Gain
Normal Profit = Rs. 2,50,000 – Rs. 76,000
Normal Profit = Rs. 1,74,000
Calculation of Capital Employed:-
Capital Employed = Total Assets – Current Liabilities
Capital Employed = Rs. 15,50,000 – Rs. 3,50,000
Capital Employed = Rs. 12,00,000
Calculation of Normal Rate of Return:-
Normal Profit = Capital Employed × Normal Rate Return/100
Rs. 1,74,000 = Rs. 12,00,000 × Normal Rate Return/100
Normal Rate Return= Rs. 17,40,000/Rs.12,00,000
Normal Rate Return= 14.5%
Raju and Rinku were partners sharing profits and losses in the ratio 3:2. They admitted Sumit as a new partner for 1/3 shares. On the date of admission Capitals of Raju and Rinku were Rs. 5,50,000 and Rs. 6,50,000 respectively, also General Reserve of Rs. 3,00,000 and Profit and Loss (Dr.) balance of Rs. 1,00,000 were appearing in the books of accounts.
Firm made an average profit of Rs. 2,40,000 during the last few years and the normal rate of earning was expected to be 12%.
Calculate the Goodwill of the firm by Capitalisation Method.
Average Profit = Rs. 2,40,000
Normal Rate of Return = 12%
Capitalised value of Average Profit = Average Profit × 100/NRR
Capitalised value of Average Profit = Rs. 2,40,000 × 100/12
Capitalised value of Average Profit = Rs. 20,00,000
Capital Employed = Raju’s Capital + Rinku’s Capital + General Reserve – Profit & Loss
Capital Employed = Rs. 5,50,000 + Rs. 6,50,000 + Rs. 3,00,000 – Rs. 1,00,000
Capital Employed = Rs. 14,00,000
Goodwill = Capitalised Value of Average Profit – Capital Employed
Goodwill = Rs. 20,00,000 – Rs. 14,00,000
Goodwill = Rs. 6,00,000
Dipu and Raju were partners in a firm. Following balance were appearing in the books of the firms:
| Particulars | Amount |
|---|---|
| Dipu’s Capital A/c | 3,80,000 |
| Raju’s Capital A/c | 2,90,000 |
| Dipu’s Current A/c | 20,000 |
| Raju’s Current A/c | 50,000 |
| Profit and Loss A/c (Dr.) | 10,000 |
| Deferred Revenue Expenditure | 15,000 |
Profit for last three years ended 31st March, were:
| 2024 | Rs. 95,000 | (including gain of Rs. 5,000 from sale of Machinery) |
|---|---|---|
| 2025 | Rs. 72,000 | (including loss of vehicle destroyed by an accident on 31st March, 2025, Rs. 24,000) |
| 2026 | Rs. 1,20,000 | (including overvaluation of stock by Rs. 12,000) |
Calculate Goodwill of the firm by Capitalisation of Super Profit Method; if normal rate of return in the similar business is 8% p.a.
Calculation of Average Profit:-
| 2024 | Rs. 95,000 – Rs. 5,000 | = | Rs. 90,000 |
|---|---|---|---|
| 2025 | Rs. 72,000 – Rs. 24,000 | = | Rs. 96,000 |
| 2026 | Rs. 1,20,000 – Rs. 12,000 | = | Rs. 1,08,000 |
Average Profit = 90,000+96,000+1,08,000/3
Average Profit = 2,94,000/3
Average Profit = Rs. 98,000
Calculation of Capital Employed:-
Capital Employed = Dipu’s Capital + Raju’s Capital + Dipu’s Current A/c + Raju’s Current A/c – Profit & Loss A/c (Dr.) – Deferred Revenue Expenditure
Calculation of Capital Employed = Rs. 3,80,000 + Rs. 2,90,000 + Rs. 20,000 + Rs. 50,000 – Rs. 10,000 – Rs. 15,000
Calculation of Capital Employed = Rs. 7,15,000
Normal Profit = Capital Employed × NRR/100
Normal Profit = Rs. 7,15,000 × 8/100
Normal Profit = Rs. 57,200
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 98,000 – Rs. 57,200
Super Profit = Rs. 40,800
Goodwill = Super Profit × 100/NRR
Goodwill = Rs. 40,800 × 100/8
Goodwill = Rs. 5,10,000
Jay and Vijay were partners sharing profits and losses equally. They decide to share future profits in the ratio of 3:2 w.e.f. 1st April, 2026.
From the following Balance Sheet as at 31st March, 2026, calculate the value of goodwill on the basis of Capitalisation of Super Profit Method if the normal rate of return is 10% and average profit is Rs. 1,80,000.
| Liabilities | Amount | Assets | Amount | |
|---|---|---|---|---|
| Capital Account | Goodwill | 2,30,000 | ||
| Jay | 8,15,000 | Computer | 3,40,000 | |
| Vijay | 6,55,000 | 14,70,000 | Furniture | 2,00,000 |
| Profit and loss A/c | 1,40,000 | Investments (Non-trade) | 1,65,000 | |
| Sundry Creditors | 3,80,000 | Stock | 4,70,000 | |
| Outstanding Rent | 1,10,000 | Sundry Debtors | 6,37,000 | |
| Cash at Bank | 23,000 | |||
| Advertisement Suspense | 35,000 | |||
| 21,00,000 | 21,00,000 | |||
Calculation of Capital Employed:-
Capital Employed = Total Assets – Total Liabilities
Capital Employed = Computer + Furniture + Stock + Sundry Debtors + Cash at Bank – Sundry Creditors – Outstanding Rent
Capital Employed = Rs. 3,40,000 + Rs. 2,00,000 + Rs. 4,70,000 + 6,37,000 + Rs. 23,000 – Rs. 3,80,000 – Rs. 1,10,000
Capital Employed = Rs. 11,80,000
Normal Profit = Capital Employed × NRR/100
Normal Profit = Rs. 11,80,000 × 10/100
Normal Profit = Rs. 1,18,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,80,000 – Rs. 1,18,000
Super Profit = Rs. 62,000
Calculation of Goodwill:-
Goodwill = Super Profit ×100/NRR
Goodwill = Rs. 62,000 ×100/10
Goodwill = Rs. 6,20,000
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.
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
A and B are partners sharing profits and losses in the ratio of 3 : 1. It was decided that with effect from 1st April, 2024 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 2022, 2023 and 2024 were Rs. 36,000, Rs. 32,000 and Rs. 40,000 respectively.
Pass the necessary journal entry for the treatment of goodwill.
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2024 | ||||
| April 1 | B’s Capital A/c | 9,000 | ||
| To A’s Capital A/c | 9,000 | |||
| (Being goodwill adjusted to partners) |
P, Q and R are partners sharing profits equally. They decided that in future R will get 1/7 share in profits. Goodwill already exists in the books at Rs. 27,000. 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.
