NCERT Solutions for Class 12 Accountancy Accountancy Part I Chapter 3: Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Chapter at a glance

Questions for Practice – Short Answer Questions

Question SA – Q1

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

Answer

1. With the consent of all the other partners.
2. In accordance with an express agreement (the deed) among the partners.
3. In a partnership at will, by giving written notice to all the other partners of his intention to retire.

By consent of all partners, by an express agreement, or (in a partnership at will) by written notice to all partners.

Question SA – Q2

Write the various matters that need adjustments at the time of retirement of a partners.

Answer

1. Calculation of the new and gaining ratios.
2. Treatment of goodwill.
3. Revaluation of assets and reassessment of liabilities.
4. Distribution of accumulated profits, reserves and losses.
5. Share of profit or loss up to the date of retirement.
6. Adjustment of capitals of continuing partners (if required).
7. Settlement of the amount due to the retiring partner.

Gaining ratio, goodwill, revaluation, reserves and accumulated profits/losses, profit to date, capital adjustment and settlement of the amount due.

Question SA – Q3

Distinguish between sacrificing ratio and gaining ratio.

Answer

Sacrificing ratio = old share – new share (used on admission); gaining ratio = new share – old share (used on retirement/death).

Question SA – Q4

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

Answer

The book values of assets and liabilities may differ from their real values on the date of retirement or death. The gain or loss on their revaluation belongs to all partners, including the outgoing partner, as it arose while he was a partner. Revaluation ensures he receives (or bears) his fair share, and the continuing partners are not unfairly benefited or burdened later.

So that the outgoing partner gets (or bears) his share of the change in values up to his retirement or death, and the continuing partners do not gain or lose from it later.

Question SA – Q5

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

Answer

Goodwill has been built up through the efforts of all the partners, including the retiring/deceased partner. After he leaves, the continuing partners will enjoy the future profits earned on account of that goodwill. So he is compensated for giving up his share of future profits by being given his share of goodwill, paid by the gaining partners.

He helped create the goodwill, and the continuing partners will enjoy the future profits from it, so he is compensated by his share of goodwill.

Questions for Practice – Long Answer Questions

Question LA – Q1

Explain the modes of payment to a retiring partner.

Answer

1. Lump-sum cash payment – Retiring Partner’s Capital A/c Dr → To Cash/Bank A/c.
2. Transfer to loan account – the amount is kept in the business as a loan: Retiring Partner’s Capital A/c Dr → To Retiring Partner’s Loan A/c. Under Sec. 37 of the Partnership Act he is entitled, at his option, to interest at 6 % p.a. or a share of profit earned with his money until paid.
3. Part cash, part loan – a portion is paid at once; the balance is transferred to his loan account.
4. Instalments with interest – the loan is repaid in equal (or agreed) instalments, with interest on the outstanding balance: Interest A/c Dr → To Loan A/c; Loan A/c Dr → To Cash/Bank A/c.
5. If necessary, cash may be brought in by continuing partners or a bank loan taken to pay him.

Lump-sum cash, transfer to a loan account, part cash and part loan, or payment in instalments with interest.

Question LA – Q2

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

Answer

The amount is computed through the deceased partner’s capital account and transferred to his Executor’s Account:

Balance = amount due → Deceased Partner’s Capital A/c Dr → To Executor’s A/c. The executor is then paid in cash, in instalments with interest, or the amount is kept as a loan.

Add capital, reserves, revaluation gain, goodwill, interest on capital and profit to date; deduct drawings, interest on drawings and losses; transfer the balance to the executor’s account.

Question LA – Q3

Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?

Answer

1. Existing goodwill in the books is written off among all partners in the old ratio: All Partners’ Capital A/cs Dr → To Goodwill A/c.
2. The outgoing partner’s share of the current value of goodwill is credited to him and debited to the continuing partners in their gaining ratio: Continuing Partners’ Capital A/cs Dr (gaining ratio) → To Retiring/Deceased Partner’s Capital A/c.
3. If a continuing partner’s share falls (he sacrifices), he is credited along with the outgoing partner, and the gaining partner is debited.
4. Goodwill is not raised in the books (AS-26 does not permit recording self-generated goodwill).
5. Hidden goodwill: if the agreed payment exceeds the amount due, the excess is the outgoing partner’s share of goodwill and is treated as above.

