CMA Intermediate · Financial Accounting

Death of Partner: formula sheet

Full chapter guide

Key formulas

Time basis: Profit up to death = Profit of the year × (Months or days from last balance sheet date to death ÷ 12 months or 365 days); Use when profit is assumed to accrue evenly. Use months if the question gives dates in whole months.
Sales basis: Profit up to death = Profit of the year × (Sales from last balance sheet date to death ÷ Sales of the full year); Use when the question gives sales and says profit should follow sales.
Deceased partner's share: Share of profit = Profit up to death × Deceased partner's profit sharing ratio; Credit his capital account. When profit is estimated, debit Profit and Loss Suspense Account.
Journal entry for profit: Profit and Loss Suspense A/c Dr. to Deceased Partner's Capital A/c; Used when profit is estimated. For a loss, reverse the entry: Deceased Partner's Capital A/c Dr. to Profit and Loss Suspense A/c.
Sales up to death when only part sales are given: Sales up to death = Total sales of the year − Sales after the date of death; Or add monthly sales from the start of the year till the death.
Gaining ratio: Gaining ratio = New ratio − Old ratio (for each continuing partner); Use only for continuing partners. The gains should add up to the deceased partner's old share.
Deceased partner's share of goodwill: Share of goodwill = Total goodwill × Deceased partner's old share; If goodwill is given as a value for the whole firm, use it directly. If given for a part, scale it up.
Goodwill by average profit: Goodwill = Average profit × Number of years' purchase; Adjust profits for abnormal items before averaging, unless the question says otherwise.
Goodwill by super profit: Super profit = Average profit − Normal profit; Goodwill = Super profit × Years' purchase; Normal profit = Capital employed × Normal rate of return ÷ 100.
Goodwill adjustment without a goodwill account: Dr Gaining partners' capital A/cs (in gaining ratio); Cr Deceased partner's capital A/c (share of goodwill); Used when the firm does not want goodwill to remain in the books.
Goodwill raised in the books: Dr Goodwill A/c; Cr All old partners' capital A/cs (old ratio). Then Dr Continuing partners' capital A/cs (new ratio); Cr Goodwill A/c; Use when the question asks you to show goodwill and write it off.
Revaluation result: Profit or loss on revaluation is shared by all old partners in the old ratio; Increase in asset or decrease in liability is a gain. Decrease in asset or increase in liability is a loss.
Existing goodwill in the books: Write off the existing goodwill to all old partners' capital accounts in the old ratio before the new goodwill entry; Debit capital accounts in the old ratio and credit Goodwill A/c.
Policy claim entry: Bank A/c Dr (full sum assured) | To Joint Life Policy A/c; The full sum assured is received, not the surrender value.
Reserve released: Joint Life Policy Reserve A/c Dr | To Partners' Capital A/cs (old ratio); Used when the reserve method is followed. The reserve is cleared on closure.
Net gain on policy: Surplus = Claim received − Policy A/c book value; Credit to partners' capital accounts in the old ratio. This holds whether or not a reserve exists. If the policy was first adjusted to surrender value, use the adjusted book value here.
Surplus when reserve exists: Total credited to partners = (Claim − Policy A/c book value) + Joint Life Policy Reserve; Both parts are shared in the old ratio. Do not add the reserve into the surplus as if it were a new gain. The total equals the claim only when reserve = book value. In the usual textbook case the reserve equals the policy book value, or is built up to the surrender value.
Transfer if policy carried at surrender value: Adjustment = Surrender value − Original book value of policy. Then surplus on death = Claim − Surrender value; A positive adjustment is a gain and a negative one is a loss. Share it in the old ratio unless the question directs otherwise. After the adjustment, the book value is the surrender value. The adjustment and the surplus on death together equal Claim − original book value, so do not count the adjustment twice.
Interest on drawings: Drawings × Rate ÷ 100 × Months ÷ 12; Charged if the deed provides for it. Months run from the date of withdrawal to the date of death.
Interest on capital up to death: Capital × Rate ÷ 100 × Months ÷ 12; Allowed if the deed provides for it. Use opening capital unless the question gives other information.
Reserves on death: Credit to each partner = Reserve × Old ratio share; The deceased's share is part of the amount due to the executor.
Amount due to deceased partner: Capital + Reserves share + Goodwill share + Revaluation profit share + Interest on capital + Salary due + Profit up to death + JLP share − Drawings − Interest on drawings − Losses share; Use only the items the question gives. Treat each as credit or debit as shown.
Transfer entry: Deceased Partner's Capital A/c Dr. To Executor's A/c; Passed for the final credit balance after all adjustments.
Interest on instalment balance: Interest = Outstanding balance × Rate ÷ 100 × Time (in years); Use the balance outstanding at the start of that period. Half-yearly period means time = 1/2.
Closing balance of executor's account: Opening balance + Interest − Instalment paid; Instalment paid may be principal alone or principal plus interest; read the question.
Interest on drawings up to death: Drawings × Rate ÷ 100 × Months ÷ 12; Months are from the date of withdrawal to the date of death, not to year end, unless stated.
Gaining ratio: Gain = New share − Old share (for each continuing partner); The gaining ratio is the ratio of these gains. If all survivors gain, every gain is positive.
New ratio when survivors continue in their old ratio: New ratio = Old ratio of survivors only; For example, if A, B and C share 5:3:2 and C dies, A and B continue 5:3. In this case the gaining ratio equals the new ratio.
Goodwill share of deceased: Deceased's goodwill = Total goodwill × Deceased's old share; Credit the deceased's capital account. Debit the gaining partners' capital accounts in the gaining ratio.
Reserves and revaluation: Share of reserve / revaluation profit (loss) = Amount × Old ratio share; Reserves and accumulated profits are credited to all partners in the old ratio. A revaluation profit is credited and a loss debited in the old ratio.
Amount due to executor: Capital + Share of reserves + Share of goodwill + Share of revaluation profit + Profit up to date of death (+ interest on capital, salary, JLP share if given) − Drawings − Interest on drawings − Share of revaluation loss or loss up to death; Include only the items given. Closing balance of the deceased's account is transferred to Executor's A/c.
New capitals in new ratio: New capital of each survivor = Agreed total capital × New share; The difference from the adjusted capital is cash brought in (if short) or withdrawn (if excess).

