Question

Arti, Bharti and Seema are partners sharing profits in the proportion of 3 :2 :1 and their Balance Sheet as on March 31, 2003 stood as follows.

$\text{Balance Sheet}$
$\text{as on March 31,2003}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs)}& \text{Assets}& \text{Amt. (Rs)}\\ \text{Bills Payable}& 12,000& \text{Building}& 21,000\\ \text{Creditors}& 14,000& \text{Cash in hand}& 12,000\\ \text{Ganeral Reserve}& 12,000& \text{Bank}& 13,700\\ \text{Capital}& & \text{Debtors}& 12,000\\ \text{Arti}20,000& & \text{Bills Receivable}& 4,300\\ \text{Bharti}12,000& & \text{Stock}& 1,750\\ \text{Seema}\underset{–}{8,000}& 40,000& \text{Investment}& 13,250\\ & \overline{\underset{–}{\underset{–}{78,000}}}& & \overline{\underset{–}{\underset{–}{78,000}}}\end{array}$

Bharti died on June 12, 2003 and according to the deed of the said partnership, her executors are entitled to be paid as under

(a) The capital to her credit at the time of her death and interest there on @ 10% per annum.

(b) Her proportionate share of reserve fund.

(c) Her share of profits for the intervening period will be based on the sales during that period, which were calculated as Rs. 1,00,000. The rate of profit during past three years had been 10% on sales.

(d) Goodwill according to her share of profit to be calculated by taking twice the amount of the avera ge profit of the last three years less 20%. The prof its of the previous years were

2001 - Rs. 8,200

2002 - Rs. 9,000

2003 - Rs. 9,800

The investments were sold for Rs.16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

Answer 1

$\text{Journal Entries}$
$\begin{array}{ccccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}& \\ \text{2003}& & & & & & \\ \text{June 12}& \text{Interest on Capital A/c}& \text{Dr}& & 240& & \\ & \text{Ganeral Reserve A/c}& \text{Dr}& & 4,000& & \\ & \text{Profit and Loss (Suspense) A/c}& \text{Dr}& & 3,333& & \\ & \text{To Bharti's Capital A/c}& & & & 7,573& \\ & \text{(Profit, interest and general reserve}& & & & & \\ & \text{are in credited to Bharti's capital account)}& & & & & \\ & \underset{–}{}& & & & & \\ \text{June 12}& \text{Arti's Capital A/c}& \text{Dr}& & 3,600& & \\ & \text{Seema's Capital A/c}& \text{Dr}& & 1,200& & \\ & \text{To Bharti's Capital A/c}& & & & 4,800& \\ & \text{(Bharti's share of goodwill adjusted to Atri's}& & & & & \\ & \text{and Seema capital account in their gaining}& & & & & \\ & \text{ratio 3 :1)}& & & & & \\ & \underset{–}{}& & & & & \\ \text{June 12}& \text{Bharti's Capital A/c}& \text{Dr}& & 24,373& & \\ & \text{To Bharti's Executors A/c}& & & & 24.373& \\ & \text{(Bharti's capital account is transfered to}& & & & & \\ & \text{her executors account)}& & & & & \\ & \underset{–}{}& & & & & \\ \text{June 12}& \text{Bank A/c}& \text{Dr}& & 16,200& & \\ & \text{To Investment A/c}& & & & 13,250& \\ & \text{To Profit and Loss A/c}& & & & 2,950& \\ & \text{(Investment sold)}& & & & & \\ & \underset{–}{}& & & & & \\ \text{June 12}& \text{Bharti's Executor A/c}& \text{Dr}& & 24,373& & \\ & \text{To Bank A/c}& & & & 24,373& \\ & \text{(Bharti's executor paid)}& & & & & \end{array}$

$\text{Dr}\text{Bharti's Capital Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ \text{2003}& & & & \text{2003}& & & \\ \text{June 12}& \text{Bharti's Executors A/c}& & 24,373& \text{Mar 31}& \text{Balance b/d}& & 12,000\\ & & & & & \text{Interest on Capital A/c}& & 240\\ & & & & & \text{General Reserve A/c}& & 4,000\\ & & & & & \text{Profit and Loss}& & 3,333\\ & & & & & \text{(Suspense) A/c}& & \\ & & & & & \text{Arti's Capital A/c}& & 3,600\\ & & & & & \text{Seema's Capital A/c}& & 1,200\\ & & & \underset{–}{\overline{\underset{–}{24,373}}}& & & & \underset{–}{\overline{\underset{–}{24,373}}}\end{array}$

$\text{Dr}\text{Bharti's Executor's Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ \text{2003}& & & & \text{2003}& & & \\ \text{June 12}& \text{Bank A/c}& & 24,373& \text{June 12}& \text{Capital A/c}& & 24,373\\ & & & \underset{–}{\overline{\underset{–}{24,373}}}& & & & \underset{–}{\overline{\underset{–}{24,373}}}\end{array}$

Working Note :

1. Bharti’s share of profit = Profit is 10% of sales
Sales during the last year for that period were ₹ 1, 00,000
If sales are ₹ 1, 00,000, then the profit is ₹ 10,000
Hence profit till date of death = $1,00,000\times \frac{2}{6}=3,333$

2. Bharti’s Share of Goodwill
Goodwill of the firm = Average Profit × Number of Years Purchase

Average profit $\frac{8,200+9,000+9,800}{3}$ = 9,000 - 20% of average profit

or 9,000 - 1,800 = 7,200

Goodwill of firm = Average profit $\times$ No of purchase years

= $7,200\times 2=14,400$

Bharti's share of goodwill = $14,400\times \frac{2}{6}=4,800$
to be contributed by remaining partners in gaining ratio i.e, 3 :1

3. Interest on Capital for 73 days, i.e. from April 1, 2016 to June 12, 2016

Interest on Capital = Amount of Capital × Ratio of Interest × Period
= $1,200\times \frac{10}{100}\times \frac{73}{365}=240$