A and B shared profits in the ratio 2:3. With effect from 1st April, 2021, they agreed to share profits equally. Goodwill of the firm was valued at ₹60,000. The adjustment entry will be:
A. Dr. B's Capital A/C and Cr. A's Capital A/C by ₹6,000
B. Dr. A's Capital A/C and Cr. B's Capital A/C by ₹600
C. Dr. A's Capital A/C and Cr. B's Capital A/C by ₹6,000
D. Dr. B's Capital A/C and Cr. A's Capital A/C by ₹600
Answer (1)
In this scenario, A and B are partners in a business and initially shared profits in the ratio of 2:3. With effect from April 1, 2021, they have agreed to change the profit-sharing ratio to 1:1. There is also an adjustment involving the goodwill of the firm, which is valued at ₹60,000.
To address the change in profit-sharing ratio, we need to calculate the gain or loss for each partner due to this change and then make the necessary adjustments using the goodwill amount. Here are the steps to determine the correct adjustment entry:
Calculate the Old Ratio and New Ratio :
Old Ratio = 2:3
New Ratio = 1:1
Determine the Sacrificing or Gaining Ratio :
A's Old Share = 2/5
B's Old Share = 3/5
A's New Share = 1/2
B's New Share = 1/2
A's Gain = (1/2) - (2/5) = 1/10
B's Sacrifice = (3/5) - (1/2) = 1/10
Calculate Goodwill Adjustment :
Goodwill is to be adjusted based on the sacrificing or gaining ratio.
Goodwill of the firm is ₹60,000.
Goodwill per share = ₹60,000 × (1/10) = ₹6,000
Journal Entry for Goodwill Adjustment :
Since A gains and B sacrifices, we need to credit B's Capital Account and debit A's Capital Account by this amount.
The correct journal entry is:
Dr. A's Capital A/C ₹6,000
Cr. B's Capital A/C ₹6,000
Therefore, the correct option is (c) Dr. A's Capital A/C and Cr. B's Capital A/C by ₹6,000. This entry accounts for the change in the profit-sharing ratio due to the valuation of goodwill.