Quick revision

On death, the firm settles with the executor or legal representative of the deceased.
The date of death is the cut-off for profit, interest on capital and drawings.
Profit up to death is found in one of two ways, as the question states. Time apportionment takes the previous year's (or current year's) profit pro rata to the period up to death. The sales method applies the ratio of sales up to the date of death to the total sales of the year.
The deceased's share of goodwill is credited to his capital account under either treatment. Goodwill is treated in one of two ways. (a) Goodwill is raised in the books in the old ratio, so the deceased is credited with his share, and it is written off among the surviving partners in their new ratio, since the deceased has no new share. (b) No goodwill is raised. The gaining partners' capital accounts are debited in the gaining ratio and the deceased's capital account is credited with his share. If goodwill already appears in the books, first write it off to all partners' capital accounts in the old ratio, then apply (a) or (b) to the full agreed goodwill. If the question says so, raise only the increase in the old ratio instead. Follow the question's instruction.
Gaining ratio = new share − old share for each surviving partner.
Revaluation profit or loss is shared by all partners in the old ratio, including the deceased.
On death of a partner, the firm receives the sum assured of the joint life policy in full: debit Bank, credit Joint Life Policy account. The policy account is then closed. If a policy reserve exists, it is transferred to all partners' capital accounts, including the deceased, in the old ratio. If no reserve exists, the surplus (sum assured less book value of the policy) is distributed in the old ratio. The deceased is credited only with his share, not the whole amount.
Interest on drawings is charged up to the date of death and debited to the deceased's account.
Interest on capital is credited to the deceased for the period up to the date of death only.
The deceased's capital account closes by transfer of its balance to the executor's account, shown as a liability. If it is paid in instalments with interest, it is shown as the executor's loan.
If paid in instalments, interest to the executor is a finance cost and is not part of the capital balance.
Check the final balance sheet: the total of assets must equal the total of capital and liabilities.

Common mistakes

Using the wrong profit figure, such as the current year's when the question gives the previous year's profit. Fix: Underline the phrase that tells you which year's profit to use before you start calculating.
Counting the months wrongly, for example 6 months for a 1 April to 30 June death. Fix: Count from the day after the last balance sheet date to the date of death. For a 31 March year end and death on 30 June, it is 3 months.
Sharing the deceased partner's goodwill in the new ratio instead of the gaining ratio. Fix: When no goodwill account is kept, debit the gainers in the gaining ratio. Use the new ratio only when writing off a raised goodwill account.
Crediting revaluation profit or loss to the continuing partners only. Fix: The revaluation relates to the period up to death. Share it among all old partners, including the deceased, in the old ratio.
Crediting the surrender value instead of the full claim on death. Fix: On death, the insurer pays the sum assured. Use the surrender value only to state the asset value or if the firm cancels the policy.
Sharing the policy surplus in the new ratio. Fix: Gains and reserves that arose before death belong to the old partners in the old ratio.
Taking profit for the full year instead of up to the date of death Fix: Calculate time-based profit using the method in the question: sales-based, or time-based on the previous or current year's profit. Apply it only to the period up to death.
Charging interest on drawings to year end Fix: For the deceased partner, stop interest on drawings and on capital at the date of death.
Charging goodwill to the survivors in the old ratio. Fix: The deceased's goodwill is borne by the gainers, in the gaining ratio. Only the credit to the deceased uses his old share.
Dividing the reserve among the survivors only. Fix: Reserves, accumulated profits and revaluation results belong to all partners at the date of death. Share them in the old ratio including the deceased.

Exam tips

Write the basis (time or sales) and the profit year in the first line of your working note. This earns the method mark even if arithmetic slips.
Show the fraction of the year as a number, such as 6/12, before multiplying. Examiners give step marks for it.
Always give the journal entry with narration. Use the Profit and Loss Suspense Account when profit is estimated.
For MCQs, compute the firm's profit first, then the partner's share. Options often include the firm's profit as a trap.
Check whether the question asks for the share for the deceased only or the profit for the firm. Answer exactly what is asked.
Write the gaining ratio calculation as a separate working note. Examiners give marks for it even if a later figure is wrong.
Read the wording on goodwill carefully: 'not to be shown in the books' means gaining ratio adjustment, while 'to be raised and written off' means the goodwill account method.
Always check that the total of the gains equals the deceased partner's old share before moving on.