Question

X, Y and Z were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 31st March, 2018, their Balance Sheet was as follows:
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Liabilities		Amount (₹)	Assets	Amount (₹)
Trade Creditors		1,20,000	Cash at Bank	1,80,000
Bills Payable		80,000	Stock	1,40,000
General Reserve		60,000	Sundry Debtors	80,000
Capital A/cs:			Building	3,00,000
X	7,00,000		Advance to Y	7,00,000
Y	7,00,000		Profit and Loss A/c	3,20,000
Z	60,000	14,60,000
		17,20,000		17,20,000

Y died on 30th June, 2018. The Partnership Deed provided for the following on the death of a partner:
(i) Goodwill of the business was to be calculated on the basis of 2 times the average profit of the past 5 years. Profits for the years ended 31st March, 2018, 31st March, 2017, 31st March, 2016, 31st March, 2015 and 31st March, 2014 were ₹ 3,20,000 (Loss); ₹ 1,00,000; ₹ 1,60,000; ₹ 2,20,000 and ₹ 4,40,000 respectively.
(ii) Y's share of profit or loss from 1st April, 2018 till his death was to be calculated on the basis of the profit or loss for the year ended 31st March, 2018.
You are required to calculate the following:
(a) Goodwill of the firm and Y's share of goodwill at the time of his death.
(b) Y's share in the profit or loss of the firm till the date of his death.
(c) Prepare Y's Capital Account at the time of his death to be presented to his executors.

Answer 1

Y’s Capital Account
Dr.					Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Profit & Loss A/c		1,28,000	Balance b/d	7,00,000
Profit & Loss Suspense (Share of Loss)		32,000	General Reserve	24,000
Advance to Y		7,00,000	X’s Capital A/c Z ’s Capital A/c	64,000 32,000
			Y’s Executors A/c	40,000
		8,20,000		8,20,000

Working Notes:

WN1: Calculation of Share in General Reserve

$\text{Reserve}=\frac{60,000\times 2}{5}=\text{Rs 24,000}$
WN2: Calculation of Share in Goodwill

$$\begin{gathered} \begin{array}{l}\text{Goodwill}=\text{Average Profit}\times \text{No. of years' Purchase}\\ =1,20\text{,000}\times 2=\text{Rs 2,40,000}\\ \text{Y's share in Goodwill}=\text{2,40,000}\times \frac{2}{5}=\text{Rs 96,000, should be contributed by X \& Z in 2:1}\end{array} \\ \begin{array}{l}\text{Average Profit}=\frac{\text{Total Profits of past years given}}{\text{Number of years}}\\ =\frac{1,00,000+1,60,000+2,20,000+4,40,000-3,20,000}{5}=\text{Rs 1,20,000}\end{array} \end{gathered}$$
WN3: Calculation of Profit & Loss Suspense

$\text{Profit \& loss Suspense (Loss)}=\frac{3,20,000\times 2\times 3}{5\times 12}=\text{Rs 32,000}$