Question

A, B and C are partners in a firm whose books are closed on March 31st each year. A died on 30th June, 2017 and according to the agreement, the share of profits of a deceased partner up to the date of death is to be calculated on the basis of the average profits for the last five years. The net profits for the last 5 years have been: \[ 2013 = Rs.14,000 \] \[ 2014 = Rs.18,000 \] \[ 2015 = Rs.16,000 \] \[ 2016 = Rs.10,000 \text{ (Loss)} \] \[ 2017 = Rs.16,000 \] Calculate A's share of profits up to the date of death.

• A. Rs.1,200
• B. Rs.900
• C. Rs.300
• D. None of the above

Hint:

For deceased partner's profit: \[ \text{Average Profit} \times \frac{\text{Period}}{12} \] Remember to treat losses as negative while calculating average profit.

Answer 1

The Correct Option is D

Step 1: Understanding the Question:
The problem asks for the share of profit due to a deceased partner (A) for the portion of the year they were alive.
The profit calculation is based on the average of the last five years' profits as per the partnership agreement.
Step 2: Key Formulas and Approach:
1. Average Profit = Sum of Profits of last 'n' years / n.
2. Firm's Profit for the period = Average Profit $\times$ (Months lived / 12).
3. Deceased Partner's Share = Firm's Profit for the period $\times$ Partner's Profit Sharing Ratio.
Step 3: Detailed Explanation:

Calculating Total Profit: We sum up the profits and subtract the loss.
\[ \text{Total Profit} = 14,000 + 18,000 + 16,000 - 10,000 + 16,000 = 54,000 \]

Calculating Average Profit:
\[ \text{Average Profit} = \frac{54,000}{5} = 10,800 \]

Determining the Time Period: A died on 30th June, 2017. The accounting year started on 1st April, 2017. Thus, A was alive for April, May, and June (3 months).

Estimated Firm Profit for 3 Months:
\[ \text{Firm Profit for 3 months} = 10,800 \times \frac{3}{12} = 2,700 \]

Deceased Partner's Share: Assuming equal sharing (1:1:1) as no ratio is provided:
\[ \text{A's Share} = 2,700 \times \frac{1}{3} = 900 \]

Step 4: Final Answer:
The average profit is Rs. 10,800. The firm's profit for 3 months is Rs. 2,700. A's share (1/3) is Rs. 900. The correct answer is (B).