OMTEX AD 2

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:

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:

  1. Profit and Loss Adjustment Account.
  2. Sujata’s Capital Account showing the balance payable to her Executor’s Loan Account.
  3. 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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