Question

Simar, Tanvi, and Umara were partners in a firm sharing profits and losses in the ratio of 5 : 6 : 9. On 31^st March, 2024, their Balance Sheet was as follows:

Balance Sheet of Simar, Tanvi, and Umara as at 31^st March, 2024

Liabilities	Amount (₹)	Assets	Amount (₹)
Capitals:		Fixed Assets	25,00,000
Simar	13,00,000	Stock	10,00,000
Tanvi	12,00,000	Debtors	8,00,000
Umara	14,00,000	Cash	7,00,000
General Reserve	7,00,000	Profit and Loss A/c	2,00,000
Trade Payables	6,00,000
Total	52,00,000	Total	52,00,000

Umara died on 30^th June, 2024. The partnership deed provided for the following on the death of a partner:

1. Goodwill of the firm be valued at 3 years purchase of average profits for the last 5 years. The profits/losses for the previous four years were:
   • 2022-23: ₹ 3,10,000 (loss)
   • 2021-22: ₹ 3,00,000 (profit)
   • 2020-21: ₹ 4,00,000 (profit)
   • 2019-20: ₹ 2,50,000 (profit)
2. Umara’s share of profit or loss till the date of her death was to be calculated on the basis of profit or loss for the year ended 31^st March 2024.
3. Calculate Goodwill of the firm.
4. Pass the necessary journal entry for the treatment of goodwill on Umara’s death.
5. Calculate Umara’s share in the profit or loss of the firm till the date of her death.
6. Pass the necessary journal entry to record Umara’s share of profit or loss till the date of her death.

Hint:

Always compute goodwill on average profits and adjust partners’ capital accordingly.

Answer 1

(a) Goodwill Calculation: Total profits for 5 years = ₹ [ -3,10,000 + 3,00,000 + 4,00,000 + 2,50,000 + 2,00,000 ] = ₹ 8,40,000 Average Profit = ₹ 8,40,000 / 5 = ₹ 1,68,000 Goodwill = 1,68,000 × 3 = ₹ 5,04,000 Umara’s share of goodwill = ₹ 5,04,000 × 9/20 = ₹ 2,26,800 (b) Journal Entry for Goodwill: Simar’s Capital A/c Dr. ₹ 1,26,000 Tanvi’s Capital A/c Dr. ₹ 1,00,800 To Umara’s Capital A/c ₹ 2,26,800 (Being Umara’s share of goodwill adjusted) (c) Umara’s Share of Profit till 30th June 2024: Profit for 2023-24 = ₹ 2,00,000 (loss) Assuming even accrual: Loss till June = ₹ 2,00,000 × 3/12 = ₹ 50,000 Umara’s share = ₹ 50,000 × 9/20 = ₹ 22,500 (d) Journal Entry: Profit and Loss Suspense A/c Dr. ₹ 22,500 To Umara’s Capital A/c ₹ 22,500 (Being Umara’s share of loss till date of death provided) Final Answer: Goodwill = ₹ 5,04,000; Umara’s share ₹ 2,26,800. Loss till death ₹ 22,500.