NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 4

Q.1 What are the different ways in which a partner can retire from the firm?

Ans. A partner can retire from the firm as per agreement of the partnership. So if the agreement is for a fixed period or for a particular venture then a partner can retire after the expiry of the fixed period or on completion of the venture. Likewise if partnership is at will, then a partner can retire at any time by giving due notice. Further a partner can retire on ground of health, old age etc.

Q.2 Write the various matters that need adjustments at the time of retirement of a partner.

Ans. Following are the matters that need adjustments at the time of retirement of a partner:

1. Ascertainment of new profit sharing ratio and gaining ratio.
2. Treatment of goodwill
3. Revaluation of assets and liabilities
4. Distribution of accumulated profits and losses
5. Adjustment of capital if required.
6. Settlement of amount due to retiring partner

Q.3 Distinguish between sacrificing ratio and gaining ratio.

Ans.

Q.4 Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?

Ans. At the time of retirement or death of a partner, assets of the firm are revalued and liabilities are reassessed with a purpose that the outgoing partner is not at an advantage or disadvantage because of the change in values. Hence profit or loss on revaluation is distributed among all partners in their profit sharing ratio.

Q.5 Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

Ans. At the time of retirement or death of a partner, adjustment is necessary for goodwill. When a partner retires or dies his share in profits is taken by the continuing partners for which they should compensate the outgoing partner. This compensation paid is known as goodwill.

Q.6 Explain the modes of payment to a retiring partner.

Ans. The retiring partner’s account is settled as per the terms of the partnership deed. It can settle in the following ways:

1. Lump sum immediately
2. Payment in installments
3. Partly in cash immediately and partly in installments at an agreed interval

In the absence of any agreement, section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his or her money. Hence total amount due to the retiring partner which is ascertained after all adjustments have been made is to be paid immediately to the retiring partner. In case the firm is not in a position to make payment immediately, the amount due is transferred to the retiring partner’s loan account and as and when the amount is paid it is debited to his account.

Q.7 How will you compute the amount payable to a deceased partner?

Ans. The sum due to the legal representative/ executors includes:

1. Credit balance of his capital account
2. Credit balance of his current account, if any
3. His share of goodwill
4. His share of accumulated profits and reserves
5. His share in the gain of revaluation of assets and liabilities
6. His share of profits up to the date of death
7. Interest on capital, up to the date of death
9. Salary commission due up to the date of death

The following deductions if any may have to be made from his share:
1. Debit balance of his current account,
2. His share of goodwill to be written off, if necessary
3. His share of accumulated losses
4. His share of loss on revaluation of assets and liabilities
5. His share of loss up to the date of death
6. His drawings and interest thereon up to the date of death

Q.8 Explain the treatment of goodwill at the time of retirement or on the event of death of a partner.

Ans. The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/death because the goodwill has been earned by the firm with the efforts of all the existing partners. Hence at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners; the retiring/deceased partner is compensated for his share of goodwill by the continuing partners in their gaining ratio. As such in case of retirement or death of a partner, the adjustment of goodwill will be made through partner’s capital accounts. The retiring or deceased partner’s capital account will be credited with his share of goodwill and continuing partners’ capital accounts will be debited in their gaining ratio. The following journal entry will be recorded:

Journal Entry

If goodwill already appears in the books, it will be written off among all partners in their old profit sharing ratio by means of the following entry:

Journal Entry

Q.9 Discuss the various methods of computing the share in profits in the event of death of a partner.

Ans. Deceased partner’s share of profit from the last Balance Sheet to the date of death can be computed by the following two methods:

On the basis of last year’s profit (or average profit of last few years)

On the basis of sales

1. On the basis of last year’s profit: It is also called Time Basis. In this case, profits are assumed to have arisen uniformly over the year. Suppose, the profit for the previous year is ₹60,000 and a partner dies after 3 months of the Balance Sheet. The profits of the 3 months will be ₹15,000 i.e. ₹60,000 x 3/12. If the deceased partners share of profit is 1/5, his share of profit till the date of death will be ₹3,000. It may be calculated on the basis of previous year profit alone or on the basis of average profits of certain years.

