Partners M, N and O have capital balances of ₹12,00,000, ₹8,00,000 and ₹5,00,000 respectively. Their profit‑sharing ratio is 4:3:2 and the partnership earned a profit of ₹3,00,000 for the year. Partner N dies. The firm holds a life‑insurance policy of ₹25,00,000 on each partner, payable on death. Goodwill is valued at 1.5 years' average profit, where the average profit of the last two years is ₹3,00,000. The buy‑out price of N’s share includes his book value, his share of goodwill and a 30% premium on that goodwill share. The firm also has a bank loan of ₹4,00,000. Show the journal entry to close N’s capital account, allocate the insurance proceeds, and compute the amount each surviving partner receives from the insurance (rounded to the nearest rupee).

Step-by-step solution

1. Calculate N's share of profit: 3/(4+3+2) $\times$ 3,00,000 = ₹1,00,000.
2. Determine N's book value: capital balance + profit share = 8,00,000 + 1,00,000 = ₹9,00,000.
3. Goodwill = 1.5 $\times$ average profit = 1.5 $\times$ 3,00,000 = ₹4,50,000.
4. N's share of goodwill = profit‑sharing proportion = 3/9 $\times$ 4,50,000 = ₹1,50,000.
5. Premium on N's goodwill share = 30% $\times$ 1,50,000 = ₹45,000.
6. Buy‑out price of N = book value + goodwill share + premium = 9,00,000 + 1,50,000 + 45,000 = ₹10,95,000.
7. Journal entry to close N's capital account: Dr. N’s Capital ₹9,00,000 Dr. N’s Current Account (goodwill) ₹1,50,000 Dr. Premium on Goodwill ₹45,000 Cr. Bank (or Cash) ₹10,95,000.
8. Insurance proceeds received = ₹25,00,000.
9. Repay bank loan: ₹25,00,000 – ₹4,00,000 = ₹21,00,000 remaining.
10. After paying N’s family ₹10,95,000, surplus for M and O = ₹21,00,000 – ₹10,95,000 = ₹10,05,000.
11. M and O share the surplus in the ratio of their profit‑sharing shares (excluding N): M:O = 4:2 = 2:1.
12. Total parts = 3. M receives (2/3) $\times$ 10,05,000 = ₹6,70,000.
13. O receives (1/3) $\times$ 10,05,000 = ₹3,35,000.

Concept tested: Death of a partner with insurance & goodwill premium

Published 27 September 2026 · How this solution was prepared and checked