Lesson eLearning

Partners X, Y and Z have capital balances of ₹10,00,000, ₹6,00,000 and ₹4,00,000 respectively. Their profit sharing ratio is 5:3:2 and the partnership earned a profit of ₹2,40,000 for the year. Partner Y dies. The firm holds a life‑insurance policy of ₹20,00,000 on each partner, payable on death. The buy‑out price of Y’s share is his book value plus a 20% premium on Y’s share of goodwill. Goodwill is valued at one year’s average profit. The firm also has a bank loan of ₹3,00,000. Show the journal entry to close Y’s capital account, allocate the insurance proceeds, and compute the amount each surviving partner receives from the insurance. (Round to nearest rupee)

hard 5 marks Class 12 · Accountancy · Retirement or Death of a Partner
Answer
X receives ₹9,38,286 and Z receives ₹3,75,314

The correct answer is X receives ₹9,38,286 and Z receives ₹3,75,314 — Distribute remaining insurance proceeds between X and Z in their new profit‑sharing ratio (Y removed): X : Z = 5 : 2. Total ratio = 7. X’s share = (5/7)×₹13,13,600 = ₹9,38,285.71 ≈ ₹9,38,286. Z’s share = (2/7)×₹13,13,600 = ₹3,75,314.29 ≈ ₹3,75,314. Journal entry: Dr Bank A/c ₹13,13,600 Cr X’s Capital A/c ₹9,38,286 Cr Z’s Capital A/c ₹3,75,314

Step-by-step solution

  1. Compute Y's share of profit: (3/10)×₹2,40,000 = ₹72,000.
  2. Update Y's capital to book value: ₹6,00,000 + ₹72,000 = ₹6,72,000.
  3. Calculate goodwill: one year's average profit = ₹2,40,000.
  4. Find Y's share of goodwill: (3/10)×₹2,40,000 = ₹72,000.
  5. Premium on Y's goodwill share: 20% of ₹72,000 = ₹14,400.
  6. Buy‑out price for Y = book value + premium = ₹6,72,000 + ₹14,400 = ₹6,86,400.
  7. Journal entry to close Y’s capital and pay Y’s estate: Dr Y’s Capital A/c ₹6,72,000 Dr Y’s Personal A/c (Goodwill premium) ₹14,400 Cr Bank A/c ₹6,86,400
  8. Insurance proceeds received: ₹20,00,000. Dr Insurance Receivable A/c ₹20,00,000 Cr Y’s Estate A/c ₹6,86,400 (payable to Y’s heirs) Cr Bank A/c ₹13,13,600 (remaining proceeds)
  9. Distribute remaining insurance proceeds between X and Z in their new profit‑sharing ratio (Y removed): X : Z = 5 : 2. Total ratio = 7. X’s share = (5/7)×₹13,13,600 = ₹9,38,285.71 ≈ ₹9,38,286. Z’s share = (2/7)×₹13,13,600 = ₹3,75,314.29 ≈ ₹3,75,314. Journal entry: Dr Bank A/c ₹13,13,600 Cr X’s Capital A/c ₹9,38,286 Cr Z’s Capital A/c ₹3,75,314
Common mistake: Ignoring the goodwill premium or distributing the insurance proceeds in the original profit‑sharing ratio instead of the adjusted ratio after death.

Concept tested: Buy‑out on death with insurance and goodwill premium

Published · How this solution was prepared and checked

← All Retirement or Death of a Partner questions