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Death of Partner
Assignment
Q. Questions and Solutions
No.
1. The partnership agreement of a firm consisting of three partners - A, B and C (who share profits in
proportion of ½, ¼ and ¼ and whose fixed capitals are ₹10,000; ₹6,000 and ₹4,000 respectively)
provides as follows:
a) That partners be allowed interest at 10 per cent per annum on their fixed capitals, but no interest
be allowed on undrawn profits or charged on drawings.
b) That upon the death of a partner, the goodwill of the firm be valued at two years’ purchase of the
average net profits (after charging interest on capital) for the three years to 31st December
preceding the death of a partner.
c) That an insurance policy of ₹10,000 each to be taken in individual names of each partner, the
premium is to be charged against the profit of the firm.
d) Upon the death of a partner, he is to be credited with his share of the profits, interest on capital etc.
calculated upon 31st December following his death.
e) That the share of the partnership policy and goodwill be credited to a deceased partner as on 31st
December following his death.
f) That the partnership books be closed annually on 31st December.

A died on 30th September 20X3, the amount standing to the credit of his current account on 31st December,
20X2 was ₹450 and from that date to the date of death he had withdrawn ₹3,000 from the business.
An unrecorded liability of ₹2,000 was discovered on 30th September, 20X3. It was decided to record it
and be immediately paid out.
The trading result of the firm (before charging interest on capital) had been as follows: 20X0 Profit ₹9,640;
20X1 Profit ₹6,720; 20X2 Loss ₹640; 20X3 Profit ₹3,670.
Assuming the surrender value of the policy to be 20 percent of the sum assured.
Required: Prepare an account showing the amount due to A’s legal representative as on 31st
December, 20X3.
(ICAI SM/January 2021/July 2021)
Sol. A’s Capital Account
20X3 Particulars ₹ 20X3 Particulars ₹
Sep. 30 To Current A/c (3,000 2,550 Jan. 1 By Balance b/d 10,000
- 450) Dec. 31 By Profit and Loss A/c:
Dec. 31 To Profit and Loss Adjt. 1,000 Interest on Capital Share 1,000
(Unrecorded Liability) of Profit 835
ToBalance Transferred B & C (Goodwill) 3,240
to A’s Executor’s A/c 18,525 Insurance Policies A/c 7,000
22,075 22,075

Working Notes:
i) Valuation of Goodwill
Profit before Interest Profit after
Year Interest on interest
fixed capital
₹ ₹ ₹
20X0 9,640 2,000 7,640
20X1 6,720 2,000 4,720
20X2 (-) 640 2,000 (-) 2,640
15,720 6,000 9,720

₹
Average (₹9,720÷3) 3,240
Goodwill at two years purchase of average net profits 6,480
Share of ‘A’ in the goodwill (₹6,480/2) 3,240

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ii) Profit on Separate Life Policy

A’s policy 10,000
B and C’s policy @ 20% 4,000
14,000
Share of A (1/2) 7,000
iii) Share in profit for 20X3
Profit for the year 3,670
Less: Interest on capitals (2,000)
1,670
A’s share in profit (1/2) 835

iv) As unrecorded liability of ₹ 2,000 has been charged to Capital Accounts through Profit and
Loss Adjustment Account, no further adjustment in current year’s profit is required.
v) Profits for 20X0, 20X1 and 20X2 have not been adjusted (for valuing goodwill) for unrecorded
liability for want of precise information.
2. The following was the Balance Sheet of Om & Co. in which X, Y, Z were partners sharing profits and
losses in the ratio of 1:2:2 as on 31.3.20X2. Mr. Z died on 31st December, 20X2. His account has to be
settled under the following terms.
Balance Sheet of Om & Co. as on 31.3.2020
Liabilities ₹ Assets ₹
Trade payables 20,000 Goodwill 30,000
Bank loan 50,000 Building 1,20,000
General reserve 30,000 Computers 80,000
Capital accounts: Inventories 20,000
X 40,000 Trade receivables 20,000
Y 80,000 Cash at bank 20,000
Z 80,000 2,00,000 Investments 10,000
3,00,000 3,00,000

Goodwill is to be calculated at the rate of two years purchase on the basis of average of three years’
profits and losses. The profits and losses for the three years were detailed as below:
Year ending on profit/loss
31.3.20X2 30,000
31.3.20X1 20,000
31.3.20X0 (10,000) Loss

Profit for the period from 1.4.20X2 to 31.12.20X2 shall be ascertained proportionately on the basis
of average profits and losses of the preceding three years.
During the year ending on 31.3.20X2 a car costing ₹40,000 was purchased on 1.4.20X1 and debited to
traveling expenses account on which depreciation is to be calculated at 20% p.a. This asset is to be
brought into account at the depreciated value.
Other values of assets were agreed as follows:
Inventory at ₹16,000, building at ₹1,40,000, computers at ₹50,000; investments at ₹6,000. Trade
receivables were considered good.

