Question

Partnership Deed of C and D, who are equal partners, has a clause that any partner may retire from the firm on the following terms by giving a six-month notice in writing:
The retiring partner shall be paid−
(a) the amount standing to the credit of his Capital Account and Current Account.
(b) his share of profit to the date of retirement, calculated on the basis of the average profit of the three preceding completed years.
(c) half the amount of the goodwill of the firm calculated at 11/2 times the average profit of the three preceding completed years.
C gave a notice on 31st March, 2017 to retire on 30th September, 2017, when the balance of his Capital Account was ₹ 6,000 and his Current Account (Dr.) ₹ 500. Profits for the three preceding completed years ended 31st March, were: 2015 − ₹ 2,800; 2016 − ₹ 2,200 and 2017 − ₹ 1,600. What amount is due to C as per the partnership agreement?

Answer 1

C’s Capital Account

Dr.					Cr.
Particulars		Amount Rs	Particulars	Amount Rs
C’s Loan A/c		7,700	Balance b/d	6,000
			C’s Current A/c	1,700
		7,700		7,700

 

C’s Current Account

Dr.					Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Balance b/d		500	Profit and Loss Suspense A/c (Share of profit) (WN 1)	550
C’s Capital A/c (balancing figure)		1,700	D’s Current A/c (Share of goodwill) (WN 2)	1,650
		2,200		2,200

Working Notes:

WN 1 Calculation of Profit (from April 01, 2017 to Sept. 30, 2017)

`"Average Profit" = "Profit of last 3 years"/3 = "2,800 + 2,200 + 1,600"/3 = "Rs" 2,200`

`"C's profit share" ("6 months") = "Average Profit" xx "C's Share" xx 6/12`

                                       = `2,200 xx 1/2 xx 6/12 = "Rs" 550`

WN 2 Calculation of Goodwill 

Goodwill = Average Profit × 1.5

= 2,200 × 1.5 = Rs 3,300

C’s Share of Goodwill = `3,300 xx 1/2 = "Rs" 1,650`