Question

P, R and S are in partnership sharing profits 4/8, 3/8 and 1/8 respectively. It is provided in the Partnership Deed that on the death of any partner his share of goodwill is to be valued at one-half of the net profit credited to his account during the last four completed years.
R died on 1st January, 2018. The firm's profits for the last four years ended 31st December, were as: 
2014 − ₹ 1,20,000; 2015 − ₹ 80,000; 2016 − ₹ 40,000; 2017 − ₹ 80,000.
(a) Determine the amount that should be credited to R in respect of his share of Goodwill.
(b) Pass Journal entry without raising Goodwill Account for its adjustment.

Answer 1

(a) Calculation of R’s Share of Goodwill
Profit credited to R’s Capital Account in 4 years = Net profit for last four years × R’s Share

=`(1,20,000 + 80,000 + 80,000 + 4,000) xx 3/8`

= `3,20,000 xx 3/8 = "Rs" 1,20,000`

`"R's share of goodwill" = 1/2 xx ("profit credited R's capital acccount in 4 years")`

                                      = `1/2 xx 1,20,000`

                                      = `"Rs" 60,000`

(b)

Journal

Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
P’s Capital A/c	Dr.		48,000
S’s Capital A/c	Dr.		12,000
To R’s Capital A/c				60,000
(R’s share of goodwill adjusted)

Working Notes:

R’s Share of Goodwill = Rs 60,000

Old Ratio (P, R and S) = 4 : 3 : 1

R died.

∴ Gaining Ratio = 4 : 1

This share of goodwill is to be distributed between P and S in their gaining ratio (i.e. 4 : 1)

`"P's share in goodwill" = 60,000 xx 4/5 = "Rs" 48,000`

`"S's share in goodwill" = 60,000 xx 1/5 = "Rs" 12,000`