Required:
i) Calculate goodwill and Z’s share in the profits of the firm for the period 1.4.20X2 to 31.12.20X2.
ii) Prepare revaluation account assuming that other items of assets and liabilities remained the
same.
iii) Prepare partners’ capital accounts and balance sheet of the firm Om & Co. as on 31.12.20X2
(ICAI SM/May 2000)

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Sol. i) Calculation of goodwill and Z’s share of profit

a) Adjusted profit for the year ended 31.3.20X2: ₹ ₹
Profit (Given) 30,000
Add: Cost of car wrongly written out 40,000
Less: Depreciation for the year 20X1-X2 (8,000) 32,000
(20% on ₹ 40,000)
62,000
b) Average of last three year’s profits and losses
Year ended on Profit/(loss)
₹
31.3.20X0 (10,000)
31.3.20X1 20,000
31.3.20X2 62,000
72,000
Average profit (72,000/3) Goodwill at 2 24,000
c) years’ purchase
₹24,000 × 2 = ₹48,000
d) Z’s share of profits from the period 1.4.20X2 to 31.12.20X2
₹24,000 ×9/12 × 2/5 = ₹7,200

ii) Revaluation Account

Particulars ₹ Particulars ₹
To Inventory account 4,000 By Building account By Loss 20,000
To Computers account 30,000 transferred to
To Investments account 4,000 XYZ 3,600
7,200
7,200
18,000
38,000 38,000

Partners’ Capital Accounts

Particulars X Y Z Particulars X Y Z
₹ ₹ ₹ ₹ ₹ ₹
To Revaluation A/c 3,600 7,200 7,200 By Balance b/d 40,000 80,000 80,000
To Z’s Executor’s A/c 1,12,000 By General reserve 6,000 12,000 12,000
To Goodwill A/c 6,000 12,000 12,000 By X and Y – – 19,200
To Z 6,400 12,800 – By Car A/c 6,400 12,800 12,800
To Balance c/d 36,400 72,800 By Profit and Loss – – 7,200
suspense A/c
52,400 1,04,800 1,31,200 52,400 1,04,800 1,31,200

Balance Sheet of Om & Co. as 31.12.20X2

Liabilities ₹ Assets ₹
Trade payables 20,000 Building 1,40,000
Bank loan 50,000 Car 32,000
Capital accounts: Inventories 16,000
X 36,400 Computers 50,000
Y 72,800 Investments 6,000
Z’s Executor’s account 1,12,000 Trade receivables 20,000
Cash at bank 20,000
Profit and Loss suspense 7,200
Account
2,91,200 2,91,200

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Working Note:
Goodwill calculated at the time of death of partner Z ₹ 48,000
Partner Old Share New Gain Sacrifice
Share
X 1 1 2 –
5 3 15
Y 2 2 2 –
5 3 15
Z 2 – – 2
5 5

Adjusting entry:
X’s Capital Account Dr. 6,400
Y’s Capital Account Dr. 12,800
To Z’s Capital Account 19,200
(Adjustment for goodwill on the death of Z on the basis of gaining ratio)
3. The following is the Balance Sheet of M/s. ABC Bros as at 31st December, 20X0.
Balance Sheet as at 31st December, 20X0
Liabilities ₹ Assets ₹
Capital: - Machinery 5,000
A 4,100 Furniture 2,800
B 4,100 Fixture 2,100
C 4,500 Cash 1,500
General Reserve 1,500 Inventories 950
Trade payables 2,350 Trade receivables 4,500
Less: Provision for Doubtful 300 4,200
debts
16,550 16,550

C died on 3rd January, 20X1 and the following agreement was to be put into effect.
a) Assets were to be revalued: Machinery to ₹5,850; Furniture to ₹2,300; Inventory to ₹750.
b) Goodwill was valued at ₹3,000 and was to be credited with his share, without using a Goodwill
Account
c) ₹1,000 was to be paid away to the executors of the dead partner on 5th January, 20X1
Required to show:
i) The journal entry for goodwill adjustment.
ii) The Revaluation Account and Capital Accounts of the partners.
iii) Which account would be debited and which account credited if the provision for doubtful debts
in the Balance Sheet was to be found unnecessary to maintain at the death of C.
(ICAI SM/Nov. 2021 RTP)
Sol. i) Journal Entry in the books of the firm
Date Particulars ₹ ₹
Jan 3, 20X1 A’s Capital A/c Dr. 500
B’s Capital A/c Dr. 500
To C’s Capital A/c 1,000
(Being the required adjustment for goodwill
through the partner’s capital accounts)

ii) Revaluation Account

Particulars ₹ Particulars ₹
To Furniture A/c (₹2,800 - 2,300) To 500 By Machinery A/c 850
Inventory A/c (₹950 - 750) 200 (₹5,850 - 5,000)
To Partners’ Capital A/cs 150
(A - ₹50, B - ₹50, C - ₹50) 850 850

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Partner’s Capital Accounts

Particulars A B C Particulars A B C
₹ ₹ ₹ ₹ ₹ ₹
To C (Goodwill) 500 500 – By Balance b/d 4,100 4,100 4,500
By General Reserve
To Cash A/c – – 1,000 A/c 500 500 500
By Revaluation A/c
To Executors A/c – – 5,050 50 50 50
(Profit)

To Balance C/d 4,150 4,150 – By A (Goodwill) – – 500

By B (Goodwill)
– – 500
4,650 4,650 6,050 4,650 4,650 6,050

iii) Provision for Doubtful Debts Account is a credit balance. To close, this account is to be
debited. It becomes a gain for the partners. Therefore, either Partners’ Capital Accounts
(including C) or Revaluation Account is to be credited.

