Pravin, Prakash and Paresh were partners sharing profits and losses in the proportion to their capitals. their balance sheet of the firm on 31st March, 2013 was as under.

Solution: Death of Partner - March 2014 Board Question

Problem Statement (Question 3 - OR)

Pravin, Prakash, and Paresh were partners sharing profits and losses in the proportion to their capitals. Their balance sheet of the firm on 31st March, 2013 was as under:

Balance Sheet as on 31st March 2013

Liabilities Amount (Rs) Assets Amount (Rs)
Capital A/c’s:
Pravin
Prakash
Paresh
60,000
40,000
20,000 		Land and Building
Investments
Debtors
Less: R.D.D.
Stock
Cash 		80,000
40,000
32,000
(4,000)
36,000
28,000
Creditors 56,000
Reserve Fund 36,000
Total 2,12,000 Total 2,12,000

Adjustments: Paresh died on 1st August, 2013 and the following adjustments were made:

  • (1) Assets were revalued as − Land and building Rs 88,000, Investments Rs 36,000 and Stock Rs 34,000.
  • (2) All debtors were good.
  • (3) Goodwill of the firm valued at two times the Average Profit of the last 4 years profit.
  • (4) Paresh’s share of profit upto his death to be calculated on the basis of Average profit of the last two years.
  • (5) Profit for the last four years were: Rs 12,000, Rs 24,000, Rs 14,000 and Rs 22,000.

Prepare: (i) Profit and Loss Adjustment Account. (ii) Paresh’s Capital Account, showing the amount payable to his executor. (iii) Give working of Paresh’s share in Goodwill and profit.

Solution

(i) Profit and Loss Adjustment Account

Dr. Cr.
Particulars Amount
Rs		 Particulars Amount
Rs
Investments 4,000 Land & Building 8,000
Stock 2,000 Provision for Doubtful Debts 4,000
Profit transferred to (Balancing Figure)
Pravin’s Capital     3,000
Prakash’s Capital   2,000
Paresh’s Capital    1,000 6,000
Total 12,000 Total 12,000

(ii) Paresh’s Capital Account

Dr. Cr.
Particulars Amount
Rs		 Particulars Amount
Rs
Paresh’s Executors A/c (Balancing Figure) 34,000 Balance b/d 20,000
Reserve Fund 6,000
Profit & Loss Adjustment A/c 1,000
Pravin’s Capital 3,600
Prakash’s Capital 2,400
Profit & Loss A/c 1,000
Total 34,000 Total 34,000

Working Notes

1. Calculation of Profit Sharing Ratio

Ratio to Capital = 6 : 4 : 2 = 3 : 2 : 1

2. Calculation of amount transferred to Reserve Fund

$$ \text{Reserve Fund} = 36,000 \times \frac{1}{6} = \text{Rs. } 6,000 $$

3. Calculation of Valuation of Goodwill

Valuation of Goodwill = Average Profit × Number of Year's of Purchase

Average Profit Calculation:

$$ \text{Average Profit} = \frac{12000 + 24000 + 14000 + 22000}{4} = \text{Rs. } 18,000 $$

Firm's Goodwill Calculation:

$$ = 18,000 \times 2 = \text{Rs. } 36,000 $$

Paresh's Share of Goodwill:

$$ \text{Paresh Goodwill} = 36,000 \times \frac{1}{6} = \text{Rs. } 6,000 $$

Adjustment: Goodwill given to Paresh should be shared between Pravin and Prakash in the Ratio 3:2.

$$ \text{Pravin's Contribution} = 6,000 \times \frac{3}{5} = \text{Rs. } 3,600 $$ $$ \text{Prakash's Contribution} = 6,000 \times \frac{2}{5} = \text{Rs. } 2,400 $$

4. Calculation of Paresh's share of Profit upto his death

Average amount for last two years:

$$ \text{Average Profit} = \frac{14000 + 22000}{2} = \text{Rs. } 18,000 $$

Share for 4 months (April to July):

$$ \text{Profit \& Loss A/c} = 18,000 \times \frac{4}{12} \times \frac{1}{6} = \text{Rs. } 1,000 $$

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