Goodwill adjustment when profit sharing ratio changes

Goodwill adjustment when profit sharing ratio changes

Goodwill adjustment when profit sharing ratio changes is to be made in partner’s capital account. The purchasing or gaining partner must compensate the sacrificing partner by paying the proportionate amount of goodwill.

Example 1

A , D and K are partners sharing profits and losses in the ratio of 1 : 3 : 1 respectively.From 1st April 2002 they decided to share the profits equally.For this purpose,the goodwill of the firm was valued at Rs. 150000 .The necessary journal enry for the treatment of goodwill on change in the profit sharing ratio will be:

Explanation : –

New profit sharing ratio = 1 : 1 : 1
Sacrificing ratio = Old share – New share

A sacrifice/Gain =\cfrac{1}{5}\cfrac{1}{3}=\cfrac{3 - 5}{15}=\cfrac{-2}{15}

D sacrifice/Gain =\cfrac{3}{5}\cfrac{1}{3}=\cfrac{9 - 5}{15}=\cfrac{4}{15}

K sacrifice/Gain =\cfrac{1}{5}\cfrac{1}{3}=\cfrac{3 - 5}{15}=\cfrac{-2}{15}

Share of goodwill :

A = 150000 X\cfrac{-2}{15}= -20000 (Dr)

D = 150000 X\cfrac{4}{15}= 40000 (Cr)

K = 150000 X\cfrac{-2}{15}= -20000 (Dr)

A ‘s Capital Account Dr. 20000
K ‘s Capital Account Dr. 20000
To D ‘s Capital Account 40000

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