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, 2020, Y died and it was decided that the new profit-sharing ratio between X and Z will be equal. 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	2015-16	2016-17	2017-18	2018-19
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 average profit of 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 Amount (₹)	Credit Amount (₹)
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:

WN 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

WN 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.

WN 3: Calculation of Retiring Partner’s Share of Profit

Average profit for 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