Question

A, B and C were partners. Their partnership deed provided that they were to share profits thus; A 26 percent; B 34 percent; C 40 percent; and that if a partner died, his capital should remain in the business for a stated period at a fixed rate of interest, but that the deceased partner’s share should be credited with an amount for Goodwill, based upon one and a half year’s average profits, for the five years prior to his death, but be subject to deduction of 5 percent from the book debts. C died, and the profits of the firm for five years were agreed at ₹ 20,000; ₹ 30,000; ₹ 15,000 (loss); ₹ 5,000 (loss); and ₹ 45,000 respectively. Book Debts stood at ₹ 90,000.

Prepare a statement showing the amount of Goodwill to be credited to C’s Account and give the Journal entry in the firm's book necessary to carry out the transactions.

Answer 1

Journal Entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	A’s Capital A/c     ...Dr.		3,120
	B’s Capital A/c     ...Dr.		4,080
	To C’s Capital A/c			7,200
	(Being C’s share of goodwill adjusted to the accounts of continuing partners in their ratio 26 : 34)

Total profit = 20,000 + 30,000 + (-15000) + (-5000) + 45000

= ₹ 75000

Average profit = `75000/5` = ₹ 15000

Goodwill = 15000 × 1.5 = 22500

Total Goodwill = ₹ 22,500

Net Goodwill = 22,500 – 4,500 (5% of Book Debts) = ₹ 18,000

C’s Share = `18,000xx40/100` = ₹ 7,200

A = `7,200xx26/60` = ₹ 3,120

B = `7,200xx34/60` = ₹ 4,080