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
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| P’s Capital A/c | Dr. | 4,000 | |||
| Q’s Capital A/c | Dr. | 4,000 | |||
| To R’s Capital A/c | 8,000 | ||||
| (Being R sacrifice goodwill to P and Q) | |||||
A. B and C were partners sharing profits and losses in the ratio of 7:3:2 From 1st April 2025, 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 2022, 2023, 2024 and 2025 were Rs. 52,000, Rs. 48,000, Rs. 60,000 and Rs. 90,000 respectively. Give the necessary journal entry.
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
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2025 | |||||
| April 01 | B’s Capital A/c | Dr. | 1,100 | ||
| C’s Capital A/c | Dr. | 2,200 | |||
| To A’s Capital A/c | 3,300 | ||||
| (Being A sacrifice goodwill to B and C) | |||||
Ravi, Jay and Vipin are partners sharing profits in the ratio of 5:4:1. It is now agreed they will share future profit in a new ratio. Following Journal entry is passed for adjustment of goodwill due to change in profit-sharing ratio:
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Vipin’s Capital A/c | Dr. | 90,000 | |||
| To Ravi’s Capital A/c | 60,000 | ||||
| To Jay’s Capital A/c | 30,000 | ||||
| (Adjustment for goodwill due to change in profit sharing ratio) | |||||
Find out new profit sharing ratio of Ravi, Jay and Vipin.
Ravi and Jay are the sacrificing Partner.
Sacrificing Ratio = 60,000 : 30,000
Sacrificing Ratio = 2 : 1
Vipin Gained = 3/10
Calculation of New Profit Sharing Ratio:-
Ravi’s New Share = 5/10-2/10=3/10
Jay’s New Share = 4/10-1/10=3/10
Vipin’s New Share = 1/10+3/10=4/10
Hence, the new profit sharing Ratio = 3:3:4.
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, 2024. 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2024 | |||||
| April 01 | Profit and Loss A/c | Dr. | 70,000 | ||
| To A’s Capital A/c | 42,000 | ||||
| To B’s Capital A/c | 28,000 | ||||
| (Being undistributed profit share in old ratio) | |||||
A’s Capital = Rs. 70,000 ×3/5 = Rs. 42,000
B’s Capital = Rs. 70,000 ×2/5 = Rs. 28,000
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2016 | |||||
| April 01 | A’s Capital A/c | Dr. | 15,000 | ||
| B’s Capital A/c | Dr. | 30,000 | |||
| C’s Capital A/c | Dr. | 45,000 | |||
| To Profit and Loss A/c | 90,000 | ||||
| (Being loss share in old ratio) | |||||
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
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, 2024. An extract of their Balance Sheet as at 31st March, 2024 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2024 | Case (i) | ||||
| April 01 | Workmen Compensation Reserve a/c | Dr. | 40,000 | ||
| To A’s Capital A/c | 16,000 | ||||
| To B’s Capital A/c | 24,000 | ||||
| (Being workmen compensation reserve transfer to partners’ capital account in old ratio) | |||||
| Case (ii) | |||||
| Workmen Compensation Reserve a/c | Dr. | 40,000 | |||
| To Provision for Workmen Compensation Claim a/c | 25,000 | ||||
| To A’s Capital A/c | 6,000 | ||||
| To B’s Capital A/c | 9,000 | ||||
| (Being workmen compensation claim settled and excess amount will distributed between partners in old profit sharing ratio) | |||||
| Case (iii) | |||||
| Workmen Compensation Reserve a/c | Dr. | 40,000 | |||
| To Provision for Workmen Compensation Claim a/c | 40,000 | ||||
| (Being workmen compensation claim settled) | |||||
| Case (iv) | |||||
| Workmen Compensation Reserve a/c | Dr. | 40,000 | |||
| Revaluation a/c | Dr. | 10,000 | |||
| To Provision for Workmen Compensation Claim a/c | 50,000 | ||||
| (Being Provision for workmen compensation and short amount charged from revaluation) | |||||
| A’s Capital a/c | Dr. | 4,000 | |||
| B’s Capital a/c | Dr. | 6,000 | |||
| To Revaluation a/c | 10,000 | ||||
| (Being revaluation loss transferred to partner’s capital account) | |||||
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2018 | |||||
| April 01 | Profit and Loss A/c | Dr. | 9,000 | ||
| To P’s Capital A/c | 2,250 | ||||
| To Q’s Capital A/c | 2,250 | ||||
| To R’s Capital A/c | 4,500 | ||||
| (Being profit is distributed among the partners in old ratio) | |||||
| April 01 | Workmen Compensation Fund A/c | Dr. | 64,000 | ||
| To Workmen Compensation Claim A/c | 30,000 | ||||
| To P’s Capital A/c | 8,500 | ||||
| To Q’s Capital A/c | 8,500 | ||||
| To R’s Capital A/c | 17,000 | ||||
| (Being workmen compensation claimed and balance credited to partners’ capital account) | |||||
| April 01 | P’s Capital A/c | Dr. | 60,000 | ||
| Q’s Capital A/c | Dr. | 60,000 | |||
| To R’s Capital A/c | 1,20,000 | ||||
| (Being goodwill is revalued of the firm and adjustment made) | |||||
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
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, 2024. Following is an extract of their Balance Sheet as at 31st March, 2024:
| 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2024 | Case (i) | ||||
| April 01 | Investment Fluctuation Reserve a/c | Dr. | 54,000 | ||
| To A’s Capital A/c | 24,000 | ||||
| To B’s Capital A/c | 18,000 | ||||
| To C’s Capital A/c | 12,000 | ||||
| (Being investment fluctuation reserve transfer to partners’ capital account in old ratio) | |||||
| Case (ii) | |||||
| April 01 | Investment Fluctuation Reserve a/c | Dr. | 54,000 | ||
| To A’s Capital A/c | 24,000 | ||||
| To B’s Capital A/c | 18,000 | ||||
| To C’s Capital A/c | 12,000 | ||||
| (Being investment fluctuation reserve transfer to partners’ capital account in old ratio) | |||||
| Case (iii) | |||||
| April 01 | Investment Fluctuation Reserve A/c | Dr. | 54,000 | ||
| To Investments A/c | 9,000 | ||||
| To A’s Capital A/c | 20,000 | ||||
| To B’s Capital A/c | 15,000 | ||||
| To C’s Capital A/c | 10,000 | ||||
| (Being excess investment fluctuation reserve transfer to partners’ capital account in their old profit sharing ratio) | |||||
| Case (iv) | |||||
| April 01 | Investment Fluctuation Reserve a/c | Dr. | 54,000 | ||
| Revaluation a/c | Dr. | 18,000 | |||
| To Investment a/c | 72,000 | ||||
