Question

Priya, Karam and Anna were partners of a firm sharing profits in the ratio of 3 : 2 : 1. Their Balance Sheet on 31st March, 2014 was as follows :

$\begin{array}{ccccc}\text{Capital and Liabilities}& & \text{Rs}& \text{Assets}& \text{(Rs)}\\ \text{Bills Payable}& & 1,20,000& \text{Cash in Hand}& 20,000\\ \text{Creditors}& & 1,40,000& \text{Debtors}& 1,40,000\\ \text{Karam's Loan at}5\%& & 1,00,000& \text{Bills Receivable}& 70,000\\ \text{Reserve}& & 1,80,000& \text{Stock}& 1,70,000\\ \text{Capital A/cs :}& \text{Priya}2,00,000& & \text{Investment}& 1,30,000\\ & \text{Karam}1,20,000& & \text{Advertisement Suspense A/c}& 1,20,000\\ & \text{Anna}\underset{–}{80,000}& \underset{–}{4,00,000}& \text{Building}& 2,90,000\\ & & \underset{–}{\underset{–}{9,40,000}}& & \overline{\underset{–}{\underset{–}{9,40,000}}}\end{array}$

Karam died on 12th June, 2014 and according to the Partnership Deed his executors were entitled to be paid as under :

(a) His share in the profits of the firm till the date of his death which will be calculated on the basis of average profits of last three completed years.

(b) His share in the goodwill of the firm which will be calculated on the basis of two years' purchase of total profits of last three years.

(c) Profits for the last three years were : Rs 30,000, Rs 70,000 and Rs 80,000.

Prepare Karam's Capital A/c to be rendered to his executors.

Answer 1

$\begin{array}{ccccccc}\text{Dr}& & & & \text{KARAM'S CAPITAL ACCOUNT}& & \text{Cr}\end{array}$

$\begin{array}{ccccc}\text{Particulars}& & \text{Rs}& \text{Particulars}& \text{(Rs)}\\ \text{Advertisement Suspense A/c}& & & \text{Balance b/d}& 1,20,000\\ (Rs1,20,000\times \frac{2}{6})& & 40,000& \text{Reserve A/c}& 60,000\\ \text{Karam's Executors A/c}& & 3,65,000& {\text{Profit and Loss Suspense A/c}}^{\left(1\right)}& 4,000\\ & & & {\text{Priya's Capital A/c}}^{\left(2\right)}& 90,000\\ & & & {\text{Anna's Capital A/c}}^{\left(2\right)}& 30,000\\ & & & \text{Karam's Loan A/c}& 1,00,000\\ & & & \text{By Interest on Karam's Loan A/c}& \\ & & & (Rs1,00,000\times \frac{5}{100}\times \frac{73}{365})& 1,000\\ & & \overline{\underset{–}{\underset{–}{4,05,000}}}& & \overline{\underset{–}{\underset{–}{4,05,000}}}\end{array}$

Working Notes :

1. Karam's Share of Profit till the date of death :

Average Profit = $\frac{Rs30,000+Rs70,000+Rs80,000}{3}=Rs60,000$

Number of Days till the date of death = 73

Karam's Share of Profit till the date of death = $Rs60,000\times \frac{73}{365}\times \frac{2}{6}=Rs4,000$

2. Karam's Share of Goodwill :

Total Profits of last three years = Rs 30,000 + Rs 70,000 + Rs 80,000 = Rs 1,80,000

Firm's Goodwill = Rs 1,80,000 $\times 2$ = Rs 3,60,000

Karam's Share of Goodwill = $Rs3,60,000\times \frac{2}{6}=Rs1,20,000,$ which its contributed by Priya and Anna in their Gaining Ratio of 3 : 1

Priya's Contribution $=Rs1,20,000\times \frac{3}{4}=Rs90,000$

Anna's Contribution $=Rs1,20,000\times \frac{1}{4}=Rs30,000$