Death of partner

DEATH OF A PARTNER

Learning Objectives:

After studying this Unit, students will be able to understand and prepare:
a)     Deceased partners capital account
b)     Deceased partners Executor account
c)      Executors loan account
d)     Calculation of share of profit and Goodwill of the deceased partner.
SALIENT POINTS:
v Gaining Ratio: When the partner retires or dies, his share of profit is taken over by the remaining partners.
v Gaining ratio is applied for the purpose of  calculating Goodwill to be paid off to the deceased partner.
v The deceased partner s share of profit till the date of death will be calculated by preparing Profit and Loss Suspense account on the date of Death.

SHORT QUESTIONS--- (3-4 MKS)
1.     A,B and C are partners sharing profits and losses in the ratio of 5:4:1. The profit for the year ending 31, March, 2010 was Rs 1, 00,000. B died on 30th June 2010. Calculate C’s share of profit till the date of death and pass necessary journal entry.

Profit and Loss suspense a/c – Dr

      B’s Capital Account
10,000


10,000
(Being B’s share of profit transferred to his capital account)



C’s share of profit = 1,00,000 X 4/10 X 3/12 = 10,000

2.     X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5:4:1.The Partnership agreement provides that the share of profit of the deceased partner will be worked out on the basis of sales. The sales for the year 2009-10 was Rs 8,00,000 and the sales from April 1, 2010 to June 30, 2010 was Rs 1,50,000. The profit for the year ended 31st  March 2010 amounted to Rs 1,00,000. Y died on 30th June 2010. Calculate his share of profit and pass necessary journal entry.

Profit and Loss suspense a/c – Dr

      Y’s Capital Account
7500


7500
(Being Y’s share of profit transferred to his capital account



Sales for the year 2009-10   ----8, 00,000       Profit for the year 2009-10    -----1,00,000
Sales from April 1,2010 to 30th June 2010 -----1,50,000   Profit upto 30th June 2010----?
C’s share of profit = 1,00,000/8,00,000 X 1,50,000 = 18750 X 4/10 = 7500.




3.  Ram, Mohan and Sohan were partners sharing profits and losses in the ratio of 5:3:2. On
31st March, 2006 their Balance Sheet was as under :

Liabilities
Rs
Assets
Rs
Capitals

Leasehold
1,25,000
Ram
1,50,000
Patents
30,000
Mohan
1,25,000
Machinery
1,50,000
Sohan
    75,000
Stock
1,90,000
Workmen’s Compensation  Reserve

    30,000

Cash at Bank

40,000
Creditors
1,55,000



5,35,000

5,35,000

Sohan died on 1st August, 2006. It was agreed that :
(i) Goodwill of the firm is to be valued at Rs. 1,75,000.
(ii) Machinery be valued at Rs. 1,40,000; Patents at Rs. 40,000; Leasehold at
Rs. 1,50,000 on this date.
(iii) For the purpose of calculating Sohan’s share in the profits of 2006-07, the profits
should be taken to have accrued on the same scale as in 2005-06, which were
Rs. 75,000.
Prepare Sohan’s Capital Account and Revaluation Account.                                      (6)
                                                                 Revaluation Account
Particulars
Amt
Particulars
Amt
Machinery
10,000
Leasehold
25000
Capital Accounts

Patents
10,000
        Ram
12500


        Mohan
   7500


        Sohan
   5000



35000

35000

                                                                   Sohan’s capital Account
Particulars
Rs
Particulars
Rs


Balance b/d
75000
Sohan’s Executor’s account
1,26,000
Revaluation a/c
5000


Ram’s Capital a/c
21875


Mohan’s capital a/c
13125


P & L Suspense A/c
13125


Workmen’s Compensation reserve a/c


6000

1,26,000

1,26,000





Working Note :
a)Total Goodwill of the firm = 1,75,000
Sohan’s share of goodwill = 1,75,000 X 2/10 = 35000 ( to be divided in the ratio of 5:3 i.e gaining ratio)
b) Sohan’s share of profit = 75000 X 4/12 x 2/10 = Rs 5000
4. Following is the Balance sheet of  P , Q and R as on 31st December 2010 sharing profits in the ratio of 5:3:2.
Particulars
Rs
Particulars
Rs
Capital Accounts

Cash
13000
P
30000
Debtors
  8000
Q
25000
Machinery
30000
R
15000
Stock
10000
Creditors
  7000
Patents
  6000
Reserve Fund
10000
Building
20000

87000

87000

P died on 1st July 2011 on the following terms-
i)                Patents are to be valued at Rs 8000, Machinery at Rs 28000 and Building at Rs 30,000.
ii)              Interest on Capital is to be provided at 10% p.a.
iii)            Goodwill of the firm is valued at 2 years purchase of the average profits of the last five years which were-
2006  - Rs 15,000                   2007 – Rs 13000                  2008 – Rs 12,000               2009—15,000   and                      2010--- Rs 20,000
iv)             Profit for the year 2011 has been accrued on the same scale as in 2010.
v)               P’s Executor is to be paid Rs 11,500 and balance transferred to his loan account.
Prepare Revaluation Account, P’s Capital account and P’s executors account. Also pass necessary journal entries.

