Question

A, B and C were partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. Their books are closed on March 31st every year.

B died on 1st August, 2023. The executors of B are entitled to:

1. His share of Capital i.e., ₹ 4,00,000 along-with his share of goodwill. The total goodwill of the firm was valued at 1.5 year's purchase of last year's profit.
2. His share of profit up to his date of death on the basis of sales till date of death. Sales for the year ended March 31, 2023 was ₹ 4,00,000 and profit for the same year was ₹ 80,000. Sales shows a growth trend of 25% and percentage of profit earning is increased by 4%.
3. Amount payable to B was transferred to his executors.

Pass necessary Journal Entries and show the workings clearly.

Answer 1

Journal
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
(i)	A’s Capital A/c      ...Dr.		32,000
	C’s Capital A/c    ...Dr.		16,000
	To B’s Capital A/c			48,000
	(Being B’s share of goodwill debited to the gaining partners in their gaining ratio of 2: 1)
(ii)	Profit & Loss Suspense A/c    ...Dr.		16,000
	To B’s Capital A/c			16,000
	(Being B’s share of profit till the date of his death transferred to his Capital A/c)
(iii)	B’s Capital A/c    ...Dr.		4,64,000
	To B’s Executor A/c			4,64,000
	(Being amount due to B transferred to his Executor’s A/c)

Working Notes:

1. Old ratio of A, B & C = 2 : 2 : 1

B died,

New ratio of A & C = 2 : 1

Gaining ratio = New ratio (i.e., 2 : 1)

2. Goodwill = Last year Profit × No. of year’s purchase

= 80,000 × 1.5

= ₹ 1,20,000

B’s share of Goodwill = `1,20,000xx2/5`

= ₹ 48,000

3. Sales for the year = `4,00,000+4,00,000xx25/100`

= 4,00,000 + 1,00,000

= ₹ 5,00,000

% of profit on the basis of sales = `(80,000)/(4,00,000)xx100`

= 20%

% of profit increased = 20 + 4 

= 24%

4 months (i.e., from 1st April 2022 to 1st August 2022)

B’s share of profit = `5,00,000xx24/100xx4/12xx2/5`

= ₹ 16,000