Write off existing goodwill in the old ratio; credit the outgoing partner with his share of goodwill and debit continuing partners in the gaining ratio, without opening a goodwill account.

Question LA – Q4

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

Answer

1. Time basis – based on last year’s (or average) profit: Share = Last year’s profit × (Months up to death ÷ 12) × Deceased partner’s share.
2. Turnover (sales) basis – based on sales up to the date of death: Profit to date = Sales up to death × Rate of profit on sales ÷ 100; Share = that profit × deceased partner’s share.

Entry (either method): Profit and Loss Suspense A/c Dr → To Deceased Partner’s Capital A/c. The suspense account is closed at the year-end by transfer to the Profit and Loss Appropriation Account (or the continuing partners bear it in the gaining ratio).

Time basis (last year’s profit × period × share) or turnover basis (sales to date × rate of profit × share), debited to Profit and Loss Suspense A/c.

Questions for Practice – Numerical Questions

Question Num – Q1

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. Record necessary journal entries.

Answer

Manisha’s share = 1,80,000 × 2/6 = ₹ 60,000. Gaining ratio: Aparna 3/5 – 3/6 = 3/30; Sonia 2/5 – 1/6 = 7/30 → 3 : 7.

Aparna Dr ₹ 18,000, Sonia Dr ₹ 42,000; Manisha Cr ₹ 60,000.

Question Num – Q2

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.

Answer

Existing goodwill written off 2 : 3 : 5. Sangeeta’s share = 90,000 × 2/10 = ₹ 18,000. Gain: Saroj 1/2 – 3/10 = 2/10; Shanti 1/2 – 5/10 = 0 → Saroj alone gains.

Goodwill ₹ 60,000 written off (₹ 12,000 : ₹ 18,000 : ₹ 30,000); Saroj is debited ₹ 18,000 for Sangeeta’s share of goodwill.

Question Num – Q3

Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3 : 2 : 1. On March 31, 2019, 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: (i) Building to be appreciated by 20%. (ii) Plant and Machinery to be depreciated by 10%. (iii) A provision of 5% on debtors to be created for bad and doubtful debts. (iv) 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.

Answer

Revaluation Account

Gain on revaluation ₹ 18,000: Himanshu ₹ 9,000, Gagan ₹ 6,000, Naman ₹ 3,000.

Question Num – Q4

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 Reserves ₹ 36,000 and Profit and Loss Account (Dr.) ₹ 15,000. Record the necessary journal entries to the above effect.

Answer

Reserve ₹ 36,000 credited ₹ 12,000 each; P&L debit balance ₹ 15,000 debited ₹ 5,000 each.

Question Num – Q5

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, 2020: Liabilities – Creditors 49,000; Reserves 18,500; Capitals Digvijay 82,000, Brijesh 60,000, Parakaram 75,500 (total 2,85,000). Assets – Cash 8,000; Debtors 19,000; Stock 42,000; Buildings 2,07,000; Patents 9,000 (total 2,85,000). Brijesh retired on March 31, 2020 on the following terms: (i) Goodwill of the firm was valued at ₹ 70,000 and was not to appear in the books. (ii) Bad debts amounting to ₹ 2,000 were to be written off. (iii) Patents were considered as valueless. Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

Answer

Brijesh’s goodwill share = 70,000 × 2/5 = ₹ 28,000, borne by Digvijay and Parakaram in the gaining ratio 2 : 1 (they continue in the old proportion).

Revaluation Account

Partners’ Capital Accounts

Balance Sheet of Digvijay and Parakaram

Loss on revaluation ₹ 11,000; capitals Digvijay ₹ 66,333 and Parakaram ₹ 67,667; Brijesh’s loan ₹ 91,000; Balance Sheet total ₹ 2,74,000.

Question Num – Q6

Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the firm. On that date, their Balance Sheet: Liabilities – Trade Creditors 3,000; Bills Payable 4,500; Expenses Owing 4,500; General Reserve 13,500; Capitals Radha 15,000, Sheela 15,000, Meena 15,000 (total 70,500). Assets – Cash-in-Hand 1,500; Cash at Bank 7,500; Debtors 15,000; Stock 12,000; Factory Premises 22,500; Machinery 8,000; Loose Tools 4,000 (total 70,500). The terms were: a) Goodwill of the firm was valued at ₹ 13,500. b) Expenses owing to be brought down to ₹ 3,750. c) Machinery and Loose Tools are to be valued at 10% less than their book value. d) 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.