| (Being decreased value of the investment adjusted by revaluation account) | |||||
| April 01 | A’s Capital a/c | Dr. | 8,000 | ||
| B’s Capital a/c | Dr. | 6,000 | |||
| C’s Capital a/c | Dr. | 4,000 | |||
| To Revaluation a/c | 18,000 | ||||
| (Being revaluation loss transferred to partner’s capital account) | |||||
| Case (v) | |||||
| April 01 | Investment Fluctuation Reserve A/c | Dr. | 54,000 | ||
| To A’s Capital A/c | 24,000 | ||||
| To B’s Capital A/c | 18,000 | ||||
| To C’s Capital A/c | 12,000 | ||||
| (Being transfer of excess investment fluctuation reserve) | |||||
| April 01 | Investment A/c | Dr. | 60,000 | ||
| To Revaluation A/c | 60,000 | ||||
| (Being Value of investment increased to market value) | |||||
| April 01 | Revaluation A/c | Dr. | 60,000 | ||
| To A’s Capital A/c | 26,667 | ||||
| To B’s Capital A/c | 20,000 | ||||
| To C’s Capital A/c | 13,333 | ||||
| (Being profit transfer to partners’ capital account) | |||||
Samiksha, Ash and Divya were partners in a firm sharing profits and losses in the ratio of 5:3:2. With effect from 1st April, 2026, 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 1.) | Samiksha’s Capital A/c | Dr. | 25,000 | ||
| Ash’s Capital A/c | Dr. | 15,000 | |||
| Divya’s Capital A/c | Dr. | 10,000 | |||
| To Profit and Loss A/c | 50,000 | ||||
| (Being debit balance of P&L Debited to Partners 5:3:2.) | |||||
| 2.) | Investment Fluctuation Reserve a/c | Dr. | 40,000 | ||
| To Investment A/c | 20,000 | ||||
| To Samiksha’s Capital A/c | 10,000 | ||||
| To Ash’s Capital A/c | 6,000 | ||||
| To Divya’s Capital A/c | 4,000 | ||||
| (Being IFR distributed between partners in 5:3:2) | |||||
| 3.) | Ash’s Capital A/c | Dr. | 60,000 | ||
| Divya’s Capital A/c | Dr. | 30,000 | |||
| To Samiksha’s Capital A/c | 90,000 | ||||
| (Being firm’s goodwill adjusted) | |||||
Calculation of Sacrificing Ratio:-
Old Ratio:- 5:3:2
New Ratio:-2:5:3
Samiksha = 5/10-2/10=5-2/10=3/10 (Sacrifice)
Ash = 3/10-5/10=3-5/10=2/10 (Gain)
Divya = 2/10-3/10=2-3/10=1/10 (Gain)
P,Q, and R are partners in a firm sharing profits in the ratio of 2:2:1. On March 31, 2024, their Balance Sheet showed a general reserve of Rs. 3,00,000. On that date they decide to share future profit equally. 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Case 1.) | General Reserve A/c | Dr. | 3,00,000 | ||
| To P’s Capital A/c | 1,20,000 | ||||
| To Q’s Capital A/c | 1,20,000 | ||||
| To R’s Capital A/c | 60,000 | ||||
| (Being general Reserve distributed to partners in 2:2:1) | |||||
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Case 2.) | R’s Capital A/c | Dr. | 40,000 | ||
| To P’s Capital A/c | 20,000 | ||||
| To Q’s Capital A/c | 20,000 | ||||
| (Being firm’s goodwill adjusted) | |||||
Calculation of Sacrificing Ratio:-
Old Ratio:- 2:2:1
New Ratio:-1:1:1
P = 2/5-1/3=6-5/15=1/15 (Sacrifice)
Q = 2/5-1/3=6-5/15=1/15 (Sacrifice)
R = 1/5-1/3=3-5/15=-2/10 (Gain)
Mahi and Neena are partners sharing profits and losses equally. From 1st April, 2026, they decided to share profits and losses in the ratio of 2:3. The firm’s Balance Sheet shows debit balance of Profit and Loss Account of Rs. 40,000.
Partners decide to continue with the above balance in the books of the reconstituted firm.
Old Ratio = 1:1
New Ratio = 2:3
Sacrificing Ratio = Old Ratio – New Ratio
Mahi = 1/2-2/5=5-4/10=1/10 (Sacrifice)
Neena = 1/2-3/5=5-6/10=1/10 (Gain)
Calculation of Amount of Goodwill = Rs. 40,000 × 1/10 = Rs. 4,000
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 1.4.2022. They decided to record the effect of the following, without effecting their book values:-
(i) General Reserve Rs. 24,000
(ii) Profit and Loss Account (Dr.) Rs. 12,000
Pass the necessary adjusting entry.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2022 | |||||
| Mar. 31 | Z’s Capital a/c | Dr. | 3,600 | ||
| To X’s Capital A/c | 3,600 | ||||
| (Being adjustment for profit and loss account balance and advertisement suspense account on change in profit sharing ratio) | |||||
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
Rambha and Urvashi were partners in a fimr sharing profits and losses in the ratio of 13:12. From 1st April, 2024, they decide the share future profit and losses in the ratio of 12:13.
On this date, their balance sheet showed a debit balance of Rs. 2,50,000 in Advertising Suspense Accounts and a balance of Rs. 5,00,000 in contingency Reserve.
Partners decided to write off the balance of the Advertising Suspense Account but decided not to distribute Contingency Reserve.
Pass necessary journal entries for the above transactions on the reconstitution of the firm. Show your working clearly.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2023 | |||||
| April 1 | Rambha’s Capital A/c | Dr. | 1,30,000 | ||
| Urvashi’s Capital A/c | Dr. | 1,20,000 | |||
| To Advertising Suspense A/c | 2,50,000 | ||||
| (Being advertising suspense balance written off in old ratio) | |||||
| Urvashi’s Capital A/c | Dr. | 20,000 | |||
| To Rambha’s Capital A/c | 20,000 | ||||
| (Being adjustment of contingency reserve) | |||||
Calculation of Sacrificing Ratio:-
Old Ratio = 13:12
New Ratio = 12:13
Rambha = 13/25-12/25=13-12/25=1/25 (Sacrifice)
Urvashi = 12/25-13/25=12-13/25=1/25 (Gain)
Tanvi, Rani and Divya are sharing profits and losses in an agreed ratio. They decide to share profits and losses in the ratio of 5:2:3 with effect from 1st April, 2026. They also decide to record the effect of the following without affecting their book values by passing a single adjustment journal entry:
| (a) General Reserve | Rs. 2,30,000 |
|---|---|
| (b) Profit and Loss A/c (Dr.) | Rs. 1,20,000 |
| (c) Advertisement Suspense A/c | Rs. 50,000 |
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2026 | |||||
| April 1 | Tanvi’s Capital A/c | Dr. | 60,000 | ||
| To Divya’s Capital A/c | 60,000 | ||||
| (Adjustment made for general reserve, profit and loss a/c advertisement suspense a/c due to change in profit sharing ratio) | |||||
Calculate each partner’s Gain or sacrifice due to change in profit sharing ratio and their old profit sharing ratio.
