# The partnership agreement of a firm consisting of three partners A, B and C who share profits

## Question:

The partnership agreement of a firm consisting of three partners A, B and C who share profits and losses in the ratio of 2 : 1 : 1 and whose fixed capital are ₹10,000; ₹6,000 and ₹4,000 respectively, provide as follows :

(a) That partners be allowed interest @ 10% p.a. on their fixed capitals, but no interest be allowed on undrawn profits or charged on drawings.

(b) That, upon the death of a partner, the goodwill of the firm be valued at two years’ purchase of the average net profits (after charging interest on capital) for the three years to 31st December preceding the death of a partner.

(c) That an insurance policy of ₹10,000 each to be taken in individual names of each partner, the premium to be charged to the profit of the firm.

(d) That, upon the death of a partner, he be credited with his share of the profits, interest on capital, etc., calculated upon 31st December, following his death.

(e) That, the share of the partnership policy and goodwill be credited to a deceased partner as on 31st December following his death.

(f) That the partnership books be closed annually on 31st December.

A died on 30th September, 2017, the amount standing to the credit of his Current Account on 31st December, 2016, was ₹450 and from that date to the date of death he had withdrawn ₹3,000 from the business. An unrecorded liability of ₹2,000 was discovered on 30th September, 2016. It was decided to record it and be immediately paid-off.

The trading results of the firm (before charging interest on capital) had been as follows : 2014 : profit ₹9,640; 2015: profit ₹6,720; 2016 : loss ₹640; and 2017 : profit ₹3,670.

Assuming the surrender value of the policy to be 20% of the sum assured, you are required to prepare an account showing the amount due to A’s legal representative as on 31st December, 2017.

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