Ownclasses

M, N and O were partners in a firm sharing profits and losses equally. Their Balance Sheet on 31-12-2009 was as follows:

Liabilities

Amount(Rs)

Assets

Amount(Rs)

 

Capital:              M 70,000

                         N 70,000

                         O 70,000

 

General Reserve

Creditors

 

 

 

2,10,000

 

30,000

20,000

 

Plant and Machinery

Stock

Sundry Debtors

Cash at Bank

Cash in Hand

 

60,000

30,000

95,000

40,000

35,000

 

2,60,000

 

2,60,000

 

N died on 14th March, 2010. According to the Partnership Deed, executors of the deceased partner are entitled to:

(i) Balance of partner's capital account.
(ii) Interest on Capital @ 5% p.a.
(iii) Share of goodwill calculated on the basis of twice the average of past three year's profits and
(iv) Share of profits from the closure of the last accounting year till the date of death on the basis of twice the average of three completed year's profits before death.
Profits for 2007, 2008 and 2009 were Rs. 80,000, Rs. 90,000, Rs. 1,00,000 respectively. Show the working for deceased partner's share of goodwill and profits till the date of his death. Pass the necessary journal entries and prepare N's Capital Account to be rendered to his executors. 

Answer

                                               Journal

Date 

         Particulars

LF

Dr (Rs.)

Cr (Rs.)

 

2010

14th

March

       

        

 

General Reserve A/c Dr

 

       To N’s Capital A/c

 

(Being transfer of N’s share of general reserve to his capital A/c)

 

 

 

10000

 

 

 

 

 

 


700

 

 

 

 

 

 

 

30000

 

30000

 

 

 


12000

 

 

 

 


152700

 

 

 

10000

 

 

 

 

 

 

 

700

 

 

 

 

 

 

 

 

 

60000

 

 

 

 

12000

 

 

 

 

152700

 

Interest on Capital A/c Dr

 

       To N’s Capital A/c

 

(Being Interest 5% pa credited to N’s Capital A/c upto 14/3/2010)

 

 

M’s Capital A/c Dr

 

O’s Capital A/c Dr

 

       To N’s Capital A/c

 

(Being the share of Goodwill Adjusted)X

 

Profit and Loss Suspense A/c Dr

 

        To N’s Capital A/c

 

(Being the transfer of N’s Share of Profit to his capital A/c upto the date of his death)

 

N’s Capital A/c Dr

 

         To N’s Executor A/c

 

(Being the transfer of amount due to N’s = 1×5 executor a/c)



N’s Capital A/c

Particulars

Amount

Particulars

Amount

To

N’s Executor’s a/c

 

152700

By

Balance b/d

 

By General reserve a/c

 

By Interest on capital a/c

(70,000 x 5 /100 x 73 /365)

 

By M’s Capital a/c

 

By O’s Capital a/c

 

By Profit & Loss Suspense A/c (90000 x 2x73/365x1/3)

 

70000

 

10000

 

700

 

 

30000

 

30000

 

12000

 

 

152700

152700

 

Working Note

Calculation of Goodwill = Average Profit x No. of year of Purchase = 9000 x 2 = Rs. 180000

Average Profit = Total Profit / No. Of year = 270000 / 3 = 90000

N’s Share in Good Will = 180000 x1/3 = 60000.