2. On the basis of sales: If the profit till the date of death is to be ascertained on the basis of sales or turnover, we should know (a) sales for the previous accounting year (b) sales up to the date of death and (c) profit of the previous year. Suppose the rate of profit on sales is 20% for previous year. Sales up to the date of death is ₹5,00,000, then profits up to the date of death will be ₹1,00,000 i.e. 20% of ₹5,00,000. Then deceased partner’s share of profit is computed.

Q.10 Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2017, Naman retires.

The various assets and liabilities of the firm on the date were as follows:

Cash ₹10,000, Building ₹1,00,000, Plant and Machinery ₹40,000, Stock ₹20,000, Debtors ₹20,000 and Investments ₹30,000.

The following was agreed upon between the partners on Naman’s retirement:

1. Building to be appreciated by 20%.
2. Plant and Machinery to be depreciated by 10%.
3. A provision of 5% on debtors to be created for bed and doubtful debts.
4. Stock was to be valued at ₹18,000 and Investment at ₹35,000.

Record the necessary journal entries to the above effect and prepare the revaluation account.

Ans. Revaluation A/c

Journal Entries

Q.11 Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserve ₹36,000 and Profit and Loss Account (Dr.) ₹15,000.

Pass the necessary journal entries to the above effect.

Ans. Journal Entries

Q.12 Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at ₹1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary journal entries.

Ans.

\begin{array}{l}\text{Manisha’s share in goodwill}\\ \text{₹1,80,000 x}\frac{\text{2}}{\text{6}}\text{=}\text{₹}\text{60,000}\\ \text{Gaining ratio = New ratio – Old ratio}\\ \text{Old ratio = 3:2:1}\\ \text{New ratio = 3:2}\\ \text{Gaining ratio}\\ \text{Aparna =}\frac{\text{3}}{\text{5}}\text{–}\frac{\text{3}}{\text{6}}\text{=}\frac{\text{3}}{\text{30}}\\ \text{Sonia =}\frac{\text{2}}{\text{5}}\text{–}\frac{\text{1}}{\text{6}}\text{=}\frac{\text{7}}{\text{30}}\\ \text{=}\frac{\text{3}}{\text{30}}\text{:}\frac{\text{7}}{\text{30}}\\ \text{= 3:7}\end{array}

\begin{array}{l}\text{Aparna’s share in goodwill =₹60,000 ×}\frac{\text{3}}{\text{10}}\text{=₹18,000}\\ \text{Sonia’s share in goodwill =₹60,000 ×}\frac{\text{7}}{\text{10}}\text{=₹42,000}\\ \end{array}

Q.13 Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of ₹60,000.Sangeeta retires and goodwill is valued at ₹90,000. Saroj and Shanti decided to share future profits equally. Record necessary journal entries.

Ans.

\begin{array}{l}\text{Sangeeta’s share in goodwill}\\ \text{₹90,000 x}\frac{\text{2}}{\text{10}}\text{=}\text{₹}\text{18,000}\\ \text{Gaining ratio = New ratio – Old ratio}\\ \text{Old ratio = 2:3:5}\\ \text{New ratio = 1:1}\\ \text{Gaining ratio}\\ \text{Saroj =}\frac{\text{1}}{\text{2}}\text{–}\frac{\text{3}}{\text{10}}\text{=}\frac{\text{2}}{\text{10}}\\ \text{Shanti=}\frac{\text{1}}{\text{2}}\text{–}\frac{\text{5}}{\text{10}}\text{=}\text{0}\end{array}

Q.14 Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1.

Their Balance Sheet as on March 31, 2017 was as follows:

Brijesh retired on March 31, 2017 on the following terms:

1. Goodwill of the firm was valued at ₹70,000 and was not to appear in the books.
2. Bad debts amounting to ₹2,000 were to be written off.
3. Patents were considered as valueless.

Prepare Revaluation account, Partner’s Capital accounts and the Balance Sheet of Digvijay and Parakram after Brijesh’s retirement.

