The partnership deed of a firm consisting of 3 partners - Alfa, Beta and Gamma (profit sharing ratio being2:1:1) and whose fixed capitals are -…
CA Foundation · Accounting · RTP · September 2025
The partnership deed of a firm consisting of 3 partners - Alfa, Beta and Gamma (profit sharing ratio being2:1:1) and whose fixed capitals are - 90,000,36,000 and - 24,000 respectively provides as follows: (i) The partners are allowed interest @8% p.a. on their fixed capitals, but no interest is to be allowed on undrawn profits or charged on drawings. (ii) That upon the death of a partner, the goodwill of the firm be valued at 2 years purchase of the average net profit (after charging interest on capital) for the3 years to 31st December preceding the death of a partner. (iii) That an insurance policy of 75,000 each was taken in individual names of each partner. The premium was charged against the profits of the firm. The surrender value of the policy was 20% of the sum assured. (iv) Upon the death of a partner, he is to be credited with his share of the profits, interest on capitals, etc. calculated upto 31st December following his death. (v) That the share of the partnership policy and goodwill be credited to a deceased partner as on 31st December following his death. (vi) That the partnership books to be closed annually on 31st December. Alfa died on 30th September, 2024. The amount standing to the credit of his current account as on 31st December, 2023 was - 15,000 and from that date to the date of death he had withdrawn - 90,000 from the business. An unrecorded liability of 18,000 was discovered on 30th September, 2024 and it was decided to record it and immediately pay it off. The trading results of the firm (before charging interest on capital) had been as follows:2021 Profit - 88,0202022 Profit - 79,4102023 Loss - 24,9602024 Profit - 40,410 You are required to prepare an account showing the amount due to Alfa's legal heir as of31December, 2024. Note: Impact for unrecorded liability not to be given in earlier years.
Suggested Answer and Working Notes:
Alfa’s Capital Account 2024 ₹ 2024 ₹ Sep.30 To Current A/c 75,000 Jan.1 By Balance b/d (₹ 90,000 -15000) 90,000 Dec.31 To Profit and Loss Adjt. (Unrecorded Liability) 9,000 Dec.31 By Profit and Loss A/c : Interest on Capital 7,200 Dec.31 Share of Profit 14,205 Dec.31 To Balance Transferred to Alfa’s Executor’s A/c 1,15,395 BETA & Gamma (Goodwill) 35,490 Dec.31 Insurance Policies A/c 52,500 1,99,395 1,99,395 Working Notes: (i) Valuation of Goodwill Year Profit before Interest Interest Profit after interest 2021 88020 12000 76020 2022 79410 12000 67410 2023 -24960 12000 -36960 142470 36000 106470 Average Profit - 35490 Goodwill at two years purchase of average net profits - 70980 Share of ALFA in the goodwill - 35490 (ii) Profit on Separate Life Policy Alfa’s policy - 75,000 Beta and Gamma’s policy @20% of 50,00030,000 1,05,000 Share of Alfa (1/2) ₹ 52,500 (iii) Share in profit for2024: Profit for the year 40410 Less: Interest on capitals -12000 28,410 Alfa’s share in profit (1/2) ₹ 14205 Note: An unrecorded liability of18,000 has been charged to Capital Accounts through Profit and Loss Adjustment A/c, no further adjustment in current year’s profit is required.
Topics: Death of a Partner
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