Question

Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31,2007.

$\begin{array}{ccccccc}& & & & & & \\ & & & & \text{Balance Sheet}& & \\ \text{Dr}& & & & \text{as on March 31, 2007}& & \text{Cr}\end{array}\begin{array}{cccccc}\text{Capital and Liabilities}& & \text{Amt.(Rs)}& \text{Assets}& & \text{Amt.(Rs)}\\ \text{Sundry Creditors}& & \text{16,000}& \text{Bills Receivable}& & \text{16,000}\\ \text{General Reserve}& & \text{16,000}& \text{Furniture}& & \text{22,600}\\ \text{Capital Accounts}& & & \text{Stock}& & \text{20,400}\\ \text{Prateek}& \text{30,000}& & \text{Sundry Debtors}& & \text{22,000}\\ \text{Rockey}& \text{20,000}& & \text{Cash at Bank}& & \text{18,000}\\ \text{Kushal}& \underset{–}{20,000}& \text{70,000}& \text{Cash in Hand}& & \text{3,000}\\ & & \overline{\underset{–}{\underset{–}{1,02,000}}}& & & \overline{\underset{–}{\underset{–}{1,02,000}}}\end{array}$

Rockey died on June 30, 2007. Under the terms of the partnership deed, the executors of a deceased partner were entitled to

(a) Amount standing to the credit of the Partner's capital account.

(b) Interest on capital at 5% per annum.

(c) Share of goodwill on the basis of twice the average of the past three years' profit.

(d) Share of profit from the closing date of the last financial year to the date of death on the basis of last year's profit

Profits for the year ending on March 31, 2005, March 31, 2006 and March 31, 2007 were Rs.12,000, Rs. 16,000 and Rs.14,000 respectively. profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up Rockey's capital account to be rendered to his executor.

Answer 1

$\begin{array}{ccccccc}& & & & & & \\ & & & & \text{Journal Entries}& & \end{array}\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ \text{2007}& & & & & \\ \text{June 30}& \text{Interest on Capital A/c}& \text{Dr}& & 250& \\ & \text{Profit and Loss (Suspense) A/c}& \text{Dr}& & 1,000& \\ & \text{General Reserve A/c}& \text{Dr}& & 4,571& \\ & \text{To Rockey's Capital A/c}& & & & 5,821\\ & \text{(Share of profit, interest on capital and}& & & & \\ & \text{share of general reserve credited to Rockey's}& & & & \\ & \text{capital account)}& & & & \\ & \underset{–}{}& & & & \\ \text{June 30}& \text{Prateek's Capital A/c}& \text{Dr}& & 4,800& \\ & \text{Kushal's Capital A/c}& \text{Dr}& & 3,200& \\ & \text{To Rockey's Capital A/c}& & & & 8,000\\ & \text{(Rockey's share of goodwill adjusted to}& & & & \\ & \text{Prateek's and Kushal's capital account in their}& & & & \\ & \text{gaining ratio 3:2)}& & & & \\ & \underset{–}{}& & & & \\ \text{June 30}& \text{Rockey's Capital A/c}& \text{Dr}& & 33,821& \\ & \text{To Rockey's Executor's A/c}& & & & 33,821\\ & \text{(Balance of Rockey's capital account}& & & & \\ & \text{transferred to his executor's account)}& & & & \end{array}$

$\begin{array}{ccccccc}& & & & & & \\ \text{Dr}& & & & \text{Rockey's Capital Account}& & \text{Cr}\end{array}\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ 2007& & & & 2007& \text{Balance b/d}& & 20,000\\ \text{Apr 1}& \text{Rockey's}& & & \text{Apr 1}& \text{Interest on Capital}& & 250\\ & \text{Executor A/c}& & \text{33,821}& & \text{(3 months)}& & \\ & & & & & \text{Profit and Loss}& & 1,000\\ & & & & & \text{(Suspense) A/c}& & \\ & & & & & \text{General Reserve}& & 4,571\\ & & & & & \text{Prateek's Capital}& & 4,800\\ & & & & & \text{Kushals' Capital}& & 3,200\\ & & & \overline{\underset{–}{\underset{–}{33,821}}}& & & & \overline{\underset{–}{\underset{–}{33,821}}}\end{array}$

Working Note

(i) Rockey's share of goodwill
Firm's goodwill = $\frac{12,000+16,000+14,000}{3}\times 2$
= $\frac{42,000}{3}\times 2$ = Rs. 28,000

Deceased Partner's share = $28,000\times \frac{2}{7}$= Rs. 8,000

(ii) Share of profit = Previous years' Profit $\times$ Period till date of death $\times$ Deceased partner's share
= $14,000\times \frac{3}{12}\times \frac{2}{7}$= Rs. 1,000

(iii) Gaining Ratio will be same as old ratio because no information is given i.e., 3:2.

(iv) Contribution of remaining partners in deceased partner's share of goodwill

Prateek = $8,000\times \frac{3}{5}$ = Rs. 4,800

Kushal = $8,000\times \frac{2}{5}$= Rs. 3,200

(v) Interest on capital for 3 months = Rs. $20,000\times \frac{5}{10}\times \frac{3}{12}$ = Rs. 250