Volume 1

BALANCE SHEET OF A, B AND C as at 31th March, 2019
Assets		`	Liabilities	`
General Reserve		40,000	Cash	4,000
Bills Payable		15,000	Stock	43,000
Loan from Bank		30,000	Investment	70,000
Capital A/cs:			Land and Buildings	1,58,000
A	60,000
B	90,000
C	40,000	1,90,000
		2,75,000		2,75,000

A died on 1st October, 2019. The partnership deed provided for the following on the death of a partner:

(a) Goodwill of the firm be valued at two years’ purchase of average profits for the last three years.

(b) The profit for the year ending 31st March, 2019 was  ` 50,000.

(c) Interest on capital was to be provided @ 6% p.a.

(d) The average profits of the last three years were  ` 35,000.

Prepare A’s Capital Account to be rendered to his executors. (CBSE 2020 C)

 

A’s Capital Account
Particulars	Dr.  `	Particulars	Cr.  `
To Sadhu’s Executors A/c	1,02,300	By Balance b/d	60,000
		By General Reserve A/c (WN-1)	12,000
		By B’s Capital A/c (WN-2)	9,000
		By C’s Capital A/c (WN-2)	12,000
		By Interest on Capital A/c (WN-3)	1,800
	1,02,300		1,02,300

Working notes:

WN-1 A’s share of General Reserve

A’s Share of Profit = 40,000×3/10 =  ` 12,000

 

WN-2 Calculation of goodwill

The average profits of the last three years were  ` 35,000

Goodwill of the Firm =  ` 35,000×2=70,000

Share of A is in Goodwill = 70,000 × 3/10 = 21,000

Goodwill Share of A is in Goodwill will be compensated by B and C in 3:4

A = 21,000 × 3/7 = 9,000

B = 21,000 × 4/7 = 12,000

 

WN-3 Calculation of Interest on Capital

A’s Interest on Capital till the date of death = 60,000×6×6/100×12=1,800

X, Y and Z were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 31st March, 2023, their Balance Sheet was as follows:
 

Liabilities		(  `)	Assets	(  `)
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, 2023. 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, 2023, 31st March, 2022, 31st March, 2021, 31st March, 2020 and 31st March, 2019 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, 2023 till his death was to be calculated on the basis of the profit or loss for the year ended 31st March, 2023.
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. 

 

Y’s Capital Account
Dr.					Cr.
Particulars		`	Particulars	`
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

Reserve=60,000×2/5= ` 24,000

WN2: Calculation of Share in Goodwill

Goodwill=Average Profit×No. of years' Purchase=1,20,000×2= ` 2,40,000

Y's share in Goodwill=2,40,000×2/5= ` 96,000, should be contributed by X & Z in 2:1

Average Profit=Total Profits of past years given/Number of year =1,00,000+1,60,000+2,20,000+4,40,000−3,20,000/5= ` 1,20,000

WN3: Calculation of Profit & Loss Suspense

Profit & loss Suspense (Loss)=3,20,000×2×3/5×12= ` 32,000

Arun-  ` 2,00,000; Bhim-  ` 1,50,000 and Nakul-  ` 4,50,000.

Firm closes its accounts every year on 31st March. Bhim died on 31st March, 2021. In the event of death of any partner, the Partnership provides for the following:

(i) Interest on capital will be allowed to deceased partner only from the first of day of the accounting year till the date of his death @10% p.a.

(ii) The deceased partner’s share in the Goodwill of the firm will be calculated on the basis of 2 years’ purchase of the average profit of the last three years. The profits of the firm for the last three years ended 31st March, were: 2019-  ` 90,000; 2020  ` 2,00,000 and 2021-  ` 1,60,000.

(iii) His share of Profits till the Date of Death: The profit of the firm for the year ended 31st March, 2021 was  ` 1,60,000 before providing for interest on capital. Bhim’s Executor was paid the sum due in two equal annual instalments with interest @ 10% p.a.

Prepare Bhim’s Capital Account as on 31st March, 2021 to be presented to his executor and his Executor’s Loan Account for the year ending 31st March, 2022 and 31st March, 2023.

 

Bhim’s Capital Account
Particulars	Dr.  `	Particulars	Cr.  `
To Bhim’s Executors A/c	2,54,000	By Balance b/d	1,50,000
		By B’s Capital A/c (WN-2)	15,000
		By C’s Capital A/c (WN-2)	45,000
		By Interest on Capital A/c (WN-3)	15,000
		By P&L Suspense A/c	29,000
	2,54,000		2,54,000

Working notes:

WN-1 Calculation of goodwill

Average Profit = 90,000+2,00,000+1,60,000/3=1,50,000

Firm’s Goodwill = 1,50,000 × 2=3,00,000

Bhim’s Share of Goodwill = 3,00,000×1/5 =  ` 60,000

Goodwill Share of Bhim’s is in Goodwill will be compensated by Arun and Nakul in 1:3

Arun = 1,05,000× 1/4 = 15,000

Nakul = 1,05,000× 3/4 = 45,000

 

