Question

A, B & C were sharing profits & losses in the ratio of 3 : 2 : 1. They decided to share profits & losses equally in future. General reserve was appearing in their books at Rs 1,80,000. Goodwill was valued at Rs 1,20,000. The partners do not want to disturb the general reserve. The adjusting entry will be :

• A. A’s capital A/c Dr. Rs 1,80,000 To C’s Capital A/c Rs 1,80,000
• B. A’s capital A/c Dr. Rs 1,80,000 B’s capital A/c Rs 1,20,000 To C’s Capital A/c Rs 60,000
• C. C’s capital A/c Dr. Rs 30,000 To A’s Capital A/c Rs 30,000
• D. C’s capital A/c Dr. Rs 1,80,000 To A’s Capital A/c Rs 1,20,000 B’s capital A/c Rs 60,000

Hint:

Find net effect of gain and loss, then pass journal entries.

Answer 1

The Correct Option is C

Determining Adjusting Entry for Change in Profit Sharing Ratio
This involves calculating the net impact of the change in profit sharing ratio, considering both the undistributed reserves and the revaluation of goodwill.
Step 1: Calculate Total Effect
General Reserve Rs 1,80,000
Value of Goodwill Rs 1,20,000
Total Effect (A) Rs 3,00,000

Step 2: Calculate Net Gain/Sacrifice from both General Reserve and Goodwill
Existing ratio = 3:2:1 , New ratio is equal to 1:1:1 Hence, C is gaining from old ratio 1/6th to new ratio 1/3rd, A is sacrificing from old ratio 1/2th to new ratio 1/3rd. A is Sacrificing =(1/2)-(1/3)=(1/6), B is getting nothing C is gaining = (1/3)-(1/6)=(1/6) A Sacrificing amount =3,00,000X(1/6) Rs 50,000 C gaining amount =3,00,000X(1/6) Rs 50,000

Step 3: Passing Journal Entry
A would credit Rs 50,000 C would debit Rs 50,000 Therefore, net journal entry is A to C, by Rs 50,000