Ans. Revaluation A/c

Partners’ Capital Accounts

Brijesh’s Capital Account

Balance Sheet

as on 31^st March 2017

Note: As sufficient balance is not available to pay the amount due to Brijesh, the balance of his Capital Account transferred to his Loan Account.

\begin{array}{l}\text{Brijesh’s Share of Goodwill}\\ \text{Total goodwill of the firm × Retiring Partner’s Share = 70,000 x}\frac{\text{2}}{\text{5}}\text{=}\text{₹28,000}\\ \text{Gaining ratio = New ratio – Old ratio}\\ \text{Digvijay’s Share =}\frac{\text{2}}{\text{3}}\text{–}\frac{\text{2}}{\text{5}}\text{=}\frac{\text{10-6}}{\text{15}}\text{=}\frac{\text{4}}{\text{15}}\\ \text{Prakarma’s Share =}\frac{\text{1}}{\text{3}}\text{–}\frac{\text{1}}{\text{5}}\text{=}\frac{\text{5-3}}{\text{15}}\text{=}\frac{\text{2}}{\text{15}}\\ \text{Gaining ratio between Digvijay and Parakaram = 4:2 or 2:1}\end{array}

Q.15 Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2017, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

The terms were:

1. Goodwill of the firm was valued at ₹13,500.
2. Expenses owing to be brought down to ₹3,750.
3. Machinery and Loose Tools are to be valued at 10% less than their book value.
4. Factory premises are to be revalued at ₹24,300.

Prepare:

1. Revaluation account.
2. Partner’s capital accounts and
3. Balance Sheet of the firm after retirement of Sheela.

Ans. Revaluation A/c

Partners’ Capital Accounts

Sheela’s Capital Account

Balance Sheet

as on 1^st April 2017

\begin{array}{l}\text{Sheela’s share of goodwill}\\ \text{Total goodwill of the firm × Retiring Partner’s Share = 13,500 x}\frac{\text{2}}{\text{6}}\text{=}\text{₹4,500}\\ \text{Gaining ratio = New ratio – Old ratio}\\ \text{Radha’s Share =}\frac{\text{3}}{\text{4}}\text{–}\frac{\text{3}}{\text{6}}\text{=}\frac{\text{18-12}}{\text{24}}\text{=}\frac{\text{6}}{\text{24}}\\ \text{Meena’s Share =}\frac{\text{1}}{\text{4}}\text{–}\frac{\text{1}}{\text{6}}\text{=}\frac{\text{6-4}}{\text{15}}\text{=}\frac{\text{2}}{\text{6}}\\ \text{Gaining ratio between Digvijay and Parakaram = 6:2 or 3:1}\end{array}

Q.16 Pankan, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness on September 30, 2017. On that date the Balance Sheet of the firm was as follows:

Additional Information:

1. Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for ₹1,200 and furniture to be brought up to ₹45,000.
2. Goodwill of the firm be valued at ₹42,000.
3. ₹26,000 from Naresh’s Capital account are transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from bank.
4. Naresh’s share of profit till the date of retirement is to be calculated on the basis of last years profit i.e. Rs. 60,000.
5. New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1.

Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.

Ans. Revaluation A/c

Partners’ Capital Accounts

Bank A/c

Balance Sheet

as on 30^th September 2017

\begin{array}{l}\text{Naresh’s share in goodwill}\\ \text{42,000}\text{×}\frac{\text{2}}{\text{6}}\text{=}\text{₹}\text{14,000}\\ \text{Gaining ratio = New ratio –}\text{Old ratio}\\ \text{Old ratio = 3:2:1}\\ \text{New ratio = 5:1}\\ \text{Gaining ratio}\\ \text{Pankaj =}\frac{\text{5}}{\text{6}}\text{–}\frac{\text{3}}{\text{6}}\text{=}\frac{\text{2}}{\text{6}}\\ \text{Saurabh =}\frac{\text{1}}{\text{6}}\text{–}\frac{\text{1}}{\text{6}}\text{=}\text{0}\end{array}

Q.17 Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2017 was as follows:

Mr. Pamy died on September 30, 2017. The partnership deed provided the following:

1. The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year’s profit.
2. He will be entitled to his share of goodwill of the firm calculated on the basis of 3 year’s purchase of average of last 4 year’s profit. The profits for the last four financial years are given below:

For 2013-14: ₹80,000; for 2014-15: ₹50,000; for 2015-16: ₹40,000; for 2016-17: ₹30,000.

The drawings of the deceased partner up to the date of death amounted to ₹10,000. Interest on capital is to be allowed at 12% per annum.