Total Adjusted Amount = General Reserve – Profit and Loss A/c (Dr.) – Advertisement Suspense A/c
Total Adjusted Amount = Rs. 2,30,000 – Rs. 1,20,000 – Rs. 50,000
Total Adjusted Amount = Rs. 60,000
Here,
Tanvi is Debited so, she is the gaining Partner and Divya is Credited so, she is the Sacrificing Partner.
Adjustment Amount = Net Effect × Share Changes
Rs. 60,000 = Rs. 60,000 × Share Changes
Share Changes = 60,000/60,000
Share Changes = 1
Hence, the sacrificing and gaining ratio of the partners is
Tanvi’s Gain = 1/10
Divya’s Sacrifice = 1/10
Calculation of Old Profit Sharing Ratio:-
Tanvi’s Gaining Ratio = New Ratio – Old Ratio
1/10=5/10- Old Ratio
Tanvi’s Old Ratio = 5/10-1/10
Tanvi’s Old Ratio = (5-1)/10
Tanvi’s Old Ratio = 4/10
Rani’s Old Ratio = 2/10
Divya’s Old Ratio = 3/10+1/10
Divya’s Old Ratio = 3+1/10
Divya’s Old Ratio = 4/10
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Mar. 31 | C’s Capital A/c | Dr. | 7,000 | ||
| D’s Capital A/c | Dr. | 28,000 | |||
| To A’s Capital A/c | 7,000 | ||||
| To B’s Capital A/c | 28,000 | ||||
| (Being goodwill and reserve adjusted and amount distributed in profit sharing ratio) | |||||
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)
Arun and Varun were in partnership sharing profits in the ratio of 2 : 3. With effect from 1st May 2025 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.
[Ans. Debit Varun and Credit Arun by Rs. 30,000.]
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| 2025 | |||||
| Mar. 31 | Varun’s Capital A/c | Dr. | 30,000 | ||
| To Arun’s Capital A/c | 30,000 | ||||
| (Being goodwill and reserve adjusted and amount distributed in profit sharing ratio) | |||||
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
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, 2026 is as under:
| Liabilities | Rs. | Assets | Rs. |
|---|---|---|---|
| Sundry Creditors | 2,00,000 | Premises | 3,00,000 |
| General Reserve | 1,20,000 | Machinery | 1,80,000 |
| Capitals : A 3,00,000 B 1,50,000 C 1,00,000 | 5,50,000 | Stock Debtors Bank | 1,20,000 2,50,000 20,000 |
| 8,70,000 | 8,70,000 |
From 1st April, 2026, 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.
Revaluation Account
| Particulars | Amount | Particulars | Amount | |
|---|---|---|---|---|
| To Provision for Doubtful Debts A/c | 10,000 | By Premise A/c | 30,000 | |
| To Machinery A/c | 9,000 | By Stock A/c | 10,000 | |
| To Profit on Revaluation a/c | By Sundry Creditors A/c | 15,000 | ||
| A’s Capital | 18,000 | |||
| B’s Capital | 12,000 | |||
| C’s Capital | 6,000 | 36,000 | ||
| 55,000 | 55,000 | |||
Partners Capital Account
| Particulars | A | B | C | Particulars | A | B | C |
|---|---|---|---|---|---|---|---|
| To A’s Capital A/c | 4,800 | By Balance b/d | 3,00,000 | 1,50,000 | 1,00,000 | ||
| To B’s Capital A/c | 1,600 | By General Res. A/c | 60,000 | 40,000 | 20,000 | ||
| To Balance c/d | 3,82,800 | 2,03,600 | 1,19,600 | By Revaluation A/c | 18,000 | 12,000 | 60,000 |
| By C’s Capital A/c | 4,800 | 1,600 | |||||
| 3,82,800 | 2,03,600 | 1,26,000 | 3,82,800 | 2,03,600 | 1,26,000 |
Balance Sheet
| Liabilities | Amount | Assets | Amount | ||
|---|---|---|---|---|---|
| Sundry Creditor | 1,85,000 | Premises | 3,30,000 | ||
| Capital | Machinery | 1,71,000 | |||
| A | 3,82,800 | Stock | 1,30,000 | ||
| B | 2,03,600 | Debtors | 2,50,000 | ||
| C | 1,19,600 | 7,06,000 | Less: Provision for Debt. | 10,000 | 2,40,000 |
| Bank | 20,000 | ||||
| 8,91,000 | 8,91,000 | ||||
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
P, Q and R were partners sharing profits in the ratio of 1:3:2. Following was their Balance Sheet as at 31st March, 2026:
| Liabilities | Rs. | Assets | Rs. |
|---|---|---|---|
| Sundry Creditors | 2,80,000 | Land and Building | 5,00,000 |
| Outstanding Expenses Workmen Compensation Reserve | 15,000 60,000 | Investments (Market Value Rs.1,10,000) | 1,25,000 |
| Investment Fluctuation Reserve | 45,000 | Stock | 2,20,000 |
| Capital Accounts: P 2,00,000 Q 5,00,000 R 3,00,000 | 10,00,000 | Sundry Debtors Bank Balance Advertisement Suspense | 3,20,000 1,60,000 75,000 |
| 14,00,000 | 14,00,000 |
On 1st April, 2026 they decided to share future profits in the ratio of 4:6:5. It was agreed that:
Claim for Workmen Compensation has been estimated at Rs. 1,00,000
A motorcycle valued at Rs. 30,000 was unrecorded and is now to be now to be recorded in the books.
Outstanding expenses were not payable anymore.
Value of stock be increased to Rs. 2,90,000.
A provision for doubtful debts be created @ 5% on Sundry Debtors
Goodwill is valued at Rs. 1,00,000.
