Question

P, Q and R were partners sharing profits in the ratio of 2 : 2 : 1. P died three months after the date of the Balance Sheet. On that date, Goodwill of the firm was valued at 90,000. According to the agreement, share of profit of a deceased partner in the year of death is to be calculated on the basis of the Average Profit of the last four years. The profits of last four years were:

Year	I	II	III	IV
Profit (Loss)	₹ 2,00,000	₹ 1,80,000	₹ 2,10,000	(₹ 1,70,000)

Pass the necessary journal entries for the treatment of Goodwill and P’s share of profit on his death.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Q’s Capital A/c ... Dr.		24,000	-
	R’s Capital A/c ... Dr.		12,000	-
	To P’s Capital A/c		-	12,000
	(Being P’s share of goodwill credited to his capital account and debited to continuing partners in their gaining ratio of 2 : 1)
2.	Profit & Loss Suspense A/c ... Dr.		10,500	-
	To P’s Capital A/c		-	10,500
	(Being P’s share of estimated profit up to the date of his death credited to his capital account)

Working Note:

Total Goodwill of the Firm: ₹ 90,000

P’s Share of Goodwill = `90,000 xx 2/5`

= ₹ 36,000

Q and R will contribute in their gaining ratio of 2 : 1.

Q’s Contribution = `36,000 xx 2/3`

= ₹ 24,000

R’s Contribution = `36,000 xx 1/3`

= ₹ 12,000

Total Profit of Past 4 Years = 2,00,000 + 1,80,000 + 2,10,000 − 1,70,000

= ₹ 4,20,000

Average Profit = `(4,20,000)/4`

= ₹ 1,05,000

P’s Share of Profit (for 3 months till death):

P’s Profit Share = `1,05,000 xx 3/12 xx 2/5`

= 10,500