                                        Revaluation Account
Particulars
Rs
Particulars
Rs
Machinery
2000
Patents
  2000
Capital Accounts-

Buildings
10000
P
5000


Q
3000


R
2000



12000

12000

                                                      P’s Capital Account
Particulars
Rs
Particulars
Rs
P’s Executors a/c
61500
Balance b/d
30000


Reserve fund
   5000


Q’s Capital a/c
   9000


R’s Capital  a/c
   6000


Revaluation a/c
   5000


Interest on capital
   1500

61500

 61500

                                          P’s Executor’s account
Particulars
Rs
Particulars
Rs
Bank/cash a/c
11500
P’s Capital a/c
61500
P’s Executor’s Loan a/c

50000



61500

61500

Working Note :

a)     Interest on Capital : 30,000 X 10/100 X 6/12 = Rs 1500
b)     Reserve fund = 10,000 X 5/10 = Rs 5000
c)     P’s Share of profits = 20,000 X 5/10 X 6/12 = Rs 5000.(for 6 months)
d)     Total Goodwill of the firm =
Average profits = 75000/5 = Rs 15000
Goodwill = 15000 X 2 = 30,000
P’s share of Goodwill = 30,000 X 5/10 = 15000(to be divided in Gaining ratio 3:2)
                                                            Journal
SN
Particulars
LF
 Amt
Amt
1
Revaluation a/c    ----Dr
         Machinery a/c
(Being machinery revalued)

2000

2000
2
Patents a/c    --Dr
Building a/c  - Dr
         Revaluation a/c
(Being Assets revalued)

2000
10000


12000

3
Revaluation a/c --- Dr
       P’s Capital a/c
       Q’s Capital a/c
       R’s Capital a/c
(Being Revaluation  profit distributed)

10000

5000
3000
2000

4
Reserve fund a/c –Dr
         P’s Capital a/c
(Being reserve distributed)

5000

5000
5
Q’s Capital a/c ---Dr
R’s Capital a/c ---Dr
        P’s capital a/c
(Being deceased partner ‘s account credited by his share of goodwill contributed by the gaining partners)

9000
6000


15000

6
Interest on capital a/c – Dr
      P’s Capital a/c
(Being Interest on capital provided to the deceased partner)

1500

1500


7
P’s Capital a/c ---Dr
     P’s executor’s a/c
(Being P’s balance due transferred to his executor’s a/c)

61500

61500
8
P’s executor’s a/c  --Dr
       Cash a/c
       P’s executor’s loan a/c
(Being amount paid to the executor and balance transferred to his loan account)

61500

11500
50000

5. X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1 respectively. Their Balance Sheet as on 31st march 2007 was as follows—
                                                            Balance Sheet as on 31/03/10
Liabilities
Rs
Assets
Rs
Sundry Creditors
1,00,000
Cash at bank
   20,000
Capital Accounts

Stock
   30,000
X
    60,000
Sundry Debtors
   80,000
Y
1,00,000
Investments
   70,000
Z
    40,000
Furniture
   35,000
General Reserve
    50,000
Buildings
1,15,000

3,50,000

3,50,000

Z died on 30th September 2007  and the following was provided—
a)     “Z” will be entitled to his share of profit upto the date of death based on last year’s profit.
b)     Z’s share of Goodwill will be calculated on the basis of 3 years purchase of average profits of last four years . The profits of the last four years was as follows—
Year  I – 80,000,      Year II –Rs 50,000         Year III – Rs 40,000 and Year IV –Rs 30,000
c)     Interest on Capital was provided at 12% p.a.
d)     Drawings of the deceased partner up to the date of death was Rs 10,000.
e)     Rs 15,400 should be paid immediately to the executor of the deceased partner and the balance in four equal yearly installments with interest at 12% on remaining balance.
Prepare Z’s capital account and Z’s executors account till the account is finally  closed.
                                                Z’s Capital Account
Particulars
Rs
Particulars
Rs
Drawings
10,000
Balance b/d
40,000
Z’s Executor’s a/c
75,400
General Reserve
10,000


Profit &Loss Suspense a/c

  3,000


Interest on capital

   2400


X’s Capital a/c
15,000


Y’s capital a/c
15,000

85400

85400





                                                Z’s Executor’s Account
Date
Particulars
Rs
Date
Particulars
Rs.
30/09/07
Bank a/c
15400
30/09/07
Z’s Capital a/c
 75400




