Partners S, T and U have capital balances of ₹12,00,000, ₹8,00,000 and ₹5,00,000 respectively. Their profit‑sharing ratio is 5:3:2 and the partnership earned profits of ₹2,20,000, ₹2,40,000 and ₹2,60,000 in the last three years. Partner T dies. Goodwill is valued at 1.5 years’ average profit. The buy‑out price of T’s share includes his book value, his share of goodwill and a 20% premium on that goodwill share. The firm holds a life‑insurance policy of ₹30,00,000 on each partner, payable on death, and has an outstanding bank loan of ₹5,00,000. Show the journal entry to close T’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. Compute average profit of the last three years: (₹2,20,000+₹2,40,000+₹2,60,000)/3 = ₹2,40,000.
2. Goodwill = 1.5 × average profit = 1.5 × ₹2,40,000 = ₹3,60,000.
3. T’s share of goodwill = profit‑sharing fraction of T = 3/(5+3+2)=3/10; therefore goodwill share = ₹3,60,000 × 3/10 = ₹1,08,000.
4. Premium on goodwill = 20% of ₹1,08,000 = ₹21,600.
5. Buy‑out price of T = book value (capital balance) ₹8,00,000 + goodwill ₹1,08,000 + premium ₹21,600 = ₹9,29,600.
6. Journal entry to close T’s capital account records the debit of his capital and the credits for goodwill, premium and cash paid.
7. Life‑insurance claim received = ₹30,00,000. First, settle the bank loan: debit Bank Loan ₹5,00,000 and credit Insurance Claim ₹5,00,000.
8. Remaining insurance proceeds = ₹30,00,000 – ₹5,00,000 = ₹25,00,000.
9. Distribute the remaining amount between surviving partners S and U in their profit‑sharing ratio 5:2 (since T’s share is removed).
10. S’s share = (5/7) × ₹25,00,000 = ₹1,78,571 (rounded).
11. U’s share = (2/7) × ₹25,00,000 = ₹7,14,286 (rounded).

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

Published 1 October 2026 · How this solution was prepared and checked