Question

L, M, and N were partners in a firm sharing profits in 3:2:1 ratio. The firm closes its books on 31st March every year. M died on 12.06.2024. On M’s death the Goodwill of the firm was valued at ₹1,80,000. On M’s death his share in the profits till the time of his death was to be calculated on the basis of previous year’s profit which was ₹3,00,000. Calculate M’s share in the profit of the firm. Pass necessary journal entries for the treatment of Goodwill and M’s share of profit at the time of his death.

Hint:

When a partner dies, calculate their share in profit up to the date of death and adjust the Goodwill account according to their share.

Answer 1

Step 1: M's Share in the Profit till Date of Death.
M’s share of the profit for the year is based on the previous year’s profit of ₹3,00,000. M's share in profit is 1/6th, as the ratio of profit sharing is 3:2:1. Therefore, M's share of profit till the date of death is: \[ M’s \, \text{Share} = \frac{1}{6} \times 3,00,000 = 50,000 \] Step 2: M's Share in Goodwill.
Goodwill on M’s death is valued at ₹1,80,000. Since M’s share in the profits is 1/6th, M’s share of Goodwill is: \[ M’s \, \text{Share of Goodwill} = \frac{1}{6} \times 1,80,000 = 30,000 \] Step 3: Journal Entries.
1. Journal entry for recording M's share of profit: \[ \text{Profit and Loss A/c} \text{Dr.} \text{50,000} \text{To M’s Capital A/c} \text{50,000} \] 2. Journal entry for Goodwill on M’s death: \[ \text{Goodwill A/c} \text{Dr.} \text{1,80,000} \text{To L’s Capital A/c} \text{90,000} \text{To N’s Capital A/c} \text{60,000} \] Step 4: Conclusion.
M’s share in the profits till the time of death is ₹50,000, and M’s share of Goodwill is ₹30,000. The journal entries account for M’s share of profit and Goodwill.