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Question

Akhil, Nikhil and Sunil were partners sharing profits and losses equally. Following was their Balance Sheet as at 31st March, 2018:

Liabilities

Assets

Trade Creditors

40,000

Building

2,00,000

General Reserve

45,000

Plant and Machinery

80,000

Capital A/cs:

Stock 35,000
Akhil

1,95,000

Debtors 80,000
Nikhil 1,20,000 Cash at Bank 85,000
Sunil

80,000

3,95,000

4,80,000

4,80,000


Sunil died on 1st August, 2018. The Partnership Deed provided that the executor of a deceased partner was entitled to:
(a) Balance of Partners' Capital Account and his share of accumulated reserve.
(b) Share of profits from the closure of the last accounting year till the date of death on the basis of the profit of the preceding completed year before death.
(c) Share of goodwill calculated on the basis of three times the average profit of the last four years.
(d) Interest on deceased partner's capital @ 6% p.a.
(e) ₹ 50,000 to be paid to deceased's executor immediately and the balance to remain in his Loan Account.
Profits and Losses for the preceding years were: 2014-15 − ₹ 80,000 Profit; 2015-16 − ₹ 1,00,000 Loss; 2016-17 − ₹ 1,20,000 Profit; 2017-18 − ₹ 1,80,000 Profit.
Pass necessary Journal entries and prepare Sunil's Capital Account and Sunil's Executor Account.

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Solution

Journal
Particulars
L.F.
Debit
Amount
Rs
Credit
Amount
Rs
General Reserve A/c
Dr.
45,000
To Akhil’s Capital A/c
15,000
To Nikhil’s Capital A/c
15,000
To Sunil’s Capital A/c
15,000
(General Reserve distributed among partners in their old ratio)
Akhil’s Capital A/c
Dr.
35,000
Nikhil’s Capital A/c
Dr.
35,000
To Sunil’s Capital A/c
70,000
(Sunil’s share of goodwill adjusted)
Interest on Capital A/c
Dr.
1,600
To Sunil’s Capital A/c
1,600
(Interest allowed on Sunil’s Capital)
Profit and Loss Suspense A/c
Dr.
20,000
To Sunil’s Capital A/c
20,000
(Sunil’s profit share transferred to his capital account)
Sunil’s Capital A/c
Dr.
1,86,600
To Sunil’s Executor’s A/c
1,86,600
(Amount due to Sunil after all adjustments transferred to his Executor’s Account)
Sunil’s Executor’s A/c
Dr.
50,000
To Bank A/c
50,000
(Amount paid to Sunil’s Executor)
Sunil’s Capital Account
Dr.
Cr.
Particulars
Amount
Rs
Particulars
Amount
Rs
Balance b/d
80,000
Interest on Capital A/c
1,600
General Reserve
15,000
Profit and Loss Suspense A/c
20,000
Akhil’s Capital A/c (Goodwill)
35,000
Sunil’s Executor’s A/c
1,86,600
Nikhil’s Capital A/c (Goodwill)
35,000
1,86,600
1,86,600
Sunil’s Executor’s Account
Dr.
Cr.
Particulars
Amount
Rs
Particulars
Amount
Rs
Bank A/c
50,000
Sunil’s Capital A/c
1,86,600
Balance c/d
1,36,600
1,86,600
1,86,600

Working Notes:

WN 1 Calculation of Sunil’s Share of Profit

Profit for 2017-18 = Rs 1,80,000



WN 2 Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase



∴ Goodwill = Average Profit × Number of Years’ Purchase

= 70,000 × 3 = Rs 2,10,000

WN 3 Adjustment of Goodwill

Old Ratio = 1 : 1 : 1

Sunil died.

∴ New Ratio = 1 : 1 and

Gaining Ratio = 1 : 1

Sunil’s Share in Goodwill =

This share of goodwill is to be distributed between Akhil and Nikhil in their gaining ratio (i.e. 1 : 1).



WN 4 Calculation of Interest on Sunil’s Capital

Sunil’s Capital Balance = Rs 80,000

∴ Interest on Capital (for 4 months)

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Q. X, Y and Z were partners in a firm sharing profits and losses in the 5 : 4 : 3. Their Balance Sheet on 31st March, 2018 was as follows:

Liabilities

Amount

(₹)

Assets

Amount

(₹)

Creditors

2,00,000

Building

2,00,000

Employees' Provident Fund

1,50,000

Machinery

3,00,000

General Reserve

36,000

Furniture 1,10,000
Investment Fluctuation Reserve 14,000 Investment (Market value ₹ 86,000) 1,00,000

Capital A/cs:

Debtors 80,000
X

3,00,000

Cash at Bank 1,90,000
Y 2,50,000 Advertisement Suspense 1,20,000
Z

1,50,000

7,00,000

11,00,000

11,00,000


X died on 1st October, 2018 and Y and Z decide to share future profits in the ratio of 7 : 5. It was agreed between his executors and the remaining partners that:
(i) Goodwill of the firm be valued at 212 years' purchase of average of four completed years' profit which were:
Year 2014-15 2015-16 2016-17 2017-18
Profits (₹) 1,70,000 1,80,000 1,90,000 1,80,000

(ii) X's share of profit from the closure of last accounting year till date of death be calculated on the basis of last years' profit.
(iii) Building undervalued by ₹ 2,00,000; Machinery overvalued by ₹ 1,50,000 and Furniture overvalued by ₹ 46,000.
(iv) A provision of 5% be created on Debtors for Doubtful Debts.
(v) Interest on Capital to be provided at 10% p.a.
(vi) Half of the net amount payable to X's executor was paid immediately and the balance was transferred to his loan account which was to be paid later.
Prepare Revaluation Account, X's Capital Account and X's Executor's Account as on 1st October, 2018.
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