Question

B, C and D were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On 31st December, 2008, their Balance Sheet was as follows:
B died on 31st March, 2009. The Partnership Deed provided for the following on the death of a partner:
(a) Goodwill of the firm was to be valued at 3 years purchase of the average profit of last 5 years. The profits for the years ended 31st December, 2007, 31st December 2006, 31st December 2005 and 31st December 2004 were ₹ 70,000 ; ₹ 60,000 and ₹ 40,000 respectively.
(b) B’s share of profit and loss till the date of his death was to be calculated on the basis of the profit and loss for the year ended 31st December, 2008.
You are required to calculate the following :
(i) Goodwill of the firm and B’s share of goodwill at the time of his death.
(ii) B’s share in the profit or loss of the firm till the date of his death.
(iii) Prepare B’s Capital Account at the time of his death to be presented to his Executors.

Answer 1

Explanation:

Working Notes:

(i) Calculation of Goodwill

Goodwill = $= Average Profit \times Number of Year's Purchase$

∴$Average Profit \times Number of Year's Purchase$

$\text { Average Profit }=\frac{-70,000+70,000+60,000+50,000+40,000}{5} \times \frac{1,50,000}{5} =30,000$

$=30,000 \times 3=\mathrm{Rs} .90,000$

$\mathrm{B}: \mathrm{C}: \mathrm{D}=5: 3: 2 (Old Ratio)$

After B's Death

Gaining Ratio  (C and D) = 3 : 2

B's Share in Goodwill = $=90,000 \times \frac{5}{10}=45,000$

B's share of goodwill is to be distributed between C and D in their 3: 2(Gaining Ratio).

$C^{\prime} s=45,000 \times \frac{3}{5}-27,000$

$D^{\prime} s=45,000 \times \frac{2}{5}=18,000$

(ii) Calculation of as Share of Profit or Loss

Loss for the Year = Rs 70,000

B' s Loss = $\text { Loss of } 2008 \times \frac{5}{10} \times \frac{3}{12}$

$= 70,000 \times \frac{5}{10} \times \frac{3}{12} = 8,750$