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Retirement and Death of a Partner 4.25
Valuation of Goodwill:
` 822 225, , + ` 700 000, , + ` 250 000, , − ` 50 000, + ` 500 000, ,
Average Profit = = ` 4,44,445
5
2 years’ Average Profit = ` 4,44,445 × 2 = ` 8,88,890
Y’s Share of 2 years’ Average Profit = ` 8,88,890 × 3/8 = ` 3,33,334
Firm’s Goodwill = ` 3,33,334 – 10% of ` 3,33,334 = ` 3,00,000
Y’s Share of Goodwill = ` 3,00,000 × 3/8 = ` 1,12,500.

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)

X’s Capital A/c ...Dr. 75,000
Z’s Capital A/c ...Dr. 37,500
To Y’s Capital A/c 1,12,500
(Being Y’s share of goodwill credited to Y and debited to X and Z
in their gaining ratio)
Illustration 14.
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 Bank 90,000
Expenses Owing 2,500 Stock 70,000
Workmen Compensation Reserve 40,000 Debtors 40,000
General Reserve 27,500 Land and Building 5,00,000
Capital A/cs: Profit and Loss A/c 1,60,000
X 3,00,000 (Loss for the year ended 31st March, 2018)
Y 3,00,000
Z 1,30,000
8,60,000 8,60,000
Y died on 30th June, 2018. Partnership Deed provided for the following on death of a partner:
(i) Goodwill of the firm was to be valued at 2 years’ purchase of the average profit of
last 5 years. The profits for the past four years were ` 50,000; ` 80,000; ` 1,10,000
and ` 2,20,000 respectively.
(ii) Share of profit or loss till the date of his death was to be calculated on the basis of
the profit or loss for the year ended 31st March, 2018.
(iii) X and Z decide to record the effect of Workmen Compensation Reserve and General
Reserve without affecting their book figures.
Prepare Y’s Capital Account at the time of his death to be presented to his executors.
Solution:
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 (WN 2) 16,000 By X’s Capital A/c (Goodwill) 32,000
To Y’s Executors’ A/c 2,95,000 By Z’s Capital A/c (Goodwill) 16,000
(Balancing Figure) By X’s Capital A/c (WN 3) 18,000
By Z’s Capital A/c (WN 3) 9,000
3,75,000 3,75,000