In a partnership of A, B and C, capital balances are ₹6,00,000, ₹4,00,000 and ₹5,00,000 respectively. The partnership profit for the year is ₹1,20,000 shared in the ratio 4:3:3. Partner B dies. The partnership has a life insurance policy of ₹15,00,000 on each partner, payable on death. The buy‑out price of B’s share is book value. The partnership has a bank loan of ₹2,00,000. Show the entry to close B’s capital account and distribute the insurance proceeds to A and C. What are the amounts received by A and C from the insurance? (Round to nearest rupee)
Answer
A receives ₹8,18,182; C receives ₹6,81,818
The correct answer is A receives ₹8,18,182; C receives ₹6,81,818 — Record the entries accordingly. The bank loan remains unaffected.
Step-by-step solution
- Calculate B’s share of profit: ₹1,20,000 × (3/(4+3+3)) = ₹36,000.
- Determine B’s book value: ₹4,00,000 + ₹36,000 = ₹4,36,000.
- Debit B’s capital account by ₹4,36,000 to close it.
- Credit the insurance proceeds of ₹15,00,000 to the partnership.
- Compute the new capital after B’s death: A ₹6,00,000, C ₹5,00,000. Their ratio is 6:5.
- Distribute the insurance proceeds in this ratio: A gets ₹15,00,000 × (6/11) = ₹8,18,181.82 ≈ ₹8,18,182; C gets ₹15,00,000 × (5/11) = ₹6,81,818.18 ≈ ₹6,81,818.
- Record the entries accordingly. The bank loan remains unaffected.
Common mistake: Neglecting B’s share of profit before computing book value or mis‑splitting the insurance proceeds
Concept tested: Death of partner with insurance and buy‑out at book value
Published · How this solution was prepared and checked
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