A, B and C are partner sharing profits and losses in the ratio of 5 : 4 : 1. It was decided that with effect from 1st April, 2016 the profit sharing ratio will be 9 : 6 : 5. Goodwill is to be valued at 2 year's purchase of average of 3 year's profits. The profits of 2013-14, 2014-15 and 2015 -16 were Rs. 48,000, Rs. 42,000 and Rs. 60,000 respectively.
Pass the necessary journal entry for the treatment of goodwill.

Explanation

(a) When goodwill is adjusted Partner's Capital Accounts :
Average Profits = Rs.` (48,000 + 42,000 + 60,000)/3 = Rs. 50,000`.
Value of Goodwill at 2 year's purchase = `Rs. 50,000 xx 2 = Rs. 1,00,000`.
Old Ratio of A, B and C = ` 5 : 4 : 1`
New Ratio of A, B and C = ` 9 : 6 : 5`
Sacrifice or Gain :
`A = 5/10 - 9/20 = (10-9)/20 = 1/20` (Sacrifice)
` B = 4/10 - 6/20 = (8-6)/ 20 ` (Sacrifice)
` C = 1/10 - 5/20 = (2-5)/20 = 3/20` (Gain)
Since A has sacrificed, he will be credited by ` 1/20 ` of Rs. 1,00,000 = Rs. 5,000
Since B has sacrificed, he will be credited by ` 2/20` of Rs. 1,00,000 = Rs. 10,000
Since C has gained, he will be debited by ` 3/20` of Rs. 1,00,000 = Rs. 15,000

ALTERNATE SOLUTION: `
(b) When Goodwill is raised and written off :