Q.Furkan, Tanmay and Barkat were partners in a firm sharing profits in the ratio of 3 : 2 : 1. The firm closes its books on 31st March every year. Tanmay died on 31st July, 2019. His executor was entitled to :
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →On Tanmay's death, the firm passes journal entries for his capital, his share of goodwill (credited to the remaining partners in their gaining ratio), his share of profit up to the date of death, and the partial payment to his executor — the balance is transferred to the executor's loan account.
Concept and Accounting Treatment
When a partner dies, the partnership deed (or the Indian Partnership Act, 1932, in its absence) determines what is payable to the executor. The key principle is that the deceased partner's estate is entitled to:
- Capital standing to his credit.
- Share of goodwill — because the continuing partners will benefit from the firm's reputation built with the deceased partner's efforts. The deceased partner's share of goodwill is credited to his capital account and debited to the remaining partners in their gaining ratio (not the old ratio). Since the problem does not specify a new ratio, we assume the remaining partners continue in their old relative ratio, i.e., Furkan : Barkat = 3 : 1. Their gaining ratio is the same as their old ratio because Tanmay's share is taken over by them in that proportion.
- Share of profit up to the date of death — calculated on the basis of the average profit of the last three years (as per the agreement). This is a charge against profits, not an appropriation, so it is debited to the Profit and Loss Suspense Account (or directly to the Profit and Loss Account, but the suspense method is standard for interim periods).
- Interest on capital, salary, commission, etc. — if provided in the deed. Here, none are mentioned, so we skip them.
The payment to the executor is recorded by debiting Tanmay's Capital Account and crediting Bank (for the cheque) and the executor's loan account (for the balance).
A common mistake is to credit the goodwill amount to the deceased partner and debit the continuing partners in their old profit-sharing ratio. The correct treatment is to debit them in the gaining ratio. Since the problem does not state a new ratio, we compute the gaining ratio as: Furkan gains 3/4 of Tanmay's 2/6, and Barkat gains 1/4 of Tanmay's 2/6. Alternatively, the gaining ratio is simply the old ratio of the continuing partners (3:1) because they share the deceased's share in that proportion.
Working Notes
1. Tanmay's Share of Goodwill
Firm's total goodwill = ₹ 96,000
Tanmay's share = 2/6 × ₹ 96,000 = ₹ 32,000
This amount is credited to Tanmay's Capital Account. It is debited to Furkan and Barkat in their gaining ratio.
Gaining Ratio:
Old ratio of Furkan and Barkat = 3 : 1 (since Tanmay's 2/6 is taken over by them in this ratio).
Furkan's gain = 3/4 × 2/6 = 6/24 = 1/4
Barkat's gain = 1/4 × 2/6 = 2/24 = 1/12
Gaining ratio = 3 : 1 (same as old ratio of continuing partners).
Furkan's share of goodwill = 3/4 × ₹ 32,000 = ₹ 24,000
Barkat's share of goodwill = 1/4 × ₹ 32,000 = ₹ 8,000
2. Tanmay's Share of Profit up to Date of Death
Average profit of last 3 years = ₹ 78,000
Tanmay's share of profit for the full year = 2/6 × ₹ 78,000 = ₹ 26,000
Period from 1st April 2019 to 31st July 2019 = 4 months (April, May, June, July).
Tanmay's share of profit for 4 months = ₹ 26,000 × 4/12 = ₹ 8,667 (rounded to nearest rupee; we will use ₹ 8,667).
When the problem says "on the basis of average profit of last 3 years", it means the profit for the current year is estimated as equal to that average. No adjustment for time is needed beyond the fraction of the year.
3. Amount Due to Tanmay's Executor
| Particulars | Amount (₹) |
|---|---|
| Capital | 8,00,000 |
| Add: Share of goodwill | 32,000 |
| Add: Share of profit | 8,667 |
| Total due | 8,40,667 |
| Less: Paid by cheque | (95,000) |
| Balance transferred to executor's loan account | 7,45,667 |
Journal Entries in the Books of the Firm
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 2019 July 31 | Furkan's Capital A/c Dr. | 24,000 | ||
| Barkat's Capital A/c Dr. | 8,000 | |||
| To Tanmay's Capital A/c | 32,000 | |||
| (Being Tanmay's share of goodwill adjusted in the gaining ratio of Furkan and Barkat) | ||||
| 2019 July 31 | Profit and Loss Suspense A/c Dr. | 8,667 | ||
| To Tanmay's Capital A/c | 8,667 | |||
| (Being Tanmay's share of profit up to the date of death credited to his capital account) | ||||
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.