Question

P, R and S are in partnership sharing profits 4/8, 3/8 and 1/8 respectively. It is provided in the Partnership Deed that on the death of any partner his share of goodwill is to be valued at one-half of the net profit credited to his account during the last four completed years.
R died on 1st January, 2018. The firm’s profits for the last four years ended 31st December, were as:
2014 – ₹ 1,20,000; 2015 – ₹ 80,000; 2016 – ₹ 40,000; 2017 – ₹ 80,000.
(a) Determine the amount that should be credited to R in respect of his share of Goodwill.
(b) Pass journal entry without raising Goodwill Account for its adjustment.

Answer 1

HEYA MATE YOUR ANSWER IS

(a) Determine the amount that should be credited to R in respect of his share of Goodwill.

(b) Pass journal entry without raising Goodwill Account for its adjustment.

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Answer 2

Calculation of R’s Share of Goodwill:

Profit credited to R’s Capital Account in 4 years = Net profit for last four years × R’s Share

$\begin{aligned}&=(1,20,000+80,000+80,000+4,000) \times \frac{3}{8}\\&=3,20,000 \times \frac{3}{8}=\mathrm{Rs} 1,20,000\end{aligned}$

R's share of goodwill is given as,

$=\frac{1}{2} \times(\text { Profit Credited R's Capital Account in 4 years }) =\frac{1}{2} \times 1,20,000=\mathrm{Rs} 60,000$

R’s Share of Goodwill = Rs 60,000

Old Ratio (P, R and S) = 4 : 3 : 1  

R died.  

∴ Gaining Ratio = 4 : 1

This share of goodwill is to be distributed between P and S in their gaining ratio (i.e. 4 : 1)

$P's Share in Goodwill =60,000 \times \frac{4}{5}=\mathrm{Rs} 48,000 \\\\S's Share in Goodwill =60,000 \times \frac{1}{5}=\mathrm{Rs} 12,000$