Answer

Sheela’s goodwill = 13,500 × 2/6 = ₹ 4,500, borne by Radha and Meena in 3 : 1 (they continue in the old proportion).

Revaluation Account

Partners’ Capital Accounts

Balance Sheet after Sheela’s retirement

Gain on revaluation ₹ 1,350; capitals Radha ₹ 19,050 and Meena ₹ 16,350; Sheela’s loan ₹ 24,450; Balance Sheet total ₹ 71,100.

Question Num – Q7

Pankaj, 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: Liabilities – General Reserve 12,000; Sundry Creditors 15,000; Bills Payable 12,000; Outstanding Salary 2,200; Provision for Legal Damages 6,000; Capitals Pankaj 46,000, Naresh 30,000, Saurabh 20,000 (total 1,43,200). Assets – Bank 7,600; Debtors 6,000 less Provision 400 = 5,600; Stock 9,000; Furniture 41,000; Premises 80,000 (total 1,43,200). Additional Information: (i) 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. (ii) Goodwill of the firm be valued at ₹ 42,000. (iii) ₹ 26,000 from Naresh’s Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank. (iv) Naresh share of profit till the date of retirement is to be calculated on the basis of last years’ profit, i.e., ₹ 60,000. (v) 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.

Answer

Workings - Legal damages: a further ₹ 1,200 is provided (total ₹ 7,200) – this gives the textbook’s revaluation profit. - Provision for doubtful debts: 5 % of 6,000 = ₹ 300; existing ₹ 400, so ₹ 100 is written back. - Goodwill: Naresh’s share = 42,000 × 2/6 = ₹ 14,000. Gain: Pankaj 5/6 – 3/6 = 2/6; Saurabh 1/6 – 1/6 = 0, so Pankaj alone pays. - Profit to date: 60,000 × 6/12 × 2/6 = ₹ 10,000, debited to P&L Suspense A/c.

Revaluation Account

Partners’ Capital Accounts

Naresh’s total credit = ₹ 64,000; ₹ 26,000 to loan and ₹ 38,000 paid through bank. Bank has ₹ 7,600, so a bank loan of ₹ 30,400 is raised.

Bank Account

Balance Sheet after Naresh’s retirement

(The textbook key, ₹ 54,000 due to Naresh and a total of ₹ 1,54,800, leaves out the ₹ 10,000 profit to date that item (iv) asks for. Without it, the bank loan would be ₹ 20,400 and the total ₹ 1,54,800.)

Revaluation profit ₹ 18,000; capitals Pankaj ₹ 47,000 and Saurabh ₹ 25,000; Naresh’s credit ₹ 64,000 including ₹ 10,000 profit to date (₹ 54,000 without it); Balance Sheet total ₹ 1,64,800 (₹ 1,54,800 per the key, without the profit share).

Question Num – Q8

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, 2019: Liabilities – Sundry Creditors 1,00,000; Capitals Puneet 60,000, Pankaj 1,00,000, Pammy 40,000; Reserve 50,000 (total 3,50,000). Assets – Cash at Bank 20,000; Stock 30,000; Sundry Debtors 80,000; Investments 70,000; Furniture 35,000; Buildings 1,15,000 (total 3,50,000). Mr. Pammy died on September 30, 2019. The partnership deed provided the following: (i) 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. (ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of average of last 4 years’ profit. The profits for the last four financial years are: 2015–16 ₹ 80,000; 2016–17 ₹ 50,000; 2017–18 ₹ 40,000; 2018–19 ₹ 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 instalments 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.

Answer

Workings - Profit to date = 30,000 × 6/12 × 1/5 = ₹ 3,000. - Goodwill = (2,00,000 ÷ 4) × 3 = ₹ 1,50,000; Pammy’s share = ₹ 30,000 (Puneet and Pankaj ₹ 15,000 each). - Interest on capital = 40,000 × 12 % × 6/12 = ₹ 2,400. - Reserve share = 50,000 × 1/5 = ₹ 10,000.

Pammy’s Capital Account

Pammy’s Executor’s Account (instalment of ₹ 15,000 plus interest at 12 % on the balance outstanding)

Amount due to Pammy’s executors ₹ 75,400; ₹ 15,400 paid at once, and the remaining ₹ 60,000 in four yearly instalments of ₹ 22,200, ₹ 20,400, ₹ 18,600 and ₹ 16,800 (including interest).

