question_answer

Kanika, Sakshi and Aroha are Partners sharing profits and losses as 25%, 35% and 40%. Kanika decided to retire with the consent of other partners and sold her share to Sakshi. Goodwill was valued at two and a half years' purchase of the average profits of three years. Profits of these three years were Rs. 1,50,000, Rs. 1,70,000 and Rs. 1,60,000. Reserve fund stood in the balance sheet at Rs. 1,30,000 at the time of retirement. You are required to record necessary journal entries regarding above adjustment on Kanika's retirement. Also prepare her capital account to find out the amount due to her, when her capital balance in the balance sheet was Rs. 1,25,000 before any of the above adjustment.

Answer:

                                                                        JOURNAL

Date	Particulars		LF	Amt (Dr)	Amt (Cr)
	Sakshi's Capital A/c	Dr		1,00,000
	To Kanika's Capital A/c				1,00,000
	(Being Kanika's share of goodwill adjusted in Sakshi's capital account)
	Reserve Fund A/c	Dr		1,30,000
	To Kanika's Capital A/c \[(1,30,000\times 25/100)\]				32,500
	To Sakshi's Capital A/c \[(1,30,000\times 35/100)\]				45,500
	To Aroha's Capital A/c \[(1,30,000\times 40/100)\]				52,000
	(Being transfer of reserve fund to partners' capital accounts in their old ratio i.e. 25 : 35 : 40)

Dr                                                         Kanika's Capital Account                                                         Cr

Particulars	Amt (Rs.)	Particulars	Amt (Rs.)
To Kanika's Loan A/c	2,57,500	By Balance b/d	1,25,000
		By Sakshi's Capital A/c	1,00,000
		(Share of goodwill)
		By Reserve Fund A/c	32,500
	2,57,500		2,57,500

Working Note Calculation of Value of Goodwill and Kanika's Share of Goodwill \[\text{Average}\,\text{Profit}=\frac{\text{Total}\,\text{Profits}}{\text{Number}\,\text{of}\,\text{Years}}\] \[=\frac{1,50,000+1,70,000+1,60,000}{3}=\frac{4,80,000}{3}=Rs.\,1,60,000\] \[Goodwill=Average\text{ }Profit\times Number\text{ }of\text{ }Years'\text{ }Purchase=1,60,000\times 2.5=Rs.\,4,00,000\] Thus, Kanika's Share of Goodwill \[=4,00,000\times \frac{25}{100}=Rs.\,1,00,000\]