25 :- Karim, Saleem and Raheem were partners in a firm sharing profits and losses in the ratio of 3:4:3. The firm closes its books on 31st March every year. On 1st October, 2019, Karim died. On Karim’s death, the goodwill of the firm was valued at Rs 3,50,000. Karim’s share in the profits of the firm in the year of his death was to be calculated on the basis of average profits for the last four years. The profits for the last four years were 2015-16 – Rs 1,70,000 ; 2016-17 – Rs 1,30,000; 2017 -18 – Rs 1,90,000 and 2018 -19 – Rs 1,10,000. The total amount payable to Karim’s executors on his death was Rs 7,35,000. It was paid on 15th October, 2019.
Pass necessary journal entries for the above transactions in the books of the firm.
Solution :-
WORKING NOTES :-
(i) Calculation of Karim’s share of Goodwill
Goodwill of the firm = Rs 3,50,000
Karim’s share of goodwill = 3,50,000 x 3/10 = Rs 1,05,000
Karim’s share in goodwill will be contributed by Saleem and Rahim in their gaining ratio I.e, 4:3
Saleem contribute = 1,05,000 x 4/7 = Rs 60,000
Raheem contribute = 1,05,000 x 3/7 = Rs 45,000
(ii) Calculation of Karim’s share of profit
Average profit of last four years = 1,70,000 + 1,30,000 + 1,90,000 + 1,10,000/4
= Rs 1,50,000
Karim’s share in profit for six month = 1,50,000 x 6/12 x 3/10
= Rs 22,500