Published on February 14, 2014
ASCERTAINMENT OF SHARE OF PROFIT FROM THE DATE OF LAST BALANCE SHEET TO THE DATE OF DEATH – DEATH OF A PARTNER
The perpetrators of the late partner are at liberty to a share of profit earned by the firm from the date of most recent balance sheet and to the date of death. The profits of this phase will be computed on the basis of the provision of the firm deed. Usually, the following two methods are followed for ascertaining the profit of the said stage: (a) Time Basis (b) Turnover Basis
(A) Time Basis: Under this method, profits of the year is dispersed amid the pre-death stage and post-death stage on the basis of time presumptuous that profits have been accrued time after time all through the year. The pre-death period’s profit is dispersed amongst all the partners (including deceased) in the old profit-sharing ratio. ILLUSTRATION: X, Y and Z are partners sharing profits and losses in the ratio of 3:2:1. On the 1st March 2013, Z died. The average profits of the firm for the last four years were $36,000. Presume the date of closing to be 31st December every year.
SOLUTION: Z’s Share of Profit is computed as follows: Total Profit for the year $36,000 Pre-death period’s profit i.e. for2 months $6,000 Post-death period’s profit (I.e. for 10 months $30,000) ($36,000 - $6,000) Z’s share of profit 1/6 of $6,000 = $1,000
(B) Turnover Basis: Under this method, profit for the year is dispersed on turnover basis among pre-death period and post-death period. The pre-death period’s profit is shared between all Partners (including the deceased) in the old profit sharing ratio ILLUSTRATION: A, B and C are partners sharing equally. On 30th June 2012, A died. The profit for the year ended on 31st December 2012 is $30,000. The aggregate turnover for the year 2012 is $300,000. Turnover up till 30th June 2012 is $225,000.
SOLUTION: A’s Share of Profit is computed as follows: Total profit for the year is = $30,000 Pre-death period’s profit = $30,000 x $225,000/$300,000 = 22,500. A’s share of profit is 1/3 of the $22,500 = $7,500.
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