Retirement of a Partner: Accounting Problem
Problem Statement
Supriya, Surakha, and Sujata were partners sharing profits and losses in the ratio of 2:2:1 respectively. Their Balance Sheet as on 31st March, 2012 was as follows:
Balance Sheet as on 31st March, 2012
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital A/c: | Land and Building | 50,000 | |
| Supriya | 40,000 | Stock | 30,000 |
| Surekha | 40,000 | Debtors | 37,500 |
| Sujata | 20,000 | (-) R.D.D. | (2,500) |
| Reserve Fund | 10,000 | Furniture | 10,000 |
| Creditors | 16,000 | Cash at Bank | 5,000 |
| Outstanding Expenses | 4,000 | ||
| Total | 1,30,000 | Total | 1,30,000 |
Adjustments
Sujata died on 1st July, 2012. The following adjustments were agreed upon as per the partnership deed:
- Land and Building to be valued at ₹60,000 and all debtors were good.
- Stock to be depreciated by 10%.
- The drawings of Sujata up to the date of her death amounted to ₹2,000.
- Interest on capital was to be allowed at 10% p.a.
- The deceased partner’s share of goodwill is to be valued at 2 years’ purchase of the average profit of the last 3 years. The profits were: 2009–10 = ₹15,000; 2010–11 = ₹17,000; 2011–12 = ₹13,000.
- The deceased partner’s share of profit up to the date of her death should be based on the average profit of the last two years.
Required
You are required to prepare:
- Profit and Loss Adjustment Account.
- Sujata’s Capital Account showing the balance payable to her Executor’s Loan Account.
- Working notes for calculations.
Solution: In the books of Partnership Firm
Profit and Loss Adjustment Account
| Dr. (Particulars) | Amount (₹) | Cr. (Particulars) | Amount (₹) |
|---|---|---|---|
| To Stock A/c (Depreciation) | 3,000 | By Land & Building A/c (Appreciation) | 10,000 |
| To Profit on Revaluation transferred to Partners' Capital A/c (2:2:1) | By R.D.D. A/c (Cancelled as debtors are good) | 2,500 | |
| Supriya | 3,800 | ||
| Surekha | 3,800 | ||
| Sujata | 1,900 | ||
| Total | 12,500 | Total | 12,500 |
Sujata’s Capital Account
| Dr. (Particulars) | Amount (₹) | Cr. (Particulars) | Amount (₹) |
|---|---|---|---|
| To Drawings A/c | 2,000 | By Balance b/d | 20,000 |
| To Sujata's Executor's Loan A/c (Bal. Fig.) | 29,150 | By Reserve Fund A/c (10,000 * 1/5) | 2,000 |
| By P&L Adjustment A/c (Profit) | 1,900 | ||
| By Interest on Capital A/c | 500 | ||
| By Goodwill A/c (Share) | 6,000 | ||
| By P&L Suspense A/c (Profit share) | 750 | ||
| Total | 31,150 | Total | 31,150 |
Working Notes
1. Calculation of Goodwill
Average Profit (3 years): (15,000 + 17,000 + 13,000) / 3 = 45,000 / 3 = ₹15,000
Firm's Goodwill: Average Profit × No. of years’ purchase = 15,000 × 2 = ₹30,000
Sujata’s Share in Goodwill (1/5): 30,000 × (1/5) = ₹6,000
2. Calculation of Profit till Date of Death (P&L Suspense A/c)
Sujata was a partner for 3 months (April, May, June).
Average Profit (2 years): (17,000 + 13,000) / 2 = 30,000 / 2 = ₹15,000
Firm's Profit for 3 months: 15,000 × (3 / 12) = ₹3,750
Sujata's Share in Profit (1/5): 3,750 × (1/5) = ₹750
3. Calculation of Interest on Capital
Interest is calculated on the opening capital for the period she was a partner (3 months).
Interest: Capital × Rate × Period = 20,000 × (10/100) × (3/12) = ₹500
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