Working Note:
Statement showing the Required Adjustment for Goodwill
Particulars A B C
Right of goodwill before death 1/3 1/3 1/3
Right of goodwill after death 1/2 1/2 –
Gain/(Sacrifice) (+) 1/6 (+) 1/6 (-) 1/3

Profit sharing ratio is equal before or after the death of C because nothing has been mentioned in
respect of profit-sharing ratio.
4. B and N were partners. The partnership deed provides inter alia:
i) That the accounts be balanced on 31st December each year.
ii) That the profits be divided as follows:
B: One-half; N: One-third; and carried to Reserve Account: One-sixth
iii) That in the event of death of a partner, his executor will be entitled to the following:
(a) the capital to his credit at the date of death; (b) his proportion of profit to date of death
based on the average profits of the last three completed years; (c) his share of goodwill based on
three years’ purchases of the average profits for the three preceding completed years.
Trial Balance on 31st December, 20X2
Particulars Dr. (₹) Cr. (₹)
B’s Capital 90,000
N’s Capital 60,000
Reserve 30,000
Bills receivable 50,000
Investments 40,000
Cash 1,10,000
Trade payables 20,000
Total 2,00,000 2,00,000

The profits for the three years were 20X0: ₹42,000; 20X1: ₹39,000 and 20X2: ₹45,000. N died on 1st
May, 20X3. Show the calculation of N (i) Share of Profits; (ii) Share of Goodwill; (iii) Draw up N’s
Executors Account as would appear in the firms’ ledger transferring the amount to the Loan Account.
[ICAI SM/ Nov 2019 (Modified)]
Sol. i) Ascertainment of N’s Share of Profit ii) Ascertainment of Value of Goodwill
20X0 42,000 20X0 42,000
20X1 39,000 20X1 39,000
20X2 45,000 20X2 45,000

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Total Profit 1,26,000 Total Profit for 3 years Average 1,26,000

Average Profit 42,000 Profit 42,000
4 months’ Profit 14,000 Goodwill - 3 years
1,26,000
Purchase of Average Profit
N’s Share in Profit (2/5th* 5,600 N’s Share of goodwill (2/5 of 50,400
of ₹ 14,000) ₹1,26,000)

* Profit sharing ratio between B and N = 1/2; 1/3; = 3: 2, Therefore N’s share of Profit = 2/5
N’s Executor’s Account
Date Particulars ₹ Date Particulars ₹
20X3 20X3
May 1, To N’s Loan A/c 1,28,000 Jan. 1 By Capital A/c 60,000
May 1 By Reserves
(2/5th of ₹30,000) 12,000
May 1 By B’s Capital A/c (Share
of goodwill) 50,400
May 1 By P/L Suspense A/c (Share 5,600
of Profit)
1,28,000 1,28,000
5. The Balance Sheet of Seed, Plant and Flower as at 31st December, 20X3 was as under:
Liabilities ₹ Assets ₹
Trade payables 20,000 Fixed Assets 40,000
General Reserve 5,000 Debtors 10,000
Capital: Bills Receivable 4,000
Seed 25,000 Inventories 16,000
Plant 15,000 Cash at Bank 10,000
Flower 15,000 55,000
80,000 80,000

The profit-sharing ratio was: Seed 5/10, Plant 3/10 and Flower 2/10. On 1st May, 20X4 Plant died.
It was agreed that:
a) Goodwill should be valued at 3 years purchase of the average profits for 4 years. The profits
were:
20X0 ₹10,000 20X2 ₹12,000
20X1 ₹13,000 20X3 ₹15,000

b) The deceased partner to be given share of profits up to the date of death on the basis of the
previous year.
c) Fixed Assets were to be depreciated by 10%. A bill for ₹1,000 was found to be worthless. These
are not to affect goodwill.
d) A sum of ₹7,750 was to be paid immediately, the balance was to remain as a loan with the
firm at 9% p.a. as interest.
Seed and Flower agreed to share profits and losses in future in the ratio of 3: 2.
Give necessary journal entries.
(ICAI SM)
Sol. Journal Entries
20X4 Particulars ₹ ₹
May 1 General Reserve Account Dr. 5,000
To Seed’s Capital Account 2,500
To Plant’s Capital Account 1,500
To Flower’s Capital Account 1,000
(General Reserve transferred to Capital
Account on the death of Plant)
Seed’s Capital Account Dr. 3,750

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Flower’s Capital Account Dr. 7,500

To Plant’s Capital Account 11,250
(Adjustment for goodwill on the death of Plant on
the basis of gaining ratio)
(Value = 3 × (10,000 + 13,000 + 12,000 +
15,000)/4)
Revaluation Account Dr. 5,000
To Fixed Assets Account 4,000
To Bills Receivable Account 1,000
(Depreciation of fixed assets @ 10% and writing
out of one bill for ₹1,000 on Plant’s death)
Seed’s Capital Account Dr. 2,500
Plant’s Capital Account Dr. 1,500
Flower’s Capital Account Dr. 1,000
To Revaluation Account 5,000
(Loss on Revaluation transferred to capital
accounts)
Profit and Loss Suspense Account Dr. 1,500
To Plant’s Capital A/c 1,500
(15,000×4/12×3/10)
(Plant’s share of four month’s profit based on
the previous year)
Plant’s Capital Account Dr. 27,750
To Plant’s Executor’s Account 27,750
(Amount standing to the credit of Plant’s
Capital Account transferred to the credit of his
Executor’s Account)
Plant’s Executor’s Account Dr. 7,750
To Bank Account 7,750
(Amount paid to Plant’s Executors)
6. The following is the Balance Sheet of M/s. LMN Bros as at 31st December, 20X0, they share profit
equally: -
Balance Sheet as at 31st December, 20X0
Liabilities ₹ Assets ₹
Capital L 8,200 Machinery 10,000
M 8,200 Furniture 5,600
N 9,000 Fixture 4,200
General Reserve 3,000 Cash 3,000
Trade payables 4,700 Inventories 1,900
Trade receivables 9,000
Less: Provision for Doubtful (600) 8,400
debts
33,100 33,100

