Question

X, Y and Z were partners in a firm Z died on 31st May, 2021. His share of profit from the closure of the last accounting year till the date of death was to be calculated on the basis of the average of three completed years of profits before death. Profits for the years ended 31st March, 2019, 2020 and 2021 were ₹18,000 ₹ 19,000 and ₹ 17,000 respectively. Calculate Z's share of profit till his death and pass necessary Journal entry for the same when:
(a) Profit-sharing ratio of remaining partners does not change, and 
(b) Profit-sharing ratio of remaining partners changes and new ratio being 3:2.

Answer 1

Journal Entries

No.	Particulars		L.F.	Debit Amount (₹)	Credit Amount (₹)
(a)	Profit & Loss Suspense A/c	Dr.		1,000
	To Z’s Capital A/c				1,000
	(Proportionate profit dispensed to deceased partner)
(b)	X’s Capital A/c	Dr.		800
	Y’s Capital A/c	Dr.		200
	To Z’s Capital A/c				1,000
	(Proportionate profit dispensed to deceased partner)

Working Notes:

WN1: Calculation of Z’s Share of Profit

Z's share = Firms Average profit × Z's profit share × Period of which Z remained in the business

`"Average profits" = ("Total profits")/("Number of years")`

                             = `(18,000 + 19,000 + 17,000)/3`

                             = `(54,000)/3`

                            =  Rs. 18,000

`"Z's share" = 18,000 xx 1/3 xx 2/12 = 1,000` (to be borne by gaining partners in gaining ratio in case (b) 

WN2: Calculation of Gaining Ratio

Gaining Ratio = New Ratio − Old Ratio

`"X's gain" = 3/5 - 1/3 = 4/15`

`"Y's gain" = 2/5 - 1/3 = 1/15`

Gaining ratio = 4 : 1

`"X's share" = 1,000 xx 4/5 = 800`

`"Y's share" = 1,000 xx 1/5 = 200`