Question Num – Q9

Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2020: Liabilities – Sundry Creditors 16,000; General Reserve 16,000; Capitals Prateek 30,000, Rockey 20,000, Kushal 20,000 (total 1,02,000). Assets – Bills Receivable 16,000; Furniture 22,600; Stock 20,400; Sundry Debtors 22,000; Cash at Bank 18,000; Cash in Hand 3,000 (total 1,02,000). Rockey died on June 30, 2020. Under the terms of the partnership deed, the executors of a deceased partner were entitled to: a) Amount standing to the credit of the Partner’s Capital account. b) Interest on capital at 5% per annum. c) Share of goodwill on the basis of twice the average of the past three years’ profit and d) 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, 2018, March 31, 2019 and March 31, 2020 were ₹ 12,000, ₹ 16,000 and ₹ 14,000 respectively. 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.

Answer

Ratio of capitals 30 : 20 : 20 = 3 : 2 : 2.

Workings - Interest on capital = 20,000 × 5 % × 3/12 = ₹ 250. - Goodwill = 2 × (42,000 ÷ 3) = ₹ 28,000; Rockey’s share = 28,000 × 2/7 = ₹ 8,000 → Prateek ₹ 4,800, Kushal ₹ 3,200 (gaining ratio 3 : 2). - Profit to date = 14,000 × 3/12 × 2/7 = ₹ 1,000. - General reserve share = 16,000 × 2/7 = ₹ 4,571.43.

Journal

Rockey’s Capital Account

Amount due to Rockey’s executor = ₹ 33,821 (₹ 33,821.43).

Question Num – Q10

Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2020: Liabilities – Bills Payable 12,000; Sundry Creditors 18,000; Reserves 12,000; Capitals Narang 30,000, Suri 30,000, Bajaj 28,000 (total 1,30,000). Assets – Freehold Premises 40,000; Machinery 30,000; Furniture 12,000; Stock 22,000; Sundry Debtors 20,000 less Reserve for Bad Debts 1,000 = 19,000; Cash 7,000 (total 1,30,000). Bajaj retires from the business and the partners agree to the following: a) Freehold premises and stock are to be appreciated by 20% and 15% respectively. b) Machinery and furniture are to be reduced by 10% and 7% respectively. c) Bad Debts reserve is to be increased to ₹ 1,500. d) Goodwill is valued at ₹ 21,000 on Bajaj’s retirement. e) 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.

Answer

Old ratio 3 : 1 : 2; new ratio Narang : Suri = 3 : 1. Bajaj’s goodwill = 21,000 × 2/6 = ₹ 7,000 → Narang ₹ 5,250, Suri ₹ 1,750 (gaining ratio 3 : 1).

Revaluation Account

Partners’ Capital Accounts

Combined capital = 34,230 + 31,410 = ₹ 65,640 → Narang 3/4 = ₹ 49,230; Suri 1/4 = ₹ 16,410. Narang’s deficit of ₹ 15,000 is debited to his current account, and Suri’s surplus of ₹ 15,000 is credited to his current account.

Balance Sheet of Narang and Suri

Revaluation profit ₹ 6,960; amount due to Bajaj ₹ 41,320; capitals Narang ₹ 49,230 and Suri ₹ 16,410, with current accounts Narang ₹ 15,000 (Dr) and Suri ₹ 15,000 (Cr); Balance Sheet total ₹ 1,51,960.

Question Num – Q11

The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015: Liabilities – Bills Payable 6,250; Sundry Creditors 10,000; General Reserves 2,750; Capitals Rajesh 20,000, Pramod 15,000, Nishant 15,000 (total 69,000). Assets – Factory Building 12,000; Debtors 10,500 less Provision 500 = 10,000; Bills Receivable 7,000; Stock 15,500; Plant and Machinery 11,500; Bank Balance 13,000 (total 69,000). Pramod retired on the date of Balance Sheet and the following adjustments were made: a) Stock is to be reduced by 10%. b) Factory buildings were appreciated by 12%. c) Provision for doubtful debts be created up to 5%. d) Provision for legal charges to be made at ₹ 265. e) The goodwill of the firm be fixed at ₹ 10,000. f) The capital of the new firm be fixed at ₹ 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3 : 2. Record journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.

