Question

P, R and S are in partnership sharing profits 4/8, 3/8 and 1/8 respectively. It is provided under the partnership deed that on the death of any partner his share of goodwill is to be valued at one-half of the net profits credited to his account during the last 4 completed years (books of accounts are closed on 31st March).

R died on 1st April, 2022. The firm’s profits for the last 4 years ending 31st March each year were as follows: 2019 Profits ₹ 1,20,000; 2020 Profits ₹ 60,000; 2021 Losses ₹ 20,000 and 2022 Profits ₹ 80,000.

1. Determine the amount that should be credited to R in respect of his share of goodwill.
2. Pass a journal entry without raising goodwill account for its adjustment assuming that profit sharing ratio between P and S in future will be 3 : 2. Show your working clearly.

Answer 1

(i) 

Total Profit = 1,20,000 + 60,000 + (-20,000) + 80,000 

= ₹ 2,40,000

R’s Share of Profit = `2,40,000xx3/8`

= ₹ 90,000 

(ii) 

Journal Entry
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	P’s Capital A/c     ...Dr.		12,000
	S’s Capital A/c     ...Dr.		33,000
	To R’s Capital A/c			45,000
	(Being R’s share of goodwill adjusted to the accounts of continuing partners in their gaining ratio 4 : 11)

Working note:

1. Calculation of Gaining Ratio

Gaining Ratio = New ratio - Old ratio

P = `3/5-4/8=(24-20)/40=4/40`

S = `2/5-1/8=(16-5)/40=11/40`

Gaining Ratio = 4 : 11

2. Calculation of Goodwill

R’s share in Goodwill = `90,000xx1/2`

= ₹ 45,000

P = `45,000xx4/15` = ₹ 12,000

S = `45,000xx4/15` = ₹ 33,000