Death of a partner

Question 26: Karim, Saleem and Raheem were partners in a firm sharing profits and losses in the ratio of 3:4:3. The firm closes its books on 31st March every year. On 1st October, 2019, Karim died. On Karim’s death, the goodwill of the firm was valued at  `3,50,000. Karim’s share in the profits of the firm in the year of his death was to be calculated on the basis of average profits of last four years. The profits for the last four years were 2015-16-  `1,70,000; 2016-17-  `1,30,000;2017-18-  `1,90,000 and 2018-19-  `1,10,000. The total amount payable to Karim’s executors on his death was  `7,35,000. It was paid on 15th October, 2019.

Pass necessary Journal entries for the above transactions in the books of the firm. (CBSE 2020)

 

Answer:            

 

Working notes:

WN-1 Calculation of goodwill

The goodwill of the firm was valued at  ` 3,50,000

Karim’s Share of Goodwill = 3,50,000×3/10 =  ` 1,05,000

Goodwill Share of Karim is in Goodwill will be compensated by Saleem and Raheem in 4:3

Saleem = 1,05,000× 4/7 = 60,000

Raheem = 1,05,000× 3/7 = 45,000

 

WN-2 Karim’s share of Profit till the date of death

The average profits = 1,70,000+1,30,000+1,90,000 +1,10,000/4=1,50,000

Karim’s share of Profit =  ` 1,50,000×3×6/10×12=22,500

Question 27: Trisha, Anisha and Rishika were partners in a firm sharing profits and losses in the ratio of 2:2:1. Their

Balance Sheet as at 31st March, 2022 was as follows:

Trisha died on 31st July, 2022. According to the partnership deed, the executors of the deceased partner were entitled to:

(i) Balance in Partner's Capital Account.

(ii) Salary @  `15,000 per quarter.

(iii) Share of goodwill calculated on the basis of twice the average of past three year's profits.

(iv) Share of profits from the closure of the last accounting year till the date of death on the basis of last year's profit. Profit for 2019-20, 2020-21 and 2021-22 were 1,00,000, 2,00,000 and 1,50,000 respectively.

(v) Trisha withdrew? 20,000 on 1st May, 2022 for her personal use.

Showing your working clearly. Prepare Trishas Capital Account to be rendered to her executors. (CBSE 2023)

 

Answer:

Working Notes:

 

1. Salary = 15,000×4/3=20,000

 

2. Goodwill

Total profit = 1,00,000+2,00,000+1,50,000=4,50,000

Average Profit = 4,50,000/3=1,50,000

Goodwill = 1,50,000×2=3,00,000

 

Traisha’s Share of goodwill =3,00,000×2/5=1,20,000

 

80,000 will be shared by partners

Anisha = 1,20,000×2/3=80,000

Rishika = 1,20,000×1/3=40,000

 

3. Calculation of Share of Profit

Last years profit 1,50,000

 

Traisha’s Share of Profit = 1,50,000×2/5×4/12=20,000

 

Question 28:

X and Y are partners. The Partnership Deed provides inter alia:
(a) That the Accounts be balanced on 31st March every year.
(b) That the profits be divided as: X one-half, Y one-third and carried to a Reserve one-sixth.
(c) That in the event of the death of a partner, his Executors be entitled to be paid:
  (i) The Capital to his credit till the date of death.
  (ii) His proportion of profits till the date of death based on the average profits of the last three completed years.
  (iii) By way of Goodwill, his proportion of the total profits for the three preceding years.
(d)

Profits for three years were: 2021−  ` 4,200; 2022 −  ` 3,900; 2023 −  ` 4,500.

Y died on 1st August, 2022. Prepare necessary accounts.

 

Answer:

Working Notes:

WN 1
Old Ratio (X and Y) = 1/2 : 1/3 or    3:2

WN 2
Y’s share of reserve =3,000×2/5=1,200

WN 3 Calculation Y’s Share of Profit 
Average profit = total profit of past given years/number of years

Average profit =4200+3900+4500/3=12600/3=4,50

Y’s Share of Profit (from April 01,2022 to August 01, 2023 ) 4,200×2/5×4/12=560

WN 4 Calculation of Y’s Share of Goodwill 
Y’s share of Goodwill = Y’s Profit Share in last three year
Profit for last three years = 4,200 + 3,900 + 4,500 =  ` 12,600
Y’s Share of Goodwill=12,600×2/5=5040

 

Question 29: A, B were partners in a firm. A died on 31sth March, 2018 and the Balance sheet of the firm on that date was as under:

On A’s death it was found that patents were valueless, furniture was to be brought down to  ` 24,000, plant was to be reduced by  ` 10,000 and there was a liability of  ` 7,000 on account of workmen’s compensation.

Pass the necessary Journal entries for the above at the time of A’s death. (CBSE 2019)

 

Answer:

 

Question 30: Shirish, Harit and Asha were partners in a firm sharing profits in the ratio of 5:4:1. Shirish died on 30^th June, 2018. On this date, their Balance Sheet was follows:

According to the Partnership Deed, in addition to deceased partner’s capital, his executor is entitled to:

(i) Share in profits in the year of death on the basis of average of last two years’ profit. Profit for the year 2016-17 was 60,000.

(ii) Goodwill of the firm was to be valued at 2 years’ purchase of average of last two years’ profits.

Prepare Shirish’s Capital Account to be presented to his executor. (CBSE 2019)

 

Answer:

Working notes:

WN-1 Calculation of Sadhu’s share of Profit

Average Profit of last two years= 80,000+60,000/2=70,000

Shirish’s Share of Profit = 70,000×5×3/10×12 =  ` 8,750

 

WN-2 Calculation of goodwill

The average profits of the last two years were  ` 70,000

Goodwill of the Firm =  ` 70,000×2=1,40,000

Share of Shirish is in Goodwill = 1,40,000 × 5/10 = 70,000

Goodwill Share of Shirish is in Goodwill will be compensated by Harish and Asha in 4:1

Harish = 70,000 × 4/5 = 56,000

Asha = 70,000 × 1/5 = 14,000

 

WN-3 Calculation of Sadhu’s share of undistributed Profits for the year 2017-18

Shirish’s Share of Profit = 80,000×5/10 =  ` 40,000