Surviving partners agreed that ₹15,400 should be paid to the executors immediately and the balance in four equal yearly installments with interest at 12% p.a. on outstanding balance.

Show Mr. Pammy’s Capital account, his Executor’s account till the settlement of the amount due.

Ans. Pammy’s Capital Account

Pammy’s Executor’s Account

\begin{array}{l}\text{Pammy’s share of profit =}\\ \text{30,000 x}\frac{\text{6}}{\text{12}}\text{×}\frac{\text{1}}{\text{5}}\text{=}\text{₹}\text{3,000}\\ \text{Firm’s goodwill}\\ \text{=}\frac{\text{80,000+50,000+40,000+30,000}}{\text{4}}\text{×}\text{3}\\ \text{=}\text{₹}\text{1,50,000}\\ \text{Deceased partner’s share}\\ \text{= 1,50,000}\text{×}\frac{\text{1}}{\text{5}}\text{=}\text{₹}\text{30,000}\end{array} \begin{array}{l}\text{Gaining ratio = New ratio – Old ratio}\\ \text{Puneet’s Share =}\frac{\text{2}}{\text{4}}-\frac{\text{2}}{\text{5}}\text{=}\frac{\text{2}}{\text{20}}\\ \text{Pankaj’s Share =}\frac{\text{2}}{\text{4}}-\frac{\text{2}}{\text{5}}\text{=}\frac{\text{2}}{\text{20}}\\ \text{Gaining Ratio between Puneet and Pankaj = 2 : 2 or 1 : 1}\\ \text{4) Interest on Capital for 6 months, i}\text{.e}\text{. from April 1, 2017 to September 30, 2017}\\ \text{Amount of Capital}\times \text{Rate of Interest}\times \text{Period = 40,000}\times \frac{\text{12}}{\text{100}}\times \frac{\text{6}}{\text{12}}\text{=}\text{₹2,400}\\ \text{5) Interest AmountThe firm closes its books every year on March 31,}\\ \text{while installments to Pammy’s Executor are paid on September 30 every year}\text{.}\\ \text{Amount outstanding on 30 September = 75,400 – 15,400 = ₹60,000}\end{array}

Q.18 Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2017.

Rockey died on June 30, 2017. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

1. Amount standing to the credit of the Partner’s Capital account.
2. Interest on capital at 5% per annum.
3. Share of goodwill on the basis of twice the average of the past three years profit and
4. Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit. Profits for the year ending on March 31, 2015, March 31, 2016 and March 31, 2017 were Rs. 12,000, Rs. 16,000 and Rs. 14,000 respectively.
5. Profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up Rockey’s capital account to be rendered to his executor.

Ans. Journal Entries

Rockey’s Capital Account

\begin{array}{}\end{array} \begin{array}{l}\text{Firm’s goodwill}\\ \text{=}\frac{\text{12,000+16,000+14,000}}{\text{3}}\text{x}\text{2}\\ \text{=}\text{₹}\text{28,000}\\ \text{Deceased partner’s share}\\ \text{= ₹28,000 x}\frac{\text{2}}{\text{7}}\text{=}\text{₹}\text{8,000}\end{array} \begin{array}{l}\text{Gaining ratio = New ratio – Old ratio}\\ \text{Prateek’s Share =}\frac{3}{5}\text{–}\frac{3}{7}\text{=}\frac{9}{35}\\ \text{Rockey’s Share =}\frac{\text{2}}{5}\text{–}\frac{\text{2}}{7}\text{=}\frac{4}{35}\\ \text{Gaining Ratio between Prateek and Kushal}=\text{9}:\text{4 or 3}:\text{2}\\ \text{4) Interest on Capital for 3 months i}.\text{e}.\text{from April 1},\text{2}0\text{17 to June 3}0,\text{2}0\text{17}\\ \text{Amount of Capital × Rate of Interest × Period = 20,000 ×}\frac{5}{\text{100}}\text{×}\frac{3}{\text{12}}=₹250\\ \end{array}

Average profits for last 3 years = 32,000/3 =Rs. 10,667

His share of profits = 10,667 x 1/3 x 3/12 = Rs. 889

Interest on capital =

20,000 x 5/100 x 3/12 = Rs. 250

Q.19 Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of ½, 1/6 and 1/3 respectively.