N died on 3rd January, 20X1 and the following agreement was to be put into effect.
a) Assets were to be revalued: Machinery to ₹11,700; Furniture to ₹4,600; Inventory to ₹1,500.
b) Goodwill was valued at ₹6,000 and was to be credited with his share, without using a Goodwill
Account.
c) ₹2,000 was to be paid away to the executors of the dead partner on 5th January, 20X1.
d) After death of N, L and M share profit equally.

You are required to prepare: -

i) Journal Entry for Goodwill adjustment.
ii) Revaluation Account and Capital Accounts of the partners.
(Nov. 2019 RTP)

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Sol. i) Journal Entry in the books of the M/s LMN

Date Particulars Dr. Cr.
₹ ₹
Jan 3 L’s Capital A/c Dr. 1,000
20X1 M’s Capital A/c Dr. 1,000
To N’s Capital A/c 2,000
(Being the required adjustment for goodwill
through partner’s capital accounts.)

ii)
Dr. Revaluation Account Cr.
Particulars ₹ Particulars ₹
To Furniture A/c 1,000 By Machinery A/c 1,700
(₹ 5,600 – ₹ 4,600) (₹ 11,700 - ₹ 10,000)
To Inventory A/c 400
(₹ 1,900 – ₹ 1,500)
To Partners’ Capital A/cs 300
(L - ₹ 100, M - ₹ 100, N - ₹ 100)
1,700 1,700

Partners’ Capital Accounts

Particulars L M N Particulars L M N
To N (Goodwill) 1,000 1,000 – By Balance b/d 8,200 8,200 9,000
To Cash A/c – – 2,000 By General Reserve 1,000 1,000 1,000
A/c
To Executors A/c – – 10,100 By Revaluation A/c 100 100 100
(Profit)
To Balance c/d 8,300 8,300 – By L (Goodwill) – – 1000
By M (Goodwill) – – 1000
9,300 9,300 12,100 9,300 9,300 12,100

Working Note:
Statement showing the Required Adjustment for Goodwill
Particulars L M N
Right of goodwill before death 1/3 1/3 1/3
Right of goodwill after death 1/2 1/2 –
Gain / (Sacrifice) (+) 1/6 (+) 1/6 (-) 1/3

7. Monika, Yedhant and Zoya are in partnership, sharing profits and losses equally. Zoya died on 30th
June 20X4. The Balance Sheet of Firm as at 31st March 20X4 stood as: -
Liabilities Amount Assets Amount
Creditors 20,000 Land and Building 1,50,000
General Reserve 12,000 Investments 65,000
Capital Accounts: Stock in trade 15,000
Monika 1,00,000 Trade receivables 35,000
Yedhant 75,000 Less: Provision for (2,000) 33,000
doubtful debt
Zoya 75,000 Cash in hand 7,000
Cash at bank 12,000
2,82,000 2,82,000

In order to arrive at the balance due to Zoya, it was mutually agreed that: -
i) Land and Building be valued at ₹1,75,000
ii) Debtors were all good, no provision is required

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iii) Stock is valued at ₹13,500

iv) Goodwill will be valued at one Year's purchase of the average profit of the past five years. Zoya's
share of goodwill be adjusted in the account of Monika and Yedhant.
v) Zoya's share of profit from 1st April 20X4, to the date of death be calculated on the basis of
average profit of preceding three years.
vi) The profit of the preceding five years ended 1st March were:
20X4 20X3 20X2 20X1 20X0
25,000 20,000 22,500 35,000 28,750

You are to Prepare: -

Required: -
1) Revaluation account
2) Capital accounts of the partners and
3) Balance sheet of the firm as at 1st July 20X4.
(May 2019)
Sol. Revaluation Account
Particulars ₹ Particulars ₹
To Stock 1,500 By Land & Building 25,000
To Partners: (Revaluation By Provision for doubtful debt 2,000
Profit)
Monika 8,500
Yedhant 8,500
Zoya 8,500
27,000 27,000
Partners’ Capital Accounts
Particulars Monika Yedhant Zoya Particulars Monika Yedhant Zoya
To Zoya 4,375 4,375 - By Balance b/d. 1,00,000 75,000 75,000
To Zoya’s - - 98,125 By General reserve 4,000 4,000 4,000
Executor By Monika & Yedhant - - 8,750
To Bal. c/d 1,08,125 83,125 By Profit and Loss - - 1,875
Adjustment*
(suspense) A/c
By Revaluation 8,500 8,500 8,500
1,12,500 87,500 98,125 1,12,500 87,500 98,125
*Profit and Loss Adjustment = [(25,000 + 20,000 + 22,500)/3] x 3/12 x 1/3 = 1,875

