Question

​​R, S and T were partners sharing profits and losses in the ratio of 5 : 3 : 2 respectively. On 31st March, 2018, their Balance Sheet stood as:

Liabilities		₹	Assets	₹
Sundry Creditors		40,000	Goodwill	25,000
Bills Payable		15,000	Leasehold	1,00,000
Workmen Compensation Reserve		30,000	Patents	30,000
Capital A/cs:			Machinery	1,50,000
R	1,50,000		Stock	50,000
S	1,25,000		Debtors	40,000
T	75,000	3,50,000	Cash at Bank	40,000
		4,35,000		4,35,000

T died on 1st August, 2018. It was agreed that:
(a) Goodwill be valued at $2^{\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$2$}\right.}$ years' purchase of average of last 4 years' profits which were:
2014-15: ₹ 65,000; 2015-16: ₹ 60,000; 2016-17: ₹ 80,000 and 2017-18: ₹ 75,000.
(b) Machinery be valued at ₹ 1,40,000; Patents be valued at ₹ 40,000; Leasehold be valued at ₹ 1,25,000 on 1st August, 2018.
(c) For the purpose of calculating T's share in the profits of 2018-19, the profits in 2018-19 should be taken to have accrued on the same scale as in 2017-18.
(d) A sum of ₹ 21,000 to be paid immediately to the Executors of T and the balance to be paid in four equal half-yearly instalments together with interest @ 10% p.a.
Pass necessary Journal entries to record the above transactions and T's Executors' Account.

Answer 1

Journal
Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
Revaluation A/c	Dr.		10,000
To Machinery A/c				10,000
(Decrease in value of Machinery transferred to Revaluation Account)
Patents A/c	Dr.		10,000
Leasehold A/c	Dr.		25,000
To Revaluation A/c				35,000
(Increase in value Patents and Leasehold transferred to Revaluation Account)
Revaluation A/c	Dr.		25,000
To R’s Capital A/c				12,500
To S’s Capital A/c				7,500
To T’s Capital A/c				5,000
(Revaluation profit distributed among partners in their old ratio)
R’ Capital A/c	Dr.		12,500
S’s Capital A/c	Dr.		7,500
T’s Capital A/c	Dr.		5,000
To Goodwill A/c				25,000
(Goodwill written off among partners in their old ratio)
R’s Capital A/c	Dr.		21,875
S’s Capital A/c	Dr.		13,125
To T’s Capital A/c				35,000
(T’s share of goodwill adjusted)
Profit and Loss Suspense A/c	Dr.		5,000
To T’s Capital A/c				5,000
(T’s share of profit transferred to his capital account)
Workmen’s Compensation Reserve A/c	Dr.		30,000
To R’s Capital A/c				15,000
To S’s Capital A/c				9,000
To T’s Capital A/c				6,000
(Workmen’s Compensation Reserve distributed among partners in their old ratio )
T’s Capital A/c	Dr.		1,21,000
To T’s Executors A/c				1,21,000
(Amount due to T after all adjustments transferred to his Executor’s Account)
T’s Executor’s A/c	Dr.		21,000
To Bank A/c				21,000
(Amount paid to T’s Executor)

T’s Executor’s Account
Dr.					Cr.
Date	Particulars	Amount Rs	Date	Particulars	Amount Rs
2018			2018
Aug. 01	Cash A/c	21,000	Aug. 01	T’s Capital A/c	1,21,000
2019			2019
Jan. 31	Cash A/c (25,000 + 5,000)	30,000	Jan. 31	Interest (1,00,000 ×10% for 6 months)	5,000
Mar. 31	Balance c/d	76,250	Mar. 31	Interest (75,000 ×10% for 2 months)	1,250
		1,27,250			1,27,250
2019			2019
Aug. 01	Cash A/c (25,000 + 1,250 + 2,500)	28,750	Apr. 01	Balance b/d	76,250
2020			Aug. 01	Interest (75,000 × 10% for 4 months)	2,500
Jan. 31	Cash A/c (25,000 + 2,500)	27,500	2020
Mar. 31	Balance c/d	25,417	Jan. 31	Interest (50,000 × 10% for 6 months)	2,500
			Mar. 31	Interest (25,000 × 10% for 2 months)	417
		81,667			81,667
2020			2020
Aug. 01	Cash A/c (25,000 + 417 + 833)	26,250	Apr. 01	Balance b/d	25,417
			Aug. 01	Interest (25,000 × 10% for 4 months)	833
		26,250			26,250

Working Notes:

WN 1 Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase



∴ Goodwill = Average Profit × Number of Years’ Purchase
= 70,000 × 2.5 = Rs 1,75,000

WN 2 Adjustment of Goodwill

Old Ratio (R, S and T) = 5 : 3 : 2

T died.

∴ New Ratio (R and S) = 5 : 3 and

Gaining Ratio = 5 : 3

T’s Share in Goodwill =

This share of goodwill is to be distributed between R and S in their gaining ratio (i.e. 5 : 3).


WN 3 Calculation of T’s Share of Profit

Profit for 2017-18 = Rs 75,000

T's Share of Profit for 2018-19 =$75,000\times \frac{2}{10}\times \frac{4}{12}=Rs.5,000$

WN 4

Revaluation Account
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Machinery		10,000	Patents	10,000
Profit transferred to:			Leasehold	25,000
R’s Capital A/c	12,500
S’s Capital A/c	7,500
T’s Capital A/c	5,000	25,000
		35,000		35,000

WN 5

T’s Capital Account
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Goodwill	5,000	Balance b/d	75,000
T’s Executor’s A/c	1,21,000	Workmen’s Compensation Reserve	6,000
		Profit and Loss Suspense A/c	5,000
		R’s Capital A/c	21,875
		S’s Capital A/c	13,125
		Revaluation A/c (Profit)	5,000
	1,26,000		1,26,000