Question

X, Y and Z were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 31st March, 2018 their Balance Sheet was as follows:
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Y died on 30th June, 2018. The Partnership Deed provided for the following on the death of a partner:
(i) Goodwill of the business was to be calculated on the basis of 2 times the average profit of the past 5 years. The profits for the years ended 31st March, 2018, 31st March, 2017, 31st March, 2016, 31st March, 2015 and 31st March, 2014 were ₹ 3,20,000 (Loss) ; ₹ 1,00,000; ₹ 1,60,000; ₹ 2,20,000 and ₹ 4,40,000 respectively.
(ii) Y’s share of profit or loss from 1st April, 2018 till his death was to be calculated on the basis of the profit or loss for the year ended 31st March, 2018.
You are required to calculate the following:
(a) Goodwill of the firm and Y’s share of goodwill at the time of his death.
(b) Y’s share in the profit or loss of the firm till the date of his death.
(c) Prepare Y’s Capital Account at the time of his death to be presented to his executors.

Answer 1

Explanation:

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Answer 2

The goodwill and the Capital accounts are prepared below:

Explanation:

Calculation of Y's Share of Profit/Loss

Y's share = Last Year's Profit/coss $\times$ Y's Profit Share $\times$ Period for which Y remained in the business

Y's share( loss )

$=3,20,000 \times \frac{2}{5} \times \frac{3}{12}=32,000$

Calculation of Y's Share of Goodwill

Y's share = Firm's Goodwill $\times$ Y's Profit Share

Y's share

$=2,40,000 \times \frac{2}{5}=96,000$

(to be borne by gaining partners in gaining ratio)

Firm's Goodwill = Average Profit $\times$2

Average Profits $=\frac{\text { Total Profits }}{\text { Number of Years }}$

$=\frac{(3,20,000)+1,00,000+1,60,000+2,20,000+4,40,000}{5}$

$=\frac{6,00,000}{5}=R s, 1,20,000$

Firm's Goodwill

$=1,20,000 \times 2=2,40,000$