Question

Furkan, Tanmay and Barkat were partners in a firm sharing profits in the ratio of 3 : 2 : 1. The firm closes its books on 31st March every year. Tanmay died on 31st July, 2019. His executor was entitled to:

1. His capital ₹ 8,00,000 and his share of goodwill which was valued for the firm at ₹ 96,000.
2. His share of profit as per partnership agreement, which was to be calculated on the basis of average profit of last 3 years. Average profits of the last 3 years were ₹ 78,000.
3. Tanmay's executor's were paid ₹ 95,000 by cheque at the time of his death and the balance was transferred to his executor's loan account.

Pass the necessary journal entries in the books of the firm, on Tanmay's death, for the above transactions.

Answer 1

Journal entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2019
July 31	Furkan's Capital A/c   ...Dr.		24,000
	Furkan's Capital A/c   ...Dr.		8,000
	To Tanmay's Capital A/c			32,000
	(Being Tanmay's share of goodwill adjusted among continuing partners in their gaining ratio of 3 : 1)
July 31	Profit & Loss Suspense A/c   ...Dr.		8,667
	To Tanmay's Capital A/c			8,667
	(Being Tanmay's share of profit up to the date of death credited to his capital account)
July 31	Tanmay's Capital A/c   ...Dr.		8,40,667
	To Tanmay's Executor's A/c			8,40,667
	(Being total balance in Tanmay's capital account transferred to his executor's account)
July 31	Tanmay's Executor's A/c   ...Dr.		8,40,667
	To Bank A/c			95,000
	To Tanmay's Executor's Loan A/c			7,45,667

Working note:

1. Calculation of Gaining Ratio

Old Ratio (Furkan : Tanmay : Barkat) = 3 : 2 : 1

Since no new ratio is mentioned, the remaining partners continue in their old relative proportion.

Gaining Ratio of Furkan and Barkat = 3 : 1

2. Adjustment of Goodwill

Total value of firm's goodwill = ₹ 96,000

Tanmay's Share of Goodwill = `96,000 xx 2/6 = 32,000`

Furkan's contribution = `32,000 xx 3/4 = 24,000`

Barkat's contribution = `32,000 xx 1/4 = 8,000`

3. Calculation of Tanmay's Share of Profit

Period from 1st April 2019 to 31st July 2019 = 4 months

Average Profit of last 3 years = ₹ 78,000

Estimated profit for 4 months = `78,000 xx 4/12 = 26,000`

Tanmay's Share of Profit = `26,000 xx 2/6 = 8,667` (rounded off)

4. Settlement of Executor's Account

Total due to Tanmay's Executor = Capital (₹ 8,00,000) + Goodwill (₹ 32,000) + Profit (₹ 8,667) = ₹ 8,40,667

Amount paid immediately by cheque = ₹ 95,000

Balance transferred to Loan A/c = 8,40,667 − 95,000 = ₹ 7,45,667