Question

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

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

Hint:

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

Answer 1

The Correct Option is D

When the profit sharing ratio changes, goodwill is adjusted through partners' capital accounts using the sacrificing/gaining ratio. The entry is: Gaining Partner's Capital A/c Dr. To Sacrificing Partner's Capital A/c. 1. Calculate Sacrifice/(Gain) = Old Share - New Share:
Old Ratio (Preet : Saral) = 3:2 (\( \frac{3}{5} : \frac{2}{5} \))
New Ratio (Preet : Saral) = 1:1 (\( \frac{1}{2} : \frac{1}{2} \)) Preet's Change = \( \frac{3}{5} - \frac{1}{2} = \frac{6 - 5}{10} = +\frac{1}{10} \) (Sacrifice)
Saral's Change = \( \frac{2}{5} - \frac{1}{2} = \frac{4 - 5}{10} = -\frac{1}{10} \) (Gain) 2. Calculate the amount for adjustment:
Amount = Total Goodwill \( \times \) Sacrificed/Gained Share
Amount = Rs 1,00,000 \( \times \frac{1}{10} = Rs 10,000 \) 3. Pass the Journal Entry:
Gaining Partner (Saral) Dr. to Sacrificing Partner (Preet) Cr. with the calculated amount. Saral's Capital A/c Dr. 10,000
\quad To Preet's Capital A/c Cr. 10,000
This matches Option (D).