The Balance Sheet on April 1, 2015 was as follows:

Bajaj requires from the business and the partners agree to the following:

1. Freehold premises and stock are to be appreciated by 20% and 15% respectively.
2. Machinery and furniture are to be depreciated by 10% and 7% respectively.
3. Bad debts reserve is to be increased to ₹1,500.
4. Goodwill is valued at ₹21,000 on Bajaj’s retirement.
5. The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any in their capital accounts will be adjusted through current accounts.

Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.

Ans. Revaluation A/c

Partners’ Capital Accounts

Bajaj’s Capital Account

Balance Sheet

as on 1^st April 2015

\begin{array}{l}\text{Calculation of New Capitals of the existing partners}\text{.}\\ \text{Balance in Narang’s Capital=₹34,230}\\ \text{Balance in Suri’s Capital = ₹31,410}\\ \text{Total Capital of the New firm after revaluation of assets and}\\ \text{liabilities and adjustment of Goodwill and Reserves = ₹65,640}\\ \text{Based on new profit sharing ratio of 3:1}\\ \text{Narang’s’s capital =₹65,640 ×}\frac{\text{3}}{\text{4}}\text{=₹49,230}\\ \text{Suri’s capital =₹65,640 ×}\frac{\text{1}}{\text{4}}\text{=₹16,410}\\ \text{NOTE:i}\text{. In the given Question Suri’s Capital is ₹30,000 instead of ₹20,000}\\ \text{.ii}\text{Due to insufficient balance in Bajaj’s Capital Account, the tdue to Bajaj is transferred to his Loan Account}\text{.}\end{array}

Q.20 The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015:

Pramod retired on the date of Balance Sheet and the following adjustments were made:

1. Stock is to be reduced by 10%.
2. Factory buildings were appreciated by 12%.
3. Reserve for doubtful debts be created up to 5%.
4. Reserve for legal charges to be made at ₹265.
5. The goodwill of the firm is fixed at ₹10,000.
6. The capital of the new firm is fixed at ₹30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.

Pass journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.

Ans. Revaluation A/c

Partners’ Capital Accounts

Pramod’s Capital Account

Balance Sheet

as on 31^st March 2015

Journal Entries

\begin{array}{l}\text{Pramod’s share in goodwill}\\ \text{10,000 ×}\frac{\text{3}}{\text{10}}\text{=}\text{₹}\text{3,000}\\ \text{Gaining ratio = New ratio}-\text{Old ratio}\\ \text{Old ratio = 4:3:3}\\ \text{New ratio = 3:2}\\ \text{Gaining ratio}\\ \text{Rajesh =}\frac{\text{3}}{\text{5}}-\frac{\text{4}}{\text{10}}\text{=}\frac{\text{2}}{\text{10}}\\ \text{Nishant =}\frac{\text{2}}{\text{5}}-\frac{\text{3}}{\text{10}}\text{=}\frac{\text{1}}{\text{10}}\end{array}

Q.21 Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2016.

The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 01, 2016 and his share in the business is to be calculated as per the following terms of revaluation of assets and liabilities:

Stock: ₹20,000; office furniture: ₹14,250; Plant and Machinery: ₹23,530; land and building: ₹20,000.

A provision of ₹1,700 to be created for doubtful debts. The goodwill of the firm is valued at ₹9,000.

The continuing partners agreed to pay ₹16,500 as cash on retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as loan.

Prepare Revaluation account, capital accounts and Balance Sheet of the reconstituted firm.

Ans. Revaluation A/c

Partners’ Capital Accounts

Malik’s Capital Account

Balance Sheet

as on 31^st March 2016

\begin{array}{l}\text{Naresh’s share in goodwill}\\ \text{42,000}\times \frac{\text{2}}{\text{6}}\text{=}\text{ram}\text{14,000}\\ \text{Gaining ratio = New ratio –}\text{Old ratio}\\ \text{Old ratio = 3:2:1}\\ \text{New ratio = 5:1}\\ \text{Gaining ratio}\\ \text{Pankaj =}\frac{\text{5}}{\text{6}}-\frac{\text{3}}{\text{6}}\text{=}\frac{\text{2}}{\text{6}}\\ \text{Saurabh =}\frac{\text{1}}{\text{6}}-\frac{\text{1}}{\text{6}}\text{=}\text{0}\end{array}

