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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