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| P’s Capital A/c | Dr. | 12,500 | |||
| Q’s Capital A/c | Dr. | 37,500 | |||
| R’s Capital A/c | Dr. | 25,000 | |||
| To Advertisement Suspense A/c | 75,000 | ||||
| (Being accumulated loss transfer to capital account in old profit sharing ratio) | |||||
| Investment Fluctuation Reserve A/c | Dr. | 45,000 | |||
| To Investment A/c | 15,000 | ||||
| To P’s Capital A/c | 5,000 | ||||
| To Q’s Capital A/c | 15,000 | ||||
| To R’s Capital A/c | 10,000 | ||||
| (Being loss on investment and excess of reserve credited to capital account) | |||||
| Workmen Compensation Reserve A/c | Dr. | 60,000 | |||
| Revaluation A/c | Dr. | 40,000 | |||
| To Pro. For Workmen Compensation Claim a/c | 1,00,000 | ||||
| (Being provision for workmen compensation created) | |||||
| Motor Cycle A/c | Dr. | 30,000 | |||
| Outstanding Expenses A/c | Dr. | 15,000 | |||
| Stock A/c | Dr. | 70,000 | |||
| To Revaluation A/c | |||||
| (Being adjustment of assets and liabilities recorded in revaluation account) | |||||
| Revaluation A/c | Dr. | 16,000 | |||
| To Pro. For Doubtful Debts A/c | 16,000 | ||||
| (Being provision made for doubtful debts) | |||||
| Revaluation A/c | Dr. | 20,000 | |||
| To Bank A/c | 20,000 | ||||
| (Being payment of expenses of revaluation) | |||||
| Revaluation A/c | Dr. | 39,000 | |||
| To P’s Capital A/c | 6,500 | ||||
| To Q’s Capital A/c | 19,500 | ||||
| To R’s Capital A/c | 13,000 | ||||
| (Being revaluation profit distributed between partners) | |||||
| P’s Capital A/c | Dr. | 10,000 | |||
| To Q’s Capital A/c | 10,000 | ||||
| (Being goodwill change in profit sharing ratio) | |||||
Revaluation Account
| Particulars | Amount | Particulars | Amount | |
|---|---|---|---|---|
| To Provision for workmen com. Claim A/c | 40,000 | By Motor Cycle A/c | 30,000 | |
| To Provision for Doubtful Debts A/c | 16,000 | By Outstanding Exp. A/c | 15,000 | |
| To Bank A/c | 20,000 | By Stock A/c | 70,000 | |
| To Profit on Revaluation | ||||
| P’s Capital | 6,500 | |||
| Q’s Capital | 19,500 | |||
| R’s Capital | 13,000 | 39,000 | ||
| 1,15,000 | 1,15,000 | |||
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
A, B and C are partners sharing profits and losses in the ratio of 2 : 2:1 From 1st April, 2023 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 :
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%.
Furniture (book value of Rs. 50,000) be reduced to Rs. 30,000.
Computers (book value of Rs. 40,000) be reduced by Rs. 10,000.
Claim on account of Workmen's Compensation amounted to Rs. 50,000.
Investments (book value of Rs. 30,000) were revalue at Rs. 25,000.
Pass necessary journal entries for the above.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Profit and Loss A/c | Dr. | 20,000 | |||
| To A’s Capital A/c | 8,000 | ||||
| To B’s Capital A/c | 8,000 | ||||
| To C’s Capital A/c | 4,000 | ||||
| (Being profit distributed in old ratio) | |||||
| A’s Capital A/c | Dr. | 6,000 | |||
| B’s Capital A/c | Dr. | 6,000 | |||
| C’s Capital A/c | Dr. | 3,000 | |||
| To Advertisement Suspense A/c | 15,000 | ||||
| (Being loss transfer to partners’ capital account) | |||||
| Workmen Comp. Reserve A/c | Dr. | 60,000 | |||
| To Provision Workmen Comp. Reserve A/c | 50,000 | ||||
| To P’s Capital A/c | 4,000 | ||||
| To Q’s Capital A/c | 4,000 | ||||
| To R’s Capital A/c | 2,000 | ||||
| (Being excess of workmen compensation reserve credited to capital account) | |||||
| C’s Capital A/c | Dr. | 4,000 | |||
| To A’s Capital A/c | 2,000 | ||||
| To B’s Capital A/c | 2,000 | ||||
| (Being goodwill adjusted on change in profit sharing ratio) | |||||
| Revaluation A/c | Dr. | 35,000 | |||
| To Furniture A/c | 20,000 | ||||
| To Office Equipment A/c | 10,000 | ||||
| To Investments A/c | 5,000 | ||||
| (Being value of assets decrease) | |||||
| A’s Capital A/c | Dr. | 14,000 | |||
| B’s Capital A/c | Dr. | 14,000 | |||
| C’s Capital A/c | Dr. | 7,000 | |||
| To Revaluation A/c | 35,000 | ||||
| (Being loss on revaluation transferred to partners’ capital account in old ratio) | |||||
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)
Asha, Rina and Chahat were partners in a firm sharing profit s and losses in the ratio of 2:2:1. Their Balance Sheet as at 31st March, 2019 was as follows:
| Liabilities | Rs. | Assets | Rs. | ||
|---|---|---|---|---|---|
| Creditors | 12,00,000 | Plant and Machinery | 14,80,000 | ||
| General Reserve | 2,00,000 | Stock | 2,20,000 | ||
| Capitals: | Sundry Debtors | 2,60,000 | |||
| Asha | 3,00,000 | Less: Pro. For Doubtful Debts | 20,000 | 2,40,000 | |
| Rina | 2,00,000 | Bank | 60,000 | ||
| Chahat | 1,00,000 | ||||
| 20,00,000 | 20,00,000 | ||||
Asha, Rina and Chahat decided to share future profits equally with effect from 1st 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| General Reserve A/c | Dr. | 2,00,000 | |||
| To Asha’s Capital A/c | 80,000 | ||||
| To Rina’s Capital A/c | 80,000 | ||||
| To Chahat’s Capital A/c | 40,000 | ||||
| (Being GR distributed in old ratio) | |||||
| Revaluation A/c | Dr. | 40,000 | |||
| To Bad Debts A/c | 40,000 | ||||
| (Being amount of bad debts recorded) | |||||
| Provision for Doubtful Debts A/c | Dr. | 9,000 | |||
| To Revaluation A/c | 9,000 | ||||
| (Being provision for Doubtful debts decreased) | |||||
| Asha’s Capital A/c | Dr. | 12,400 | |||
| Rina’s Capital A/c | Dr. | 12,400 | |||
| Chahat’ Capital A/c | Dr. | 6,200 | |||
| To Revaluation A/c | 31,000 | ||||
| (Being Loss on revaluation debited to partners) | |||||
| Chahat’s Capital A/c | Dr. | 20,000 | |||
| To Asha’s Capital A/c | 10,000 | ||||
| To Rina’s Capital A/c | 10,000 | ||||
| (Being firms goodwill adjusted) | |||||
Revaluation Account
| Particulars | Amount | Particulars | Amount | ||
|---|---|---|---|---|---|
| To Bad Debts A/c | 40,000 | By Provision for Doubtful Debts A/c | 9,000 | ||
| By loss on Revolution A/c | |||||
| Asha | 12,400 | ||||
| Rina | 12,400 | ||||
| Chahat | 6,200 | 3,1000 | |||
| 40,000 | 40,000 | ||||
Calculation of Goodwill:-
Asha’s Share = Rs. 1,50,000 × 1/15 = 10,000 (Credit)
Rina’s Share = Rs. 1,50,000 × 1/15 = 10,000 (Credit)
Chahat’s Share = Rs. 1,50,000 × 1/15 = 10,000 (Debit)
X and Y are partners sharing profits and losses in the ratio of 4: 3. Their Balance Sheet as at 31 st March, 2026 stood as follows:
| Liabilities | Rs. | Assets | Rs. |
|---|---|---|---|
| Sundry Creditors | 28,000 | Cash | 20,000 |
| Reserve | 42,000 | Sundry Debtors | 1,20,000 |
| Capital Accounts: X 2,40,000 Y 1,20,000 | 3,60,000 | Stock Fixed Assets | 1,40,000 1,50,000 |
| 4,30,000 | 4,30,000 |
They decided that with effect from 1st April, 2026, they will share profits and losses in the ratio of 2:1. For this purpose they decided that :
Fixed assets are to be depreciated by 10%.
