Question

Puneet, Purav and Parth were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 1. The firm closes its books on 31st March every year. As per the terms of partnership deed, on the death of any partner, the Goodwill of the firm will be calculated on the basis of 3 times the average profits of last 4 years. Puneet died on 1st July, 2021. The profits for last four years were:

Year	Profit (₹)
2017 - 18	90,000
2018 - 19	1,00,000
2019 - 20	1,30,000
2020 - 21	80,000

Puneet's share of profit up to the date of death was to be calculated on the basis of previous year's profit.

1. Calculate goodwill of the firm and Puneet's share of goodwill.
2. Calculate Puneet's share in the profits of the firm till the date of his death.
3. Pass necessary journal entries for the treatment of goodwill without opening goodwill account and for Puneet's share of profit at the time of his death.

Answer 1

(i) Average Profit = `(90,000 + 1,00,000 + 1,30,000 + 80,000)/4`

`= (₹ 4,00,000)/4`

= ₹ 1,00,000

Goodwill of the firm = Average Profit × No. of year's purchase

= ₹ 1,00,000 × 3

= ₹ 3,00,000

Puneet's share of Goodwill = `3,00,000 xx 4/8` = ₹ 1,50,000

(ii) Puneet died on 1st July, 2021

So he will be paid for profits for

(1 April, 2021 to 1^st July, 2021) = 3 Months

So, Puneet's share in profits `= ₹ 80,000 xx 4/8 xx 3/12`

= ₹ 10,000

(iii)

Journal Entries
Date	Particular	L.F.	Amount Dr. (₹)	Amount Cr. (₹)
2021
July 01	Purav's Capital A/c   ...Dr.		1,12,500	-
	Parth's Capital A/c    ...Dr.		37,500	-
	To Puneet's Capital Ne		-	1,50,000
	(Being goodwill compensated by remaining partners)
July 01	Profit & Loss Suspense A/c    ...Dr.		10,000	-
	To Puneet's Capital A/c		-	10,000
	(Being share of profit till the date of Puneet's death transferred to his capital A/c)

Working Notes:

Goodwill compensated by Purav = ₹ `1,50,000 xx 3/4` = ₹ 1,12,500

Goodwill compensated by Parth = ₹ `1,50,000 xx 1/4` = ₹ 37,500