A And C Were Partners In A Firm Sharing Profits In 21 Ratio
A And C Were Partners In A Firm Sharing Profits In 21 Ratio
A and C were partners in a firm sharing profits in a 2:1 ratio. The firm closes its books on 1st March each year. A died on February 26. The value of the firm's goodwill at the time of A's death was $s.%. The share of A in the profit of the firm till the time of his death was to be calculated based on the previous year's profit, which was $s.1. The task is to calculate A's share in the profit of the firm and provide necessary journal entries for the treatment of goodwill and A's share of profit at the time of his death.
Paper For Above instruction
The partnership agreement between A and C stipulated a profit-sharing ratio of 2:1, reflecting their respective entitlements in the firm's earnings. The firm adopted a fiscal year closing on 1st March, which is pivotal for computing the share of profit and understanding the timing of transactions related to A's death on 26th February.
At the time of A’s demise, the firm’s goodwill was valued at $s.%. This valuation signifies the intangible asset recognition on the firm's books, which must be treated with appropriate journal entries to maintain accounting integrity. Additionally, the profit-sharing basis is set on the previous year's profit of $s.1, providing a basis for A's proportionate share until his death.
Calculating A’s share involves taking the last year's profit, $s.1, which attributable to A. Since the profits are split 2:1, A's share in profit is computed as:
A’s profit share = (2/3) of $s.1
This calculation provides A’s total profit entitlement up to his date of death, considering the fiscal year's ending before the death date.
Accounting Treatment of Goodwill
The valuation of goodwill at $s.% necessitates a journal entry to recognize the goodwill on the books. Typically, goodwill is an intangible asset that is either written off (if internal valuation) or kept as an intangible asset in the books for future valuation adjustments. Assuming goodwill is to be recorded, the journal entry at the time of A's death is:
```
Dr. Goodwill Account $s.%
Cr. A’s Capital A/c $s.%
```
This entry recognizes the transfer or transferability of goodwill valuation into the partners' capital accounts.
Calculation of A’s share of profit
Using the profit of $s.1, the calculation of A's share till the date of death on February 26th is as follows:
A’s share = (2/3) of $s.1
However, since A died before the fiscal year end (March 1), A is entitled to profit upto his date of death, which requires proportional adjustment based on the number of days he was alive during the accounting period.
Total days in the accounting period = from 1st March of the previous year to 28th February of the current year. Since A died on February 26, the number of days A was alive in the accounting period can be considered for proportional profit sharing.
If we assume an even split without considering the exact number of days, the profit attributable to A till 26th February would be:
Profit up to 26th February = (Profit for the year) × (Number of days from 1st March to 26th February) / Total days in the year
Assuming a non-leap year with 365 days:
Number of days till 26th February = 31 (March) + 30 (April) + 31 (May) + 30 (June) + 31 (July) + 31 (August) + 30 (September) + 31 (October) + 30 (November) + 31 (December) + 31 (January) + 26 (February) = 362 days
Total days in year = 365
A's share of profit = (2/3) [$s.1 (362/365)]
Journal Entries for the profit and goodwill
At the end of the period, before closing the accounts:
1. To record profit sharing:
```
Dr. Profit and Loss Account (for the proportionate profits)
Cr. A’s Capital A/c (for A's share up to death)
Cr. C’s Capital A/c (for C's share up to death)
```
2. To transfer goodwill:
```
Dr. A’s Capital A/c $s.%
Cr. Goodwill Account $s.%
```
This adjusts the partners' capital accounts for the goodwill valuation.
Conclusion
The computation of A’s share in profit requires adjusting for the exact period he was alive before his death. The recognition of goodwill involves recording its value in the books, acknowledging the intangible asset. These accounting entries ensure accurate reflection of the firm's assets and partners' capital accounts, preserving the integrity of the partnership’s financial statements upon the death of a partner.
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