Death2022-2023

X, Y and Z were partners in a firm sharing profits in the ratio of 2 : 2 : 1. On 31st March, 2021, 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, 2021. 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, 2021, 31st March, 2020, 31st March, 2019, 31st March, 2018 and 31st March, 2017 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, 2021 till his death was to be calculated on the basis of the profit or loss for the year ended 31st March, 2021.
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, 2019. 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: 2017- ` 90,000; 2018 ` 2,00,000 and 2019- ` 1,60,000.

(iii) His share of Profits till the Date of Death: The profit of the firm for the year ended 31st March, 2019 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, 2019 to be presented to his executor and his Executor’s Loan Account for the year ending 31st March, 2020 and 31st March, 2021.

 

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