Question

The Partnership Deed of C and D, who are equal partners has a clause that any partner may retire from the firm on the following terms by giving a six-month notice in writing:
The retiring partner shall be paid-
(a) the amount standing to the credit of his Capital Account and Current Account.
(b) His share of profits to the date of retirement, calculated on the basis of the average profit of the three preceding completed years.
(c) half the amount of the goodwill of the firm calculated at 1 times the average profit of the three preceding completed years.
C gave a notice on 31st March, 2017 to retire on 30th September 2017, when the balance of his Capital Account was ₹ 6,000 and his Current Account (DR.) ₹ 500. The profits for the three preceding completed years were : year ended 31st March, 2015 – ₹ 2,800; year ended 31st March, 2016 – ₹ 2,200 and year ended 31st March, 2017 – ₹ 1,600. What amount is due to C in accordance with the partnership agreement?

Answer 1

Working Notes:

1. Calculation of Average Profit ( 1st April 2017 to 30th September 2017)

$\begin{array}{l}\text { Average Profit }=\frac{\text { Profit of previous } 3 \text { years }}{3} \\ \\=\frac{2,800+2,200+1,600}{3}=\frac{6,600}{3} \\ \\=2,200\end{array}$

$C's\ Profit\ share\ (for\ 6\ months) = Average Profit \times C's Share \times \frac{6}{12}$

$=2,200 \times \frac{1}{2} \times \frac{6}{12}=550$

2 . Calculation of Goodwill

$Goodwill = Average Profit \times 1.5 =2,200 \times 1.5=3,300 \\ \\C's Share of Goodwill =3,300 \times \frac{1}{2}=1,650$