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Death of a Partner 5.3

Solved Questions

Illustration 1.
X, Y and Z were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 31st March,
2018, their Balance Sheet was as follows:

Liabilities ` Assets `
Creditors 60,000 Cash at Bank 90,000
Bills Payable 40,000 Stock 70,000
General Reserve 30,000 Debtors 40,000
Capital A/cs: Land and Building 5,00,000
X 3,00,000 Profit and Loss A/c 1,60,000
Y 3,00,000 (Loss for the year ended 31st March, 2018)
Z 1,30,000 7,30,000
8,60,000 8,60,000

Y died on 30th June, 2018. The Partnership Deed provided for the following on the death
of a partner:
(i) Goodwill of the business was to be calculated on the basis of 2 times the average profits
of the past 5 years. The profits for the years ended 31st March, 2017, 31st March,
2016, 31st March, 2015 and 31st March, 2014 were ` 50,000; ` 80,000; ` 1,10,000 and
` 2,20,000 respectively.
(ii) Y’s share of profit or loss from 1st April, 2018 till his death was to be calculated on
the basis of the profit or loss for the year ended 31st March, 2018.

You are required to calculate the following:
(a) Goodwill of the firm and Y’s share of goodwill at the time of his death.
(b) Y’s share in the profit or loss of the firm till the date of his death.
(c) Prepare Y’s Capital Account at the time of his death to be presented to his executors.

Soltuion:
(` 50 ,000 + ` 80 ,000 + ` , 110 ,000 + ` , 220 ,000 - ` , 160 ,000 )
(a) Firm’s Goodwill = ¥ 2
= ` 1,20,000. 5
Y’s Share of Goodwill = ` 1,20,000 × 2/5 = ` 48,000, which is contributed by X and
Z in their Gaining Ratio of 2 : 1.
3 2
(b) Y’s Share in Loss = ` 1,60,000 × 12 ¥ 5 = ` 16,000.
(c)
Dr. Y’S CAPITAL ACCOUNT Cr.
Particulars ` Particulars `
To Profit and Loss A/c (` 1,60,000 × 2/5) 64,000 By Balance b/d 3,00,000
To Profit and Loss Suspense A/c 16,000 By General Reserve A/c (` 30,000 × 2/5) 12,000
To Y’s Executors’ A/c 2,80,000 By X’s Capital A/c (Goodwill) 32,000
(Balancing Figure) By Z’s Capital A/c (Goodwill) 16,000
3,60,000 3,60,000