T.S. Grewal Class 12 Chapter 6 Q.24 - Death of a Partner

Question 24

X, Y and Z were partners in a firm sharing profits in the ratio of 4 : 3 : 1. The firm closes its books on 31st March every year. On 1st February, 2025, Y died, and it was decided that the new profit-sharing ratio between X and Z would be equal. The Partnership Deed provided that on the death of a partner: (a) his share of goodwill be calculated on the basis of half of the profits credited to his account during the previous four completed years; the firm’s profits for the last four years were 2021 – ₹1,50,000, 2022 – ₹1,00,000, 2023 – ₹50,000, 2024 – ₹1,00,000; (b) his share of profit in the year of death be computed on the basis of the average profit of the past two years. Pass the necessary Journal entries relating to goodwill and profit to be transferred to Y’s Capital Account.

Solution

JOURNAL

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
2025 Feb 1	Z’s Capital A/c    Dr.		75,000
	To Y’s Capital A/c			75,000
	(Y’s share of goodwill adjusted, borne entirely by Z, the only gaining partner)
Feb 1	Z’s Capital A/c    Dr.		23,438
	To Y’s Capital A/c			23,438
	(Y’s share of profit till death adjusted, borne entirely by Z)

Working Notes: Old ratio X : Y : Z = 4 : 3 : 1; new ratio X : Z = 1 : 1. Gaining Ratio: X’s gain = 1/2 – 4/8 = 0; Z’s gain = 1/2 – 1/8 = 3/8 → only Z gains. Profit credited to Y’s account over the four years = 1,50,000 + 1,00,000 + 50,000 + 1,00,000 = ₹4,00,000; Y’s share (3/8) of this = ₹1,50,000; goodwill = half of this = ₹75,000. Average profit of the last two years (2023, 2024) = (50,000 + 1,00,000) / 2 = ₹75,000; Y’s share of profit for 10 months (1st April, 2024 to 1st February, 2025) = 75,000 × 3/8 × 10/12 = ₹23,438.