Kiran, Raveena and Hina were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. The firm closes its books on 31st March every year. As per the terms of the partnership deed, on the death of any partner, the goodwill of the firm will be calculated on the basis of four times the average profits of the last three years. Hina died on 1st July 2025. The Profits for the last three years were :
2022-23 Rs. 4,75,000
2023-24 Rs. 4,05,000
2024-25 Rs. 3,20,000
Hina's share of profit upto the date of death was to be calculated on the basis of previous year's profit.
(i) Calculate goodwill of the firm and Hina's share of goodwill.
(ii) Calculate Hina's share in the profits of the firm till the date of her death.
(iii) Pass necessary journal entries for the treatment of goodwill without opening goodwill account and for Hina's share of profit at the time of her death.
Kiran, Raveena and Hina were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. The firm closes its books on 31st March every year. As per the terms of the partnership deed, on the death of any partner, the goodwill of the firm will be calculated on the basis of four times the average profits of the last three years. Hina died on 1st July 2025. The Profits for the last three years were :
2022-23 Rs. 4,75,000
2023-24 Rs. 4,05,000
2024-25 Rs. 3,20,000
Hina's share of profit upto the date of death was to be calculated on the basis of previous year's profit.
(i) Calculate goodwill of the firm and Hina's share of goodwill.
(ii) Calculate Hina's share in the profits of the firm till the date of her death.
(iii) Pass necessary journal entries for the treatment of goodwill without opening goodwill account and for Hina's share of profit at the time of her death.
Working 1 — Goodwill:
Average Profit = (Rs. 4,75,000 + Rs. 4,05,000 + Rs. 3,20,000) ÷ 3 = Rs. 4,00,000
Goodwill of the firm = Average Profit × 4 = Rs. 4,00,000 × 4 = Rs. 16,00,000
Hina's share of Goodwill = 2/10 × Rs. 16,00,000 = Rs. 3,20,000
Working 2 — Hina's Share of Profit till Death:
Period from 1st April 2025 to 1st July 2025 = 3 months
Profit for the period (on basis of 2024-25 profit) = Rs. 3,20,000 × 3/12 = Rs. 80,000
Hina's Share = Rs. 80,000 × 2/10 = Rs. 16,000
Working 3 — Gaining Ratio:
Since no new ratio is specified for the remaining partners, Kiran and Raveena continue sharing in their old ratio, i.e., Gaining Ratio = 5 : 3
Kiran's share of goodwill borne = Rs. 3,20,000 × 5/8 = Rs. 2,00,000
Raveena's share of goodwill borne = Rs. 3,20,000 × 3/8 = Rs. 1,20,000
Journal Entries
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| Kiran's Capital A/c Dr. | 2,00,000 | |
| Raveena's Capital A/c Dr. | 1,20,000 | |
| To Hina's Capital A/c | 3,20,000 | |
| (Being Hina's share of goodwill adjusted through gaining partners' capital accounts in gaining ratio 5:3, without opening a Goodwill Account) | ||
| Profit and Loss Suspense A/c Dr. | 16,000 | |
| To Hina's Capital A/c | 16,000 | |
| (Being Hina's share of profit till the date of death credited to her capital account) |
Marking Scheme
- 11 mark: correct average profit (Rs. 4,00,000) and total goodwill (Rs. 16,00,000).
- 21 mark: correct Hina's share of goodwill (Rs. 3,20,000).
- 31 mark: correct time-based profit share of Hina (Rs. 16,000) for 3 months.
- 41 mark: correct journal entries for goodwill adjustment (gaining ratio 5:3) and profit share via Profit and Loss Suspense Account.
Hint
Compute average profit × 4 for goodwill, then Hina's share; her profit share is (previous year's profit × months/12) × her share; goodwill passes through the gaining partners' capital accounts, not a Goodwill account.
Quick Oral Answer
On Hina's death, her share of goodwill (Rs. 3,20,000) is adjusted by debiting the gaining partners Kiran and Raveena in their gaining ratio 5:3 and crediting Hina's Capital Account, while her time-apportioned share of profit (Rs. 16,000) is credited to her via a Profit and Loss Suspense Account.
Analysis & Explanation
This tests the full death-of-a-partner treatment: goodwill compensation plus time-apportioned profit.
Concept: On death, the deceased partner's capital account must be credited with both her share of goodwill (compensation for the firm's earning reputation she helped build) and her rightful share of the current year's profit up to the date of death.
Key rule: Since actual current-year profit is unknown at the date of death, the previous year's profit is time-apportioned as a reasonable estimate, credited via a Profit and Loss Suspense Account.
Exam trap: The gaining ratio here is simply the old ratio between the two survivors (5:3) since no new ratio is agreed — students must not assume equal sharing by default.
Real-world use: This treatment ensures a deceased partner's legal heirs are fairly compensated for both goodwill and unrealised profit share.
Common Mistakes
- 1Using an assumed new profit-sharing ratio between surviving partners without checking that none is specified — here the gaining ratio equals the old ratio between Kiran and Raveena (5:3).
- 2Calculating Hina's share of profit on the current year's (2025-26) profit instead of the previous year's (2024-25) profit as specifically instructed.
- 3Opening a Goodwill Account and passing entries through it, when the question explicitly asks for treatment 'without opening goodwill account', i.e., directly through partners' capital accounts.
Interesting Facts
On a partner's death, since the current year's actual profit is not yet known, CBSE questions typically use the previous year's profit, time-apportioned to the date of death — exactly the method tested here.
The 'Profit and Loss Suspense Account' is a technical device used only for a deceased partner's share of profit; it is later closed off against the year's actual Profit and Loss Appropriation Account.
Because no goodwill account is opened under modern accounting treatment, goodwill adjustments on death or retirement always pass only through partners' capital accounts, using the gaining partners' ratio.
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Frequently Asked Questions
Why is the gaining ratio here simply the old ratio 5:3 between Kiran and Raveena?
Because the question does not specify any new agreed ratio between the surviving partners after Hina's death, so by default they continue sharing profits in their existing mutual ratio, making the gaining ratio identical to it.
Why use the previous year's profit (2024-25) to estimate Hina's share of profit till death?
Because the firm's books close on 31st March and the actual profit for the year of death is not yet determined at the time of settlement, so the last known year's profit is used as a reasonable estimate, time-apportioned to the date of death.
What is a Profit and Loss Suspense Account used for?
It is a temporary nominal account used to record a deceased or outgoing partner's estimated share of the current year's profit until the firm's actual profit for the full year is ascertained.