Anita, Asha and Bashir are partners sharing profits and losses in the ratio of 3 : 2 : 1 respectively. From 1st April 2016, they decided to change their profit sharing ratio to 2 : 1: 3. Their partnership deed provides that in the event of any change in the profit changing ratio, the goodwill of the firm should be valued at two years’ purchase of the average super profits for the past three years.
The actual profits and losses for the past three years were :
2015-16 Profit Rs 40,000
2014-15 Profit Rs 30,000
2013-14 Loss Rs 10,000
The average capital employed in the business was Rs 1,10,000; the rate of interest expected from capital invested was 10%.
You are required to:
(i) Calculate the value of goodwill at the time of change in profit sharing ratio. (Show the workings clearly with the formulae.)
(ii) Pass the Journal entry to record the change.
