Question

A, B and C were partners in a firm. B died on 31st August, 2021. B’s share of profit from the closure of the last accounting year till the date of death was to be calculated on the basis of the average of three completed years of profits before death. Profits for the years ending 31st March 2019, 2020 and 2021 were ₹ 40 000; ₹ 50,000 and ₹ 72,000 respectively. The firm closes its books on 31st March every year.

Calculate B’s share of profit till the date of her death and pass the necessary journal entry for the same assuming:

1. There is no change in the profit sharing ratio of A and C.
2. There is change in the profit sharing ratio of A and C and the new ratio is 7 : 5.

Answer 1

Average Profit = `(40,000+50,000+72,000)/3`

= `(1,62,000)/3`

= ₹ 54,000

5 months (i.e, from 1st April, 2020 to 31st August, 2020)

B’s share of profit = `54,000xx1/3xx5/12`

= ₹ 7,500

(i)

Journal Entries
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	Profit & Loss Suspense A/c     ...Dr.		7,500
	To B’s Capital A/c			7,500
	(Being B’s share of profit till the date of his death)

(ii)

Journal Entries
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	A’s Capital A/c     ...Dr.		5,625
	C’s Capital A/c     ...Dr.		1,875
	To B’s Capital A/c			7,500
	(Being B's share of profit debited to the remaining partners in their gaining ratio i.e, 3 : 1)

Working notes:

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

B died, 

New ratio of A & C = 7 : 5

Gaining Ratio = New share - Old share

A gains = `7/12-1/3`

= `(21-12)/36`

= `9/36`

C gains = `5/12-1/3`

= `(15-12)/36`

= `3/36`

Gaining Ratio of A & C = 9 : 3

= 3 : 1