Balance Sheet of Firm as on 1.7.20X4

Particulars ₹ Particulars ₹
Monika 1,08,125 Land & Building 1,75,000
Yedhant 83,125 Investment 65,000
Zoya Executor 98,125 Stock 13,500
Creditors 20,000 Trade receivable 35,000
Profit & Loss Adjustment 1,875
Cash in hand 7,000
Cash at bank 12,000
3,09,375 3,09,375
Calculation of goodwill and Zoya’s share
Average of last five year’s profits and losses for the year ended on 31st March
31.3.20X0 28,750
31.3.20X1 35,000
31.3.20X2 22,500
31.3.20X3 20,000

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31.3.20X4 25,000
Total 1,31,250
Average profit (₹1,31,250/5) 26,250

Goodwill at 1 year purchase = ₹26,250 x 1 = ₹26,250

Zoya’s Share of Goodwill = ₹26,250 × 1/3 = ₹8,750 which is contributed by Monika and Yedhant in
their gaining ratio.
Monika = ₹8750 × 1/2 = ₹4375
Yedhant = ₹8750 × 1/2 = ₹4375
8. The Balance Sheet of Amitabh, Abhishek and Amrish as at 31.12.20X4 stood as follows: -
Liabilities Amount Assets Amount
₹ ₹
Capital: Land & Building 74,000
Amitabh 60,000 Investments 10,000
Abhishek 40,000 Advertisement 37,800
suspense
Amrish 40,000 1,40,000 Life Policy (at
surrender value):
Creditors 25,800 Amitabh 2,500
General Reserve 8,000 Abhishek 2,500
Investment Amrish 1,000
Fluctuation Reserve 2,400 Stock 20,000
Debtors 20,000
Less: Provision for
doubtful debts (1,600) 18,400
Cash & bank 10,000
balance
1,76,200 1,76,200

Amrish died on 31st March 20X5, due to this reason the following adjustments were agreed upon:
i) Land and Buildings be appreciated by 50%.
ii) Investment is valued at 6% less than the cost.
iii) All debtors (except 20% which are considered as doubtful) were good.
iv) Stock to be reduced to 94%.
v) Goodwill to be valued at one year’s purchase of the average profits of the past five years.
vi) Amrish’s share of profit to the date of death be calculated on the basis of average profits of the
three completed years immediately preceding the year of death.
The profits for the last five years are as follows:
Year ₹
20X0 23,000
20X1 28,000
20X2 18,000
20X3 16,000
20X4 20,000
1,05,000

The life policies have been shown at their surrender values representing 10% of the sum assured in
each case. The annual premium of Rs.1,000 is payable every year on 1st August.
You are required to pass necessary journal entries in the books of account of the reconstituted firm.
(Oct. 2018 MTP)

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Sol. Journal Entries

Particulars Amount Amount
1. Insurance Company’s A/c Dr. 10,000
To Life Policy A/c (₹ 1,000÷10%) 10,000
(Being the policy on the life of Amrish matured on
his death)
2. Life Policy A/c Dr. 9,000
To Amitabh’s Capital A/c 3,000
To Abhishek’s Capital A/c 3,000
To Amrish’s Capital A/c 3,000
(Being the transfer of balance in life policy account
to all partners’ capital accounts)
3. Amitabh’s Capital A/c Dr. 12,600
Abhishek’s Capital A/c Dr. 12,600
Amrish’s Capital A/c Dr. 12,600
To Advertisement suspense A/c 37,800
(Being Advertisement suspense standing in the
books written off fully)
4. Land & Buildings A/c Dr. 37,000
To Revaluation A/c 37,000
(Being an increase in the value of assets recorded)
5. Investment Fluctuation Reserve A/c Dr. 600
To Investment A/c 600
(Being reduction in the cost of investment adjusted
through Investment Fluctuation Reserve)
6. Revaluation A/c Dr. 3,600
To Stock A/c 1,200
To Provision for Doubtful Debts A/c 2,400
(Being the fall in value of assets recorded)
7. Amitabh’s Capital A/c Dr. 3,500
Abhishek’s Capital A/c Dr. 3,500
To Amrish’s Capital A/c 7,000
(Being the share of Amrish’s revalued goodwill adjusted
through capital accounts of the remaining partners)
8. Profit & Loss Suspense Account Dr. 1,500
To Amrish’s Capital A/c 1,500
(Being Amrish’s Share of profit to date of death credited to
his account)
9. Revaluation A/c Dr. 33,400
To Amitabh’s Capital A/c 11,133
To Abhishek’s Capital A/c 11,133
To Amrish’s Capital A/c 11,134
(Being the transfer of profit on revaluation)
10. General Reserve A/c Dr. 8,000
Investment Fluctuation Reserve A/c Dr. 1,800
(₹ 2,400 - ₹ 600)
To Amitabh’s Capital A/c 3,267
To Abhishek’s Capital A/c 3,267

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To Amrish’s Capital A/c 3,266

(Being the transfer of accumulated profits to capital
accounts)
11. Amrish’s Capital A/c Dr. 53,300
To Amrish’s Executor’s A/c 53,300
(Being the transfer of Amrish’s Capital A/c to his
Executor’s A/c)

Working Notes:
i) Calculation of Amrish’s Share of Amount (₹)
Profit
Total profit for last three years = 18,000+16,000+20,000 = 54,000
Average profit = 54,000/3 = 18,000
Profit for 3 months = 18,000×3/12 = 4,500
Amrish’s share of Profit = 4,500×1/3 = 1,500

ii) Calculation of Goodwill Amount (₹)