WN-2 Bhim’s share of Profit till the date of death

Interest on Capital = 1,50,000×10/100=15,000

Profit After Interest on Capital = 1,60,000-15,000 =1,45,000

Bhim’s share of Profit =  ` 1,45,000×1/5=29,000

 Ajay, Salil and Ravi were partners in a firm sharing profits in the ratio of 5:3:2. Ajay died on 20th February,2024. The Balance Sheet of the firm on that date was as follows:

Liabilities		`	Assets	`
Creditors		19,000	Machinery	41,000
General Reserve		20,000	Furniture	6,000
Loan by Ajay		7,000	Stock	9,000
Capital Aes:			Debtors	15,000
Ajay	12,000		Cash	3,000
Salil	16,000		Profit & Loss A/c	10,000
Ravi	10,000	38,000
		84,000		84,000

According to the Partnership Deed, on the death of a partner, the executor of the deceased partner will be entitled to:

(i) Balance in Capital Account.

(ii) His share in profit/loss on revaluation of assets and reassessment of liabilities which were as follows.

  (a) Machinery is to be revalued at 45,000 and furniture at 7,000.

  (b) Provision of 10% was to be created for Doubtful Debts.

(iii) The amount payable to Ajay was transferred to his Executors' Loan Account which was to be paid later Prepare Revaluation Account, Partners' Capital Accounts, Ajay's Executors' Account and the Balance Sheet of Salil and Ravi who decided to continue the business keeping their capital balances in their new profit-sharing ratio. Any surplus or deficit was to be transferred to Current Accounts of the partners.

 

Revaluation a/c Dr.                                                                        Cr.
Particulars	`	Particulars	`
Provision for Doubtful Debts	1,500	Machinery	4,000
Gain	3,500	Furniture	1,000
Capital A/cs;
Ajay - 1,750
Salil - 1,050
Ravi - 700
	5,000		5,000

 

Capital A/c
Particulars	Ajay	Salil	Ravi	Particulars	Ajay	Salil	Ravi
To Profit & Loss A/c	5,000	3,000	2,000	By Balance B/d	12,000	16,000	10,000
To Ajay’s Executor	25,750	-	-	By Revaluation A/c	1,750	1,050	700
To Balance C/d	-	20,050	12,700	By General Reserve	10,000	6,000	4,000
				By Loan by Ajay	7,000	-	-
	30,750	23,050	14,700		30,750	23,050	14,700
To Salini’s Current A/c	-	400	-	By Balance B/d	-	20,050	12,700
To Balance C/d	-	19,650	13,100	By Ravi’s Current A/c	-	-	400
	-	20,050	13,100		-	20,050	13,100

 

Ajay's Executors' Account
Particulars	`	Particulars	`
To Balance C/d	25,750	By Ajay’s Capital A/c	25,750
	25,750		25,750

 

Balance Sheet
Liabilities		`	Assets	`
Creditors		19,000	Machinery	45,000
Ajay's Executors' Account		25,750	Furniture	7,000
Salil’s Current A/c		400	Stock	9,000
Capital Aes:			Debtors (15,000-1,500)	13,500
			Cash	3,000
Salil	19,650		Ravi’s Current A/c	400
Ravi	13,100	32,750
		77,900		77,900

 

Working Note:

Total adjusted Capital of remaining partner 20,050+12,700=32,750

Rearranged in New Profit sharing Raio 3:2

Salil’s Capital=32,750×3/5=19,650

Ravi’s Capital=32,750×2/5=13,100

 

	Salil	Ravi
adjusted Capital	20,050	12,700
Less : New Capital	19,650	13,100
Capital adjusted through current account	400	400
Treatment	Debited	Credited

 

 

 Ramesh, Suresh and Dinesh were partners sharing profits and losses in the ratio of 3:2:1.Dinesh died on 1st May, 2023 on which date the capitals of Ramesh, Suresh and Dinesh after all necessary adjustments stood at 1,20,000, 80,000 and 50,000 respectively. Ramesh and Suresh decide to carry on the business for 8 months without settling the account of Dinesh. During the period of 8 months ended 31st December, 2023, profit of Rs. 40,000 is earned by the firm.

State which of the two options available with Dinesh's Executor under Section 37 of the Indian Partnership Act, 1932 should be exercised.

Also calculate the total amount payable to Dinesh's Executor if Ramesh and Suresh clear the dues of Dinesh on 31st December, 2023.

Remaining partners Continued Business without any agreement therefore according to Section 37 of the Indian Partnership Act, 1932 executor of deceased partner can opt any of the option either of two Interest in capital or share of profit whichever is higher

 

Dinesh's Executor has the following options:

(i) Interest @ 6% p.a. on balance amount =50,000x6/100 x 8/12 =72,000;

OR

(ii) Share in profit earned proportionate to his amount outstanding to total capital 50,000 2,50,000* x40,000 =8,000

*2,50,000 =1,20,000 + 80,000+50,000

Dinesh's Executor should exercise option (i),

Total amount payable to Dinesh's Executor = 50,000 +8,000=58,000