Q.22 Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2016 stood as follows:

Bharti died on June 12, 2016 and according to the deed of the said partnership, her executors are entitled to be paid as under:

1. The capital to her credit at the time of her death and interest thereon @ 10% per annum.
2. Her proportionate share of reserve fund.
3. Her share of profits for the intervening period will be based on the sales during that period, which were calculated as ₹1,00,000. The rate of profit during past three years had been 10% on sales.
4. Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous years were:

2013: ₹8,200

2014: ₹9,000

2015: ₹9,800

The investments were sold for ₹16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

Ans. Journal Entries

Bharti’s Capital Account

Bharti’s Executor’s Account

\begin{array}{l}\text{Interest on capital for 73 days =}\\ \text{₹12,000 x}\frac{\text{10}}{\text{100}}\text{x}\frac{\text{73}}{\text{365}}\text{=}\text{₹}\text{240}\\ \text{Profits till date of death =}\\ \text{₹1,00,000 x}\frac{\text{10}}{\text{100}}\text{=}\text{₹}\text{10,000}\\ \text{Share of profit =}\\ \text{₹10,000 x}\frac{\text{2}}{\text{6}}\text{=}\text{₹}\text{3,333}\end{array} \begin{array}{l}\text{Average profits}\\ \text{=}\frac{\text{8,200+9,000+9,800}}{\text{3}}\text{–}\text{20\%}\text{of}\text{average}\text{profits}\\ \text{=}\text{₹9,000}\text{–}\text{₹1,800}\text{=}\text{₹}\text{₹7,200}\\ \text{Firm’s goodwill}\text{=}\text{7,200}\text{x}\text{2}\text{=}\text{₹}\text{14,400}\\ \text{Deceased partner’s share}\\ \text{=₹14,400 x}\frac{\text{2}}{\text{6}}\text{=}\text{₹}\text{4,800}\end{array}

Q.23 Nitya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2015 was as follows:

Mithya dies on August 1, 2015. The agreement between the executors of Mithya and the partners stated that:

1. Goodwill of the firm be valued at 2.5 times the average profits of last four years. The profits of four years were in 2011-12: ₹13,000; in 2012-13: ₹12,000; in 2013-14: ₹16,000; and in 2014-15: ₹15,000.
2. The patents are to be valued at ₹ 8,000, Machinery at ₹ 25,000 and Premises at ₹25,000.
3. The share of profit of Mithya should be calculated on the basis of the profit of 2014-2015.
4. ₹4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly installments carrying interest @ 10%.

Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid.

Also prepare the Balance Sheet of Nithya and Sathya as it would appear on August 1, 2015 after giving effect to the adjustments.

Ans. Journal Entries

Revaluation A/c

Partners’ Capital Accounts

Mithya’s Capital Account

Mithiyas’s Executor’s Account

Calculation of installments:

Amount due to Mithya’s executor after paying some amount in cash was ₹ 24,400 (28,600 – 4,200) divided in 4 equal installments i.e. ₹ 6,100 each.

Calculation of interest on loan

\begin{array}{l}\text{Share in general reserve =}\\ \text{₹6,000 x}\frac{\text{2}}{\text{10}}\text{=}\text{₹}\text{1,200}\\ \text{Share in existing goodwill =}\\ \text{₹5,000 x}\frac{\text{2}}{\text{10}}\text{=}\text{₹}\text{1,000}\\ \text{Share of profit =}\\ \text{₹15,000 x}\frac{\text{4}}{\text{12}}\text{x}\frac{\text{2}}{\text{10}}\text{=}\text{₹}\text{1,000}\end{array} \begin{array}{l}\text{Firm’s goodwill}\\ \text{=}\frac{\text{13,000+12,000+15,000+16,000}}{\text{4}}\text{x}\frac{\text{5}}{\text{2}}\\ \text{=}\text{₹}\text{35,000}\\ \text{Deceased partner’s share}\\ \text{= ₹35,000 x}\frac{\text{2}}{\text{10}}\text{=}\text{₹}\text{7,000}\end{array}

Balance Sheet
as on ………