Question

Ram, Ghanshyam and Vrinda 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, 2024 Ghanshyam died and it was decided that the new profit-sharing ratio between Ram and Vrinda will be equal. The Partnership Deed provided for the following on the death of a partner:

1. 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 profit for the last four years were. 2019-20 - ₹ 1,20,000, 2020-21 - ₹ 80,000, 2021 -22 - ₹ 40,000, and 2022-23 - ₹ 80,000.
2. His share of profit in the year of his death was to be computed on the basis of average profits of past two years.

Pass necessary Journal entries relating to goodwill and profit to be transferred to Ghanshyam’s Capital Account. Also show your workings clearly.

Answer 1

Journal
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
(i)	Vrinda’s Capital A/c      ...Dr.		60,000
	To Ghanshyam’s Capital A/c			60,000
	(Being adjustment made for goodwill)
(ii)	Vrinda’s Capital A/c    ...Dr.		18,750
	To Ghanshyam’s Capital A/c			18,750
	(Being adjustment made for Ghanshyam share of profit)

Working Notes:

1. Old ratio of Ram, Ghanshyam & Vrinda = 4 : 3 : 1

Ghanshyam died,

New ratio of Ram & Vrinda = 1 : 1

Gaining ratio = New share – Old share 

Ram = `1/2-4/8`

= `(4-4)/8`

= 0

Vrinda gains = `1/2-1/8`

= `(4-1)/8`

= `3/8`

2. Goodwill of the firm = `(1,20,000+80,000+40,000+80,000)/2`

= `(3,20,000)/2`

= ₹ 1,60,000

Ghanshyam’s share of Goodwill = `1,60,000xx3/8`

= ₹ 60,000

3.  Average Profit of 2 years = `(40,000+80,000)/2`

= ₹ 60,000

10 Months (i.e., from 1st April 2022 to 1st February 2023)

Ghanshyam’s share of Profit = `60,000xx3/8xx10/12`

= ₹ 18,750