Answer

Old ratio 4 : 3 : 3. Gain: Rajesh 3/5 – 4/10 = 2/10; Nishant 2/5 – 3/10 = 1/10 → 2 : 1. Pramod’s goodwill = 10,000 × 3/10 = ₹ 3,000 → Rajesh ₹ 2,000, Nishant ₹ 1,000.

Journal

Adjusted capitals: Rajesh 20,000 – 160 + 1,100 – 2,000 = ₹ 18,940; Nishant 15,000 – 120 + 825 – 1,000 = ₹ 14,705. Required (₹ 30,000 in 3 : 2): Rajesh ₹ 18,000, Nishant ₹ 12,000, so ₹ 940 and ₹ 2,705 are withdrawn.

Balance Sheet of Rajesh and Nishant

Loss on revaluation ₹ 400; adjusted capitals Rajesh ₹ 18,940 and Nishant ₹ 14,705 (then reduced to ₹ 18,000 and ₹ 12,000); Pramod’s loan ₹ 18,705; Balance Sheet total ₹ 65,220.

Question Num – Q12

Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2020: Liabilities – Sundry Creditors 19,800; Telephone bills Outstanding 300; Accounts Payable 8,950; P&L A/c 16,750; Capitals Jain 40,000, Gupta 60,000, Malik 20,000 (total 1,65,800). Assets – Land and Building 26,000; Bonds 14,370; Cash 5,500; Bills Receivable 23,450; Sundry Debtors 26,700; Stock 18,100; Office Furniture 18,250; Plants and Machinery 20,230; Computers 13,200 (total 1,65,800). The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 1, 2020 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.

Answer

Malik’s goodwill = 9,000 × 2/10 = ₹ 1,800 → Jain ₹ 1,125, Gupta ₹ 675 (gaining ratio 5 : 3).

Revaluation Account

Partners’ Capital Accounts

Balance Sheet of Jain and Gupta

Loss on revaluation ₹ 6,500; capitals Jain ₹ 53,900 and Gupta ₹ 69,000; Malik’s loan ₹ 7,350; Balance Sheet total ₹ 1,59,300.

Question Num – Q13

Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2020: Liabilities – Bills Payable 12,000; Creditors 14,000; General Reserve 12,000; Capitals Arti 20,000, Bharti 12,000, Seema 8,000 (total 78,000). Assets – Buildings 21,000; Cash in Hand 12,000; Bank 13,700; Debtors 12,000; Bills Receivable 4,300; Stock 1,750; Investment 13,250 (total 78,000). Bharti died on June 12, 2020 and according to the deed of the said partnership, her executors are entitled to be paid as under: (a) The capital to her credit at the time of her death and interest thereon @ 10% per annum. (b) Her proportionate share of reserve fund. (c) 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. (d) 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: 2017 – ₹ 8,200; 2018 – ₹ 9,000; 2019 – ₹ 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.

Answer

Workings - Interest on capital (1 April – 12 June = 73 days) = 12,000 × 10 % × 73/365 = ₹ 240. - Reserve = 12,000 × 2/6 = ₹ 4,000. - Profit to date = 1,00,000 × 10 % × 2/6 = ₹ 3,333.33. - Goodwill = 2 × 9,000 = 18,000, less 20 % = ₹ 14,400; Bharti’s share = 14,400 × 2/6 = ₹ 4,800 → Arti ₹ 3,600, Seema ₹ 1,200 (gaining ratio 3 : 1). - Profit on sale of investments = 16,200 – 13,250 = ₹ 2,950, shared 3 : 2 : 1 (Bharti ₹ 983.33), as the investments were held on the date of death.

Journal

Bharti’s Executors Account

(Capital 12,000 + interest 240 + reserve 4,000 + profit 3,333.33 + goodwill 4,800 + gain on investments 983.33. The textbook key prints ₹ 23,436, which cannot be reproduced from the data given. Leaving out the gain on investments gives ₹ 24,373.33.)

Amount paid to Bharti’s executors = ₹ 25,356.66 (₹ 24,373.33 if the gain on the sale of investments is not shared with her).

Question Num – Q14

Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2020: Liabilities – Creditors 14,000; Reserve Fund 6,000; Capitals Nithya 30,000, Sathya 30,000, Mithya 20,000 (total 1,00,000). Assets – Investments 10,000; Goodwill 5,000; Premises 20,000; Patents 6,000; Machinery 30,000; Stