Death of Balwinder: Executor's Claim and Silent Deed
M/s Majha Traders has partners Gurpreet, Balwinder and Jaspreet, sharing profits and losses in the ratio 2 : 2 : 1. Balwinder died on 31 July 2023. His capital account showed a credit balance of ₹5,40,000 on 1 April 2023, and he withdrew ₹60,000 on 1 July 2023. The partnership deed provides interest on capital @ 10% per annum and interest on drawings @ 6% per annum, and states that a deceased partner's share of profit up to the date of death is to be calculated on the basis of the profit of the immediately preceding year, which was ₹3,60,000. Goodwill is to be valued at two years' purchase of the average profit of the last three years, which were ₹3,00,000, ₹3,60,000 and ₹4,20,000. The deed contains no clause on how goodwill is to be settled. Balwinder's son claims profit for the whole year on the ground that the firm earns evenly through the year, and also demands that goodwill be raised as an asset in the books so that his father's share is visibly protected.
1. Compute the amount payable to Balwinder's executors, showing each component.
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Component-wise computation (1 April 2023 to 31 July 2023 = 4 months)
| Item | Working | ₹ |
|---|---|---|
| Capital balance | given | 5,40,000 |
| Add: Interest on capital | 5,40,000 × 10% × 4/12 | 18,000 |
| Add: Share of profit to date of death | 3,60,000 × 4/12 × 2/5 | 48,000 |
| Add: Share of goodwill | 7,20,000 × 2/5 | 2,88,000 |
| Less: Drawings | given | (60,000) |
| Less: Interest on drawings | 60,000 × 6% × 1/12 | (300) |
| Amount due to executors | 8,33,700 |
Supporting workings
- Goodwill = average profit × 2 = [(3,00,000 + 3,60,000 + 4,20,000) / 3] × 2 = 3,60,000 × 2 = ₹7,20,000. Balwinder's share = 2/5 = ₹2,88,000.
- Interest on drawings is charged for one month only, because the money was withdrawn on 1 July 2023 and the partner died on 31 July 2023.
- Profit share is taken for 4 months (April to July) using the previous year's profit, as the deed directs, rather than by closing the books.
Presentation. The total of ₹8,33,700 is credited to Balwinder's Executors' Account. If the firm settles part of it in cash, the balance is transferred to the Executors' Account and may carry interest at the rate stated in the deed (none is specified here, so no interest is provided on the unpaid balance).
2. Compute the gaining ratio of the continuing partners and show how Balwinder's share of goodwill is adjusted in the books.
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New ratio of the continuing partners. With Balwinder (2/5) gone, the remaining 3/5 is divided between Gurpreet (2/5) and Jaspreet (1/5) in the ratio 2 : 1.
Gurpreet = 3/5 × 2/3 = 2/5... corrected to 2/3; Jaspreet = 3/5 × 1/3 = 1/3.
New ratio = 2 : 1
Gaining ratio = New share − Old share
Gurpreet = 2/3 − 2/5 = 10/15 − 6/15 = 4/15
Jaspreet = 1/3 − 1/5 = 5/15 − 3/15 = 2/15
Gaining ratio = 4 : 2 = 2 : 1
Adjustment of goodwill. Balwinder's share of ₹2,88,000 is compensated by the gaining partners in the gaining ratio:
- Gurpreet: 2,88,000 × 2/3 = ₹1,92,000
- Jaspreet: 2,88,000 × 1/3 = ₹96,000
Journal entry
Gurpreet's Capital A/c Dr 1,92,000 Jaspreet's Capital A/c Dr 96,000 To Balwinder's Capital A/c (Executors' A/c) 2,88,000
Reasoning. The continuing partners will enjoy Balwinder's 2/5 share of future profits, so they must pay for it in proportion to the benefit each receives - that is the gaining ratio, not the old or new ratio. Goodwill is not opened as an asset; it is merged into the capital accounts and disappears from the balance sheet, and the amount credited to Balwinder becomes part of what his executors receive.
3. Evaluate the son's two claims: that profit should be computed for the full year, and that goodwill should be raised as an asset in the books.
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Claim 1 – profit for the full year: rejected. Balwinder was a partner only up to 31 July 2023. Profit after that date is earned by the capital and effort of Gurpreet and Jaspreet, and a deceased partner's estate cannot share in profits of a period during which it bore none of the risk. The deed expressly adopts the previous year's profit as the basis, and the relevant fraction is 4/12 of ₹3,60,000 × 2/5 = ₹48,000. The claim that profits accrue evenly is effectively an argument for the time basis, which is exactly what has been applied - it does not justify the full twelve months. If the deed had been silent, the usual practice would be to take the average profit of the last few years, or to prepare accounts up to the date of death; either way, the period is capped at four months.
Claim 2 – goodwill as an asset: rejected. Goodwill is raised only to measure and distribute the retiring or deceased partner's share; it is not a resource the firm can realise. Accounting standards do not permit self-generated goodwill to be carried as an asset. If it were shown, the balance sheet would be inflated and the account would have to be written off later against all partners, including the continuing partners who have just paid for it in cash terms through their capital accounts. The correct treatment is the adjustment entry in the capital accounts: ₹2,88,000 debited to Gurpreet and Jaspreet and credited to Balwinder's executors.
Practical safeguard. The son's underlying worry - that the value is being lost - is answered by the fact that the ₹2,88,000 is part of the ₹8,33,700 due to the executors and is payable in cash or as an interest-bearing balance; it is legally protected without appearing as an asset.