Change in Profit Sharing Ratio of Partners Test - 7

Provision made for taxation will be recorded as follows:

Journal Entry: Revaluation Account Dr.

To Provision for Tax A/c

Revalution account will be debited and provision for tax account will be credited.

Goodwill is recorded in the books of accounts only when some money or money’s worth is paid for it. It means only purchased goodwill is recorded in the books and self generated goodwill is just a part of calculation, which is not shown in the balance sheet of a business firm.

Calculation of sacrifice and gain:

Anita = 3/6 – 2/6 = 1/6 Sacrifice

Asha = 2/6 – 2/6 = Gain

Amrit = 1/6 – 1/6 = No sacrifice/No gain

Balance sheet is prepared with the new values of assets and liabilities. At the time of reconstitution partners may show some assets at the same price but in most of the cases all assets and liabilities are shown at a revised value.

Adjustment for the amount of reserve:

X = 1/3 – 6/10 = 8/30 Gain

Y = 1/3 – 3/10 = 1/30 Sacrifice

Z = 1/3 – 1/10 = 7/30 Sacrifice

As per Accounting Standard 26, issued by Institute of Chartered Accountants of India, Goodwill should be recorded in the books only when some consideration in money or money's worth has been paid for it.

Asset Account will be debited and revaluation account will be credited to record the increase in the value of asset. Journal Entry: Asset A/c Dr. To Revaluation Account

True, This definition is really exists. As per Accounting Standard 26, issued by Institute of Chartered Accountants of India, Goodwill should be recorded in the books only when some consideration in money or money's worth has been paid for it.

Goodwill is an intangible asset and can be sold like other assets only when entire business is sold. It cannot be sold separately like other assets i.e. furniture, machine and motor vehicle etc.

Formula of super profit is : Average Profit – Normal Profit When normal profit is more than the average profit, it shows that there is no goodwill of the firm. In such a case do not show negative figure of goodwill or super profit. Super profit is the excess of average profit over normal profit. When super profit is positive, it shows the goodwill value of the firm

All unrecorded assets, which are realized will be recorded in the revaluation account credit side. In this question amount of Rs.3,000 will be recorded in the credit side of revaluation account through bank account. It will be added to bank account also.

There are different methods for the calculation of self generated goodwill. Capitalisation method is one of them, it is mainly used when number of years purchase not given in the question. Capitalisation method can be used for both super profit and average profit.

New value of creditors Rs.32,000 is to be shown in the new balance sheet of the firm. Creditors = 40,000 – 8,000 = 32,000 In Revaluation Account show Rs.3,000.

Follow these steps to calculate the value of goodwill:

1. Calculation of Capital Employed : 2,40,000 – 80,000 = 1,60,000

2. Normal Profit = 1,60,000 × 10/100 = 16,000

3. Super Profit = 20,000 – 16,000 = 4,000

4. Goodwill = 4,000 × 100/10 = 40,000

Due value of creditors is Rs.2,00,000 (at present) but if some amount is not payable in future from this due amount then this derease in the amount of creditors will be shown in the credit side of revaluation account.

Calculation of Gain and sacrifice:

Suman = 3/5 – 3/4 = -3/15 Gain

Poonam = 2/5 – 1/4 = 3/15 Sacrifice

Sumain’s capital account will be debited and Poonam’s capital account will be debited for adjustment.

Formula: Total Assets – outside liabilities, is used to find out the value of capital employed. Capital employed is that part of the capital which is active in the business at present. Calculation of capital employed is necessary to find out the goodwill while following super profit method.

Cash equivalents refers to those items which can be converted into cash in a very short period of time (say 3 months). In simple words, cash equivalents means those assets which are equal to the cash because they can be transfer in cash immediately, so they are treated as cash equivalents. Stock, prepaid expenses and loose tools are not cash equivalents.

As per the Accounting Standard – 26 issued by ICAI regarding intangible assets, goodwill should be recorded in the books of accounts only when some money or money’s worth is paid for it. Internally generated goodwill should not be recorded in the books.

Increase in assets will be recorded in the credit side of revaluation account and decrease in liabilities will also be recorded in the revaluation account credit side. In both cases, there will be increase in profit, hence, revaluation account will show profit.

Adjustment of amount shall be made as follows:

1.Total Capital = 20,000 + 30,000 + 50,000 = 1,00,000

2.Capitals before adjustments were : 50,000; 30,000 and 20,000 (5:3:2)

3.After adjustment = Rs.20,000, 30000,and 50000 (2:3:5)

4.C will bring amount = old capital 50,000 – New capital 20,000 = 30,000

Calculation of Goodwill:

1. Total profit = 15,000 + 20,000 + 15,000 – 10,000 = 40,000

2. Average Profit = 40,000/4 = 10,000

3. Goodwill = 10,000 × 1.5 = 15,000

When capitals of the partners are fixed all concerned items shall be recorded in their current accounts and not in capital accounts.

Internal goodwill or self generated goodwill is not required at all but it is calculated when a new partner is admitted, a partner retires, at the time of death of a partner and when there is change in the existing profit sharing ratio of the partners.

Decrease in the value of all assets will be recorded in the debit side or revaluation account which will result into a loss. This loss will be debited to all the existing partners’ capital/current accounts in their profit sharing ratio.