A provision of 6% be made on debtors for doubtful debts.
Stock be valued at Rs. 1,90.000.
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Revaluation A/c | Dr. | 22,200 | |||
| To Fixed Assets A/c | 15,000 | ||||
| To Provision for Doubtful Debts A/c | 7,200 | ||||
| (Being value of fixed assets decreased and provision for doubtful debts made) | |||||
| Stock A/c | Dr. | 50,000 | |||
| Sundry Creditors A/c | Dr. | 3,700 | |||
| To Revaluation A/c | 53,700 | ||||
| (Being value of stock is increased and creditors are decreased) | |||||
| Revaluation A/c | Dr. | 31,500 | |||
| To X’s Capital A/c | 18,000 | ||||
| To Y’s Capital A/c | 13,500 | ||||
| (Being revaluation profit distributed between partners) | |||||
| X’s Capital A/c | Dr. | 4,000 | |||
| To Y’s Capital A/c | 4,000 | ||||
| (Being reserves are adjusted on change in profit sharing ratio ) | |||||
Revaluation Account
| Particulars | Amount | Particulars | Amount | |
|---|---|---|---|---|
| To Fixed Assets A/c | 15,000 | By Stock A/c | 50,000 | |
| To Provision for Doubtful Debts A/c | 7,200 | By Sundry Creditors A/c | 3,700 | |
| To Profit on Revaluation | ||||
| X’s Capital | 18,000 | |||
| Y’s Capital | 13,500 | 31,500 | ||
| 53,700 | 53,700 | |||
Partner’s Capital Account
| Particulars | X | Y | Particulars | X | Y |
|---|---|---|---|---|---|
| To Y’s Capital A/c | 4,000 | - | By Balance b/d | 2,40,000 | 1,20,000 |
| To Balance c/d | 2,54,000 | 1,37,500 | By Revaluation A/c | 18,000 | 13,500 |
| By X’s Capital A/c | - | 4,000 | |||
| 2,58,000 | 1,37,500 | 2,58,000 | 1,37,500 |
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)
P, Q and R are in partnership sharing profits and losses in the ratio of 5:4:3. On 31st March 2026, 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: P 4,00,000 Q 3,00,000 R 2,00,000 | 9,00,000 | Furniture Plant & Machinery | 60,000 4,20,000 |
| 10,30,000 | 10,30,000 |
It was decided that with effect from 1st April 2026, the profit sharing ratio will be 4:3:2. For this purpose the following revaluations were made :
Furniture be taken at 80% of its value.
Stock be appreciated by 20%.
Plant & Machinery be valued at Rs. 4,00,000.
Create provision for doubtful debts for Rs. 10,000 on debtors
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| P’s Capital A/c | Dr. | 2,500 | |||
| To R’s Capital A/c | 2,500 | ||||
| (Being revaluation adjustment of assets and liabilities and for reserves on change in profit sharing ratio) | |||||
Balance Sheet
| Liabilities | Amount | Assets | Amount | ||
|---|---|---|---|---|---|
| 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 | Furniture | 60,000 | |||
| P | 3,97,500 | Plant & Machinery | 4,20,000 | ||
| Q | 3,00,000 | ||||
| R | 2,02,500 | 9,00,000 | |||
| 10,30,000 | 10,30,000 | ||||
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)
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To FixedAssets A/c | 22,000 | By Stock A/c | 36,000 |
| To Provision for Doubtful Debts A/c | 2,000 | By Sundry Creditors A/c | 9,000 |
| To Profit on Revaluation | 21,000 | ||
| 45,000 | 45,000 |
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
L, M and N are partners sharing profits and losses in equal proportion. On 31st March 2026, 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 2026, 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 2023 20,000 (Loss)
Year ending 31st March 2024 48,000 (Profit)
Year ending 31st March 2025 60,000 (Profit)
Year ending 31st March 2026 80,000 (Profit)
They further agreed that:
Provision for doubtful debts be increased by Rs. 2,000.
Stock be appreciated by 20% and fixed assets be depreciated by 10%.
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| L’s Capital A/c | Dr. | 35,000 | |||
| To M’s Capital A/c | 7,000 | ||||
| To N’s Capital A/c | 28,000 | ||||
| (Being revaluation adjustment of assets and liabilities and for reserves on change in profit sharing ratio) | |||||
Balance Sheet
| Liabilities | Amount | Assets | Amount | ||
|---|---|---|---|---|---|
| Creditors | 58,000 | Cash | 8,000 | ||
| Reserve and Surplus | 42,000 | Stock | 1,80,000 | ||
| Capital | Fixed Assets | 2,20,000 | |||
| L | 1,65,000 | Debtors | 75,000 | ||
| M | 1,07,000 | Less: Pro. For doubtful debts | 3,000 | 72,000 | |
| N | 1,08,000 | 3,80,000 | |||
| 4,80,000 | 4,80,000 | ||||
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 = 4/21 (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
Amit, Archit and Akshat are partners in a firm in the ratio of 3:2:1. On 1st April, 2026 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 being 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Akshat’s Capital A/c | Dr. | 6,000 | |||
| To Amit’s Capital A/c | 4,500 | ||||
| To Archit’s Capital A/c | 1,500 | ||||
| (Being general reserve and goodwill on change in profit sharing ratio) | |||||
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
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.
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
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
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.
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
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 4,00,000 – Rs. 90,000
Capital Employed = Rs. 3,10,000
Rishi and Suman were partners in a firm. Their capitals were: Rishi Rs. 1,20,000 and Suman Rs. 80,000. The normal rate of return in similar business is 12%.