Total Profits for last 5 years 1,05,000
Average profit = 1,05,000/3 = 21,000
Goodwill at one year’s purchase = 21,000×1 = 21,000
9. Diya Riya & Kiya are partners of M/s. DRK Fabrics sharing profits and losses in the ratio of 2:1:2.
On 31st March 20X4 their Balance Sheet was as under;
Liabilities (₹) Assets (₹)
Capitals; Goodwill 80,000
Diya 1,50,000 Land & Building 1,65,000
Riya 1,80,000 Furniture 75,000
Kiya 70,000 Joint life Policy 60,000
General Reserve 1,40,000 Inventory 88,740
Trade payables 60,000 Trade Receivable 96,750
Bank 34,510
6,00,000 6,00,000

Kiya died on 30th September, 20X4.

The partnership deed provides as follows;
a) That partner be allowed interest at 12% p.a. on their capitals, but no interest be charged on
drawings.
Goodwill appearing in the Balance Sheet on 31st March, 20X6 as it was purchased goodwill. That
upon the death of a partner, the goodwill of the firm be valued at one year’s purchase of the average
net profits (after charging interest on capital) for the four years to 31 st March preceding the death
of a partner. The profits of the firm before charging interest on capital were;
20X0-X1 − 1,62,000
20X1-X2 − 1,99,000
20X2-X3 − 1,87,000
20X3-X4 − 1,96,000

Average Capital during preceding four years may be assumed as ₹ 3,00,000.

b) Profits till the date of death to be ascertained on the basis of average profit of previous four
years
c) Upon the death of a partner, she is to be credited with her share of the profits, interest on
capitals etc. calculated till the date of death

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After death of Kiya;

1) ₹ 2,00,000 was received from insurance company against Joint life Policy.
2) Land & Building was appreciated by 20%, Furniture to be depreciated by 10%, inventory to be
revalued at ₹80,000, Bad debts amounted ₹1760.
3) Amount payable to Kiya was transferred to executor account
You are required to prepare;
1) Revaluation A/c
2) Partners’ Capital A/c
3) Balance Sheet as on 30th September 20X4, assuming other Assets and liabilities remaining the
same. (ICAI SM)
Sol. Revaluation A/c
Particulars (₹) Particulars (₹)
Furniture 7,500 Land & Building 33,000
Inventory 8,740
Bad Debts 1,760
Profit on Revaluation
− Diya 6,000
− Riya 3,000
− Kiya 6,000 15,000
33,000 33,000

Partners’ Capital A/c

Particulars Diya Riya Kiya Particulars Diya Riya Kiya
(₹) (₹) (₹) (₹) (₹) (₹)
Goodwill 32,000 16,000 32,000 Balance b/d 1,50,000 1,80,000 70,000
General 56,000 28,000 56,000
Reserve
Joint life 56,000 28,000 56,000
Policy
Interest on 4,200
Capital
revaluation 6,000 3,000 6,000
Kiya Capital 40,000 20,000 Diya & Riya 60,000
Capital
Bank 2,47,800 profit & loss 27,600
suspense A/c
Balance c/d 1,96,000 2,03,000
2,68,000 2,39,000 2,79,800 2,68,000 2,39,000 2,79,800

Bank A/c
Particulars (₹) Particulars (₹)
Balance b/d 34,510
Bank 2,00,000 Balance c/d 2,34,510
2,34,510 2,34,510

Balance Sheet as on 30th September 20X4

Liabilities (₹) Assets (₹)
Capitals; Land & Building 1,98,000
− Diya 1,96,000 Furniture 67,500
− Riya 2,03,000 Inventory 80,000
Trade Receivable 94,990
Trade payables 60,000 Bank 2,34,510
Kiya executor’s account 2,47,800 Profit and loss Suspense 31,800
(IOC is included)
7,06,800 7,06,800

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Working Notes: -
1) Goodwill Valuation;
20X0-X1 − 1,62,000
20X1-X2 − 1,99,000
20X2-X3 − 1,87,000
20X3-X4 − 1,96,000
Total 7,44,000

• Average = 7,44,000/4 = 1,86,000

• Less: Interest on Capital = 3,00,000 × 12% = 36,000
• Adjusted Average Profit = 1,50,000
• Goodwill (1 year’s purchase) = 1,50,000
• Kiya’s share (2/5) = 60,000

2) Journal Entry for Adjustment of Goodwill;

Particulars L.F. (₹) (₹)
Diya’s Capital A/c Dr. 40,000
Riya’s Capital A/c Dr. 20,000
To Kiya’s Capital A/c 60,000
(Share of goodwill adjusted)

3) Kiya’s Share of Profit till the date of death;

• Average profit for full year before interest on capital = 1,86,000
• 6 month’s profits = 93,000
• Less: Interest on capital 4,00,000 × 12% × 6/12 = 24,000
• Adjusted profit till the date of death = 69,000
• Kiya’s share 2/5th = 27,600