31/03/08




Balance c/d




63600
31/03/08
Interest on Loan
(on Rs 60,000@12% for 6 months)




  3600


79000


      79000
30/09/08
Bank a/c            ( 15000+ 7200)

22,200
1/04/08
Balance b/d
63600



31/03/09



Balance c/d



47,700
30/09/08
Interest on Loan(On Rs 60,000 @ 12% for 6 months)



  3600



31/03/09
Interest on Loan(on Rs 45000 @12% for 6 months)



  2700


69900


69900
30/09/09
Bank a/c
(15000+5400)

20,400
1/04/09
Balance b/d
47,700



 31/03/10



Balance c/d



31800
30/09/09
Interest on loan(on Rs 45000 @ 12% for 6 months)



  2700



31/03/10
Interest on loan ( on Rs 30,000@12% for 6 months)



 1800


52200


52200
30/09/10
Bank a/c(15000 + 3600)

18600
1/4/10
Balance b/d
31800
31/03/11
Balance c/d
15900
30/09/10
Interest on loan(on Rs 30,000 @12% for 6  months)


 1800



31/03/11
Interest on Loan(on Rs 15000 @12% for 6 months)


   900


34500


34500
30/09/11
Bank a/c
(15000+1800)

16800
1/04/11
Balance b/d
15900



30/09/11
Interest on loan(on Rs 15000 @12% for 6  months)


   900


16800


16800

6       Anil, Jatin and Ramesh  were sharing profit in the ratio of 2:1:1. Their Balance Sheet as at 31.12.2001  stood as follows:-
Liabilities
Rs
Assets
Rs
Creditors
24,400
Cash    
1,00,000
Bank Loan
10,000
Debtors    20000
Less : Provision 1600

18,400
Profit and Loss A/c
18,000
Stock
10,000
Bills Payable
2,000
Building         
20,000

Anil’s Capital
50,000
Investment      
14,000

Jatin’s Capital
40,000
Goodwill
22,000

Ramesh’s Capital
40,000



1,84,400         

1,84,400         

         Ramesh died on 31st March 2002. The following adjustments were agreed upon-
         (a)          Building be appreciated by Rs. 2,000
         (b)          Investments be valued at 10% less than the book value.
         (c)          All debtors (except 20% which are considered as doubtful) were good.
         (d)          Stock be increased by 10 %
         (e)          Goodwill be valued at 2 years’ purchase of the average profit of the past five years.
         (f)           Ramesh’s share of profit to the death be calculated on the basis of the profit of the preceding year. profit for the years 1997, 1998, 1999 and 2000 were Rs. 26,000, Rs. 22,000,  Rs. 20,000  and Rs. 24,000 respectively.
            Prepare revaluation account, partner’s capital Account, Ramesh ‘s Executors’ Account and Balance sheet immediately after Ramesh’s death assuming  that Rs. 18, 425 be paid immediately to his executors and balance to b left to the Ramesh’s Executor’s Account



                                                            Revaluation Account
Particulars
Rs
Particulars
Rs
Investment A/c
1,400
Building A/c
2,000
Provision for doubtful debt A/c
2,400
Stock A/c
1,000


Loss transferred to



Anil’s Capital A/c
400


Jatin’s Capital A/c
200


Ramesh’s Capital A/c
200

3800

3800
                                                Partners Capital Accounts
Particulars
Anil
Jatin
Ramesh
Particulars
Anil
Jatin
Ramesh
Goodwill A/c
11000
5500
5500
By Balance b/d
50000
40000
40000
Ramesh Capital A/c
7333
3667

Profit and Loss A/c
9000
4500
4500
Revaluation A/c (Loss)        
400
200
200
Profit  &Loss Susp A/c


1125
Ramesh’s  Executor’s A/c


50925
Anil’s Capital A/c


7333
 Balance c/d
40,267
35,133
----
Jatin’s Capital A/c


3667

59,000
41,500
56,625

59,000
41,500
56,625
                                                           




Ramesh’s Executor’s account
Particulars
Rs
Particulars
Rs
Cash Account
18425
Ramesh’s Capital account
50925
Balance c/d
32500



50925

50925
                                                           
                                                               Balance sheet
Liabilities
Rs
Assets
Rs
Bank Loan
10, 000
Cash
81,575
Creditors
20,400
Debtors       20000
Less Provision 4000
16000
Bills Payable
2,000
Stock
11000
Ramesh’s Executor’s Loan
32,500
Building
22000
Anil’s Capital
40,267
Investments
12600
Jatin’s Capital
35,133
Profit &Loss Suspense A/c
1125

         1,44,300

         1,44,300