The profits of the last four years were:
| Year | Rs. |
|---|---|
| 2019-20 | 33,000 |
| 2020-21 | 31,000 |
| 2021-22 | 25,000 |
| 2022-23 | 34,000 |
Calculate goodwill of the firm based on:
(i) Three years’ purchase of the last three years’ average profits.
(ii) Capitalisation of last 3 years’ super profit.
Capital Employed = Rishi’s Capital + Suman’s Capital
Normal Rate of Return = 12%
Average Profit of Last 3 years = Profi ts of last 3 years/3
Average Profit of Last 3 years = 31,000+25,000+34,000/3
Average Profit of Last 3 years = 90,000/3
Average Profit of Last 3 years = Rs. 30,000
Capitalised Value of Average Profit = Average Profit × 100/NRR
Capitalised Value of Average Profit = Rs. 30,000 × 100/12
Capitalised Value of Average Profit = Rs. 2,50,000
Normal Profit = Capital Employed × NRR/100
Normal Profit = Rs. 2,00,000 × 12/100
Normal Profit = Rs. 24,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 30,000– Rs. 24,000
Super Profit = Rs. 6,000
Goodwill = Super Profit × 100/NRR
Goodwill = Rs. 6,000 × 100/12
Goodwill = Rs. 50,000
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 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.
Goodwill = Super Profit × Number of year purchases
75,000 = Super Profit × 3
Super Profit = 75,000/3
Super Profit = Rs. 25,000
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
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 balance 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 1/4th share in the profit 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 firm by capitalization of average profit method. The normal rate of return in the business is 10%.
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. 5,00,000 ×100/10
Capitalised Value of Average Profit = Rs. 50,00,000
Goodwill = Capitalised Value of Average Profit – Net Assets
Goodwill = Rs. 50,00,000 – Rs. 20,00,000
Goodwill = Rs. 30,00,000
Calculation of Net Assets:-
Total Capital = Partners Capital + Partners Current + General Reserve
Total Capital = Rs. 6,00,000 + Rs. 4,00,000 + Rs. 4,00,000 + Rs. 5,00,000 + 1,00,000
Total Capital = Rs. 20,00,000
A partnership firm earned net profits during the last three years as follows:
Years Net Profit
2023-2024 1,90,000
2024-2025 2,20,000
2025-2026 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.
(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
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?
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
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 2021 Rs. 50,000; Loss 2022 Rs. 10,000; Profit 2023 Rs.1,64,000 and Profit 2024 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:
Three year's purchase of average profits.
Three year's purchase of super profits.
Capitalisation of average profits, and
Capitalisation of super profits.
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
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Z’s Capital A/c | Dr. | 30,000 | |||
| To X’s Capital A/c | 20,000 | ||||
| To Y’s Capital A/c | 10,000 | ||||
| (Being goodwill adjusted on change in profit sharing ratio) | |||||
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
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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Dinesh’s Capital A/c | Dr. | 30,000 | |||
| To Charu’s Capital A/c | 30,000 | ||||
| (Being goodwill adjusted on change in profit sharing ratio) | |||||
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
P, Q and R are partners sharing profits and losses in the ratio of 5: 3: 2 From 1st April, 2024, 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: 2020: Rs. 60,000, 2021 : Rs. 1,50,000, 2022: Rs.1,70,000, 2023: Rs. 1,90,000
Loss : 2024: Rs. 70,000.
Give the necessary journal entry to record the above change.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Q’s Capital A/c | Dr. | 10,000 | |||
| R’s Capital A/c | Dr. | 40,000 | |||
| To P’s Capital A/c | 50,000 | ||||
| (Being goodwill adjusted on change in profit sharing ratio) | |||||
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
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 2021: Rs. 75,000; 2022: Rs. 60,000; 2023 Rs. 80,000 and 2024 Rs. 1,30,000. Give the necessary journal entry.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| B’s Capital A/c | Dr. | 18,000 | |||
| To A’s Capital A/c | 18,000 | ||||
| (Being goodwill adjusted on change in profit sharing ratio) | |||||
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
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, 2026, 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.
2021-22 40,000
2022-23 10,000 (Loss)
2023-24 80,000 (Loss)
2024-25 1,20,000
2025-26 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| A’s Capital A/c | Dr. | 25,000 | |||
| To B’s Capital A/c | 25,000 | ||||
| (Being goodwill adjusted on change in profit sharing ratio) | |||||
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
X, Y and Z are partners sharing profits and losses in the ratio of 5: 3 : 2. Their position as at 31st March 2026 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 2026, 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| Y’s Capital A/c | Dr. | 8,100 | |||
| To X’s Capital A/c | 4,500 | ||||
| To Z’s Capital A/c | 3,600 | ||||
| (Being general reserve and goodwill on change in profit sharing ratio) | |||||
Balance Sheet
| Liabilities | Amount | Assets | Amount | ||
|---|---|---|---|---|---|
| Sundry Creditors | 44,000 | Cash in Hand | 8,000 | ||
| Outstanding Expenses | 10,000 | Cash at Bank | 22,000 | ||
| Capital | Stock | 2,80,000 | |||
| X | 2,84,000 | Machinery | 1,54,000 | ||
| Y | 2,71,900 | Building | 2,00,000 | ||
| Z | 1,03,600 | 6,60,000 | Debtors | 56,000 | |
| Less: Provision for Debts | 6,000 | 50,000 | |||
| 7,14,000 | 7,14,000 | ||||
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)
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Machinery | 54,000 | By Provision for Doubtful Debts | 2,000 |
| By Stock | 28,000 | ||
| By Creditors | 3,000 | ||
| By Loss on Revaluation | 21,000 | ||
| 54,000 | 54,000 |
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
The following is the balance sheet of a firm as at 31st March, 2026:
| 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 |
On 1st April, 2026, the assets and liabilities were revalue 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, 2026 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| C’s Capital A/c | Dr. | 10,800 | |||
| D’s Capital A/c | Dr. | 5,400 | |||
| To A’s Capital A/c | 5,400 | ||||
| To B’s Capital A/c | 10,800 | ||||
| (Being general reserve and goodwill on change in profit sharing ratio) | |||||
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)
Revaluation Account
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To Plant and Machinery | 1,80,000 | By Building | 1,50,000 |
| To Stock | 40,000 | ||
| To Creditors | 4,000 | ||
| To Provision for Doubtful Debts | 12,000 | By Loss on Revaluation | 86,000 |
| 2,36,000 | 2,36,000 |
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
Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses in the ratio of 3:3:2. From 1st April, 2018 they decide 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.