4) The Joint life policy in this question is based on the surrender value method. Where in the
amount shown in the balance sheet shall be deducted from the JLP proceeds received from
insurance co, on the death of a partner, -
₹ 2,00,000−60,000 (b/s value) = ₹ 1,40,000−divident in profit sharing ratio between the
partners.
10. Peter, Paul and Prince were partners sharing profits and losses in the ratio 2:1:1. It was provided in
the partnership deed that in the event of retirement /death of a partner he/his legal
representatives would be paid:
i) The balance in the capital Account
ii) His share of goodwill of the firm valued at two years purchase of normal average profits (after
charging interest on fixed capital) for the last three years to 31st December preceding the
retirement or death.
iii) His share of profits from the beginning of the accounting year to the date of retirement or death,
which shall be taken on proportionate basis of profits of the previous year as increased by 25%
iv) Interest on fixed capital at 10% p.a. though payable to the partners will not be payable in the
year of death or retirement.
v) All the asset are to be revalued on the date of retirement or death and the profit and loss be
debited/credited to the Capital Accounts in the profit sharing ratio.
Peter died on 30th September, 20X3. The books of Account are closed on calendar year basis from
1st January to 31st December.
The balance in the Fixed Capital Accounts as on 1st January, 20X2 were Peter ₹10,000, Paul ₹5,000
and Prince ₹5,000. The balance in the Current Account as on 1st January, 20X3 were Peter ₹20,000,
Paul ₹10,000 and Prince ₹7,000. Drawings of Peter till 30th September, 20X3 were ₹10,000. The
profits of the firm before charging interest on capital for the calendar years 20X0, 20X1 and 20X2
were ₹1,00,000, ₹1,20,000 and ₹1,50,000 respectively. The profits include the following abnormal
items of credit:

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20X0 20X1 20X2

Profit on sale of assets 5,000 7,000 10,000

Insurance claim received 3,000 - 12,000
The firm has taken out a Joint Life Policy for ₹1,00,000. Besides the partners had severally
insured their lives for ₹50,000 each, the premium in respect thereof being charged to the Profit and
Loss account. The surrender value of the Policies were 30% of the face value. On 30th June, 20X3
the firm received notice from the insurance company that the insurance premium in respect of fire
policy had been undercharged to the extent of ₹6,000 in the year 20X2 and the firm has to pay
immediately. The revaluation of the assets indicates an upward revision in value of assets to the
extent of ₹20,000. Prepare an account showing the amount due to Peter’s Legal representatives as
on 30th September, 20X3 along with necessary workings.
(ICAI SM)
Sol. In the books of M/s Paul and Prince
Executors of Peter Account
Particulars ₹ Particulars ₹
To Balance c/d 2,91,125 By Peter’s capital A/c (W.N.6) 20,000
By Peter’s Current A/c 2,71,125
(W.N.7)
2,91,125 2,91,125

Working Notes:
2019 2020 2021
₹ ₹ ₹
1) Valuation of Goodwill:
Profit as per Profit and loss A/c 1,00,000 1,20,000 1,50,000
Less: Interest on capital @ 10% 2,000 2,000 2,000
Abnormal Items:
Profit on sale of asset 5,000 7,000 10,000
Insurance claim received 3,000 - 12,000
Insurance premium undercharged - - 6,000
90,000 1,11,000 1,20,000
Total profit of three years 3,21,000
Average profit 1,07,000
Goodwill (2 x Average profit) 2,14,000
Peter’s share of goodwill (2/4) 1,07,000

2) Peter’s share of profit: ₹

Profit for the year 2021 1,50,000
Less: Insurance premium undercharged 6,000
1,44,000
Add: 25% increase thereof 36,000
Estimated profit for 2022 1,80,000
Less: Interest on capital * 1,000
Estimated profit for 2022 1,79,000
Estimated profit upto 30.9.22 1,34,250
Peter’s Share (2/4) 67,125

*Since Peter was not entitled to interest on capital in the year of death, interest is payable only to
the remaining two partners.

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3) Profit on revaluation of assets:

Particulars ₹
Upward revision in the value of assets 20,000
Peter’s share (2/4) 10,000

4) Peter’s share in insurance premium undercharged:

Insurance premium undercharged in 2021 6,000
Peter’s share 3,000
5) Share of life policy:
Joint life policy 1,00,000
Maturity value of Peter’s individual life policy 50,000
Surrender value of individual life policies of Paul &
Prince
(30 % of face value) 30,000
1,80,000
Peter’s share (2/4) 90,000

6) Peter’s Capital Account

Date Particulars ₹ Date Particulars ₹
30.9.22 To Executors of 20,000 1.1.22 By Balance b/d 10,000
Peter 30.9.22 By Profit on revaluation 10,000*
of assets
A/c (Transfer)
20,000 20,000

* This is generally transferred to Peter’s current account. But as per the requirement of adjustment
No. (v) of question, it is transferred to capital account.

