Question

X, Y, and Z were partners in a firm sharing profits in the ratio of 4 : 3 : 1. The firm closes its books on 31st March every year. On 1st February, 2026, Y died, and it was decided that the new profit-sharing ratio between X and Z will be equal. The Partnership Deed provided for the following on the death of a partner:
(a) His share of goodwill be calculated on the basis of half of the profits credited to his account during the previous four completed years. The firm’s profits for the last four years were:

Year (31st March)	2022	2023	2024	2025
Profit (₹)	1,50,000	1,00,000	50,000	1,00,000

(b) His share of profit in the year of his death was to be computed on the basis of the average profit of the past two years.

Pass necessary journal entries relating to goodwill and profit to be transferred to Y’s capital account.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2020
Feb 1	Z’s Capital A/c   ...Dr.		75,000	-
	To Y’s Capital A/c		-	75,000
	(Adjustment of Y’s share of Goodwill)
Feb 1	Profit and Loss Adjustment A/c   ...Dr.		23,438	-
	To Y’s Capital A/c		-	23,438
	(Adjustment of Y’s share of profit)

Working Notes:

1. Calculation of Gaining Ratio

X : Y : Z = 4 : 3 : 1 (old ratio)

X : Z = 1 : 1 (new ratio)

Gaining ratio = New ratio − Old ratio

`"X’s Gain" = 1/2 - 4/8 = (4 − 4)/8 = 0`

`"Z’s Gain" = 1/2 - 1/8 = (4 − 1)/8 = 3/8`

X : Z = 0 : 3

2. Calculation of Retiring Partner’s Share of Goodwill

Sum of Profits = 1,50,000 + 1,00,000 + 50,000 + 1,00,000

= ₹ 4,00,000

Y’s share of goodwill = `4,00,000 × 3/8 × 1/2`

= ₹ 75,000

Y’s share of goodwill will be brought by Z only.

3: Calculation of Retiring Partner’s Share of Profit

Average profit for the last two years = `(1,00,000 + 50,000)/2 = (1,50,000)/2`

= ₹ 75,000

`"Y’s share of profit" = 75,000 × 3/8 × 10/12`

= ₹ 23,438