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |
|---|---|---|---|---|---|
| (i) | General Reserve A/c | Dr. | 1,60,000 | ||
| To Dinesh’s Capital A/c | 60,000 | ||||
| To Ramesh’s Capital A/c | 60,000 | ||||
| To Suresh’s Capital A/c | 40,000 | ||||
| (Being General Reserve distributed to partners) | |||||
| (ii) | Revaluation A/c | Dr. | 22,000 | ||
| To Stock A/c | 22,000 | ||||
| (Being value of stock deceases) | |||||
| (iii) | Fixed Assets A/c | Dr. | 1,02,000 | ||
| To Revaluation A/c | 1,02,000 | ||||
| (Being value of fixed assets increased) | |||||
| (iv) | Revaluation A/c | Dr. | 80,000 | ||
| To Dinesh’s Capital A/c | 30,000 | ||||
| To Ramesh’s Capital A/c | 30,000 | ||||
| To Suresh’s Capital A/c | 20,000 | ||||
| (Being Profit on Revaluation distributed to partners ) | |||||
| (v) | Suresh’s Capital A/c | Dr. | 30,000 | ||
| To Dinesh’s Capital A/c | 15,000 | ||||
| To Ramesh’s Capital A/c | 15,000 | ||||
| (Being amount of goodwill adjusted) | |||||
Revaluation Account
| Particulars | Amount | Particulars | Amount | |
|---|---|---|---|---|
| To Stock A/c | 22,000 | By Fixed Assets A/c | 1,02,000 | |
| To Revaluation A/c | ||||
| Dinesh | 30,000 | |||
| Ramesh | 30,000 | |||
| Suresh | 20,000 | 80,000 | ||
| 1,02,000 | 1,02,000 | |||
Calculation of Partner’s Goodwill:-
Goodwill of the Firm = Rs. 3,60,000
Dinesh = Rs. 3,60,000 × 1/24 = Rs. 15,000 (Credit)
Ramesh = Rs. 3,60,000 × 1/24 = Rs. 15,000 (Credit)
Suresh = Rs. 3,60,000 × 1/24 = Rs. 30,000 (Debit)
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.
| Date | Particulars | L.F. | Debit Amount | Credit Amount | |
|---|---|---|---|---|---|
| Profit & Loss A/c | Dr. | 75,000 | |||
| To Hari’s Capital A/c | 37,500 | ||||
| To Kunal’s Capital A/c | 22,500 | ||||
| To Uma’s Capital A/c | 15,000 | ||||
| (Being profit transfer to partners’ capital account in old ratio) | |||||
| Kunal’s Capital A/c | Dr. | 60,000 | |||
| Uma’s Capital A/c | Dr. | 30,000 | |||
| To Hari’s Capital A/c | 90,000 | ||||
| (Being adjustment of goodwill on change in profit sharing ratio) | |||||
| Investment Fluctuation Fund A/c | Dr. | 15,000 | |||
| To Investments A/c | 15,000 | ||||
| (Being Investments brought down to their market value) | |||||
| Revaluation A/c | Dr. | 5,000 | |||
| To Stock A/c | 5,000 | ||||
| (Being value of stock decreased) | |||||
| Hari’s Capital A/c | Dr. | 2,500 | |||
| Kunal’s Capital A/c | Dr. | 1,500 | |||
| Uma’s Capital A/c | Dr. | 1,000 | |||
| To Revaluation A/c | 5,000 | ||||
| (Being loss on revaluation transfer to partners capital account) | |||||
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 = 3/10 (Sacrifice)
Kunal = 3/10-5/10 = (3 – 5)/10 = 2/10 (Gain)
Uma = 2/10-3/10 = (2 – 3)/10 = 1/10 (Gain)
Doremon, Shinchan and Nobita are partners sharing profits and losses in the ratio of 3:2:1. With effect from 1st April, 2022 they agree to share profits equally. For this purpose, goodwill is to be valued at two years’ purchases of the average profit of last four years which were as follows:
| Year ending on 31st March, 2019 | Rs. 50,000 (Profit) |
|---|---|
| Year ending on 31st March, 2020 | Rs. 1,20,000 (Profit) |
| Year ending on 31st March, 2021 | Rs. 1,80,000 (Profit) |
| Year ending on 31st March, 2022 | Rs. 70,000 (Loss) |
On 1st April, 2021 a Motor Bike costing Rs. 50,000 was purchased and debited to travelling expenses account, on which depreciation is to be charged @ 20% p.a. by Straight Line Method. The firm also paid an annual insurance premium of Rs. 20,000 which has already been charged to Profit and Loss Account for all the years.
Journalise the transaction along with the working notes.
| Date | Particulars | L.F. | Debit Amount | Credit Amount | |
|---|---|---|---|---|---|
| Nobita’s Capital A/c | Dr. | 26,667 | |||
| To Doremon’s Capital A/c | 26,667 | ||||
| (Being goodwill adjusted) | |||||
(i) Calculation of Gaining and Sacrificing Ratio:-
Doremon’s = 3/6-2/6=1/6 (Sacrificing)
Shinchan’s = 2/6-2/6=0 (No Gain /No Sacrifice)
Nobita’s = 1/6-2/6=-1/6 (Gain)
(ii) Calculation of Goodwill:-
There is an adjustment in 31st March, 2022 = (Rs. 70,000) + Rs. 50,000 – (Rs. 10,000) = (Rs. 30,000)
Average Profit = Total Normal Profit/Number of Year
Average Profit = 3,20,000/4
Average Profit = Rs. 80,000
Goodwill = Average Profit × Number of Year Purchases
Goodwill = Rs. 80,000 × 2
Goodwill = Rs. 1,60,000
✗ Common Mistakes Students Make
❓ Frequently Asked Questions
What is the difference between sacrificing ratio and gaining ratio?
Sacrificing ratio is the share given up by a partner whose new share is lower than the old share. Gaining ratio is the extra share received by a partner whose new share is higher. Both = Old Ratio − New Ratio; positive is a sacrifice, negative is a gain.
Why is goodwill valued when only the profit-sharing ratio changes?
Because gaining partners now get a larger share of future profits at the expense of sacrificing partners, so they must compensate them for the value of the firm's reputation and earning capacity built up jointly.
Which goodwill valuation method should I use in the exam?
Use whichever method the question specifies. If only past years' profits are given, use Average or Weighted Average Profit. If capital employed and normal rate of return are given, use Super Profit or Capitalisation.
Do reserves and accumulated losses affect the ratio-change adjustment?
Yes — General Reserve, Workmen Compensation Reserve, Investment Fluctuation Reserve, and accumulated profit/loss must be distributed in the OLD ratio before the new ratio applies.
Is this DK Goel Solutions Chapter 2 useful for CBSE 2026-27 board exams?
Yes, based on the latest DK Goel Double Entry Book Keeping textbook (2026-27 edition) and the CBSE Accountancy syllabus for Reconstitution of Partnership.