7) Peter’s Current Account

Date Particulars ₹ Date Particulars ₹
30.9.22 To Drawings 10,000 1.1.22 By Balance b/d 20,000
To Insurance 3,000 30.9.22 By Share of 1,07,000
goodwill
premium By share of profit 67,125
undercharged
To Executor’s of 2,71,125 By Share of life 75,000
policy
Peter’s Account By Paul & Prince 15,000
(balance transferred)
2,84,125 2,84,125

Note: The share of goodwill given to peter would be borne by remaining partners in their gaining
ratio, so that goodwill account does not appear in the balance sheet.
11. A, B and C were trading in partnership sharing profits and losses in the proportion of 4:3:3. The
balances in the books of the firm as on 31st December, 20X3 subject to final adjustment were as
under:
Debit Credit
Amount Amount
₹ ₹
Capital Accounts
A 2,25,000
B 1,12,500

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C 1,35,000
Current Account
A 36,000
B 54,000
C 54,000
Land and Building 1,80,000
Furniture and Fixtures 33,750
Stock 2,81,250
Debtors 45,000
Bank Account 90,000
Profit for the year before charging interest 2,34,000
Creditors 67,500
Total 7,74,000 7,74,000

Regarding Goodwill may be made separately, instead of through Revaluation Account C died on 30th
June, 20X3. The Partnership deed provided that:
a) Interest was credited on Capital Account of Partners as @ 12% per annum on the balance at the
beginning of the year.
b) On the death of partner
i) Goodwill was to be valued at three years purchase of average annual profits of three years
up to the death, after deducting interest on capital employed at 10% p.a. and a fair
remuneration for each of the partners.
ii) Fixed assets were to be valued by an independent valuer and all other assets and liabilities
to be taken at book value, and
c) Whenever necessary, profit or loss should be apportioned on a time basis. You ascertain that:
i) Profit for three years, before charging partner’s interest were:
20X0 2,52,000
20X1 2,83,500
20X2 2,70,000
ii) The independent valuation on the date of death revealed:
Land and Building ₹2,25,000
Furniture ₹22,500
iii) For valuation of goodwill a fair remuneration for each of the partners would be ₹56,250 per
annum and that the capital employed in the business to be taken as ₹5,85,000 throughout.
It was agreed between the partners that:
1) Goodwill was not be shown as an asset of the firm as on 31 st December, 20X3. Therefore,
adjustment for goodwill was to be made in Capital Accounts.
2) The amount due to C’s Estate was to remain as loan with the firm carrying interest at 12%
p.a.
3) A and B would share profits equally from the date of death of C.
4) Depreciation on revised value of assets would be ignored.
You are required to prepare:
A) Partner’s Capital Account and Current Account; and
B) Balance Sheet of the firm as on 31st December, 20X3.
Working should be done correct to the nearest rupee.
(June 2023)

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Sol. Partner’s Capital Accounts

Particular A B C Particular A B C
To C’s 11,475 22,950 By balance 2,25,000 1,12,500 1,35,000
capital A/c b/d
(goodwill)
(W.N. 1)
To C’s 9,180 By A & B 34,425
current 1,60,245 Capital
A/c To C’s A/c
executor 2,13,525 89,550 (goodwill)
A/c (W.N. 1)

2,25,000 1,12,500
To balance
c/d
2,25,000 1,12,500 1,69,425 1,69,425

Partner’s Current Accounts

Particulars A B C Particulars A B C
To balance b/d 36,000 54,000 54,000 By Interest on capital 27,000 13,500 8,100
To balance c/d 83,528 39,787 By Profit & Loss A/c 79,028 70,162 26,595
(W.N. 3)
By Revaluation Profit 13,500 10,125 10,125
(W.N. 4)
By C’s Capital 9,180
1,19,528 93,787 54,000 1,19,528 93,787 54,000

Balance sheet as on 31st December,2022

Liabilities ₹ Assets ₹
Capital A/c A 2,13,525 Land & building 1,80,000
B 89,550 Add : revaluation 45,000 2,25,000
Current A/c A 83,528 Fixture & furniture 33,750
B 39,787 Less: revaluation 11,250 22,500
C’s executor A/c 1,60,245 Stock 2,81,250
C’s interest on executors 9,615 Debtors 45,000
Amount
Creditors 67,500 Bank 90,000
6,63,750 6,63,750

Working Notes:
1) Calculation of goodwill ₹
Average profit of last 3 years up to 30.6.2022
2019 (6 months) 1,26,000
2020 2,83,500
2021 2,70,000
2022 (6 months) 1,17,000
7,96,500
Years 3
Average profit 2,65,500
Less: 10% of capital employed (58,500)
Less: remuneration of partners (56,250 x 3) (1,68,750)
Average adjusted profit 38,250
Goodwill for 3 years 1,14,750
C’s Share of Goodwill (3/10x 1,14,750) 34,425

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2) Calculation of gaining ratio

Name of Partner New ratio Old ratio Gaining Ratio
A 1/2 - 4/10 1/10
B 1/2 - 3/10 2/10

A’s capital A/c Dr. 11,475

B’s capital A/c Dr. 22,950
To C’s capital A/c 34,425

Profit & Loss Appropriation Account

Particulars 1.4.22 to 1.7.22 to Particulars 1.4.22 to 1.7.22 to
30.6.22 31.12.22 30.6.22 31.12.22
To interest on capital (6 By Net profit 1,17,000 1,17,000
months):
A 2,25,000 x 6% 13,500 13,500
B 1,12,500 x 6% 6,750 6,750
C 1,35,000 x 6% 8,100 -
To Interest on executor
amount
(1,60,245 x 6%) - 9,615
To partners current
A/c:
A 35,460 43,568
B 26,595 43,567
C 26,595 -
1,17,000 1,17,000 1,17,000 1,17,000

3) Calculation of Revaluation Profit

Revaluation Account
Particulars Amount Particulars Amount
To Furniture and Fixtures 11,250 By Land & building 45,000
To Profit A (4/10) = 13,500 33,750
B (3/10) = 10,125
C (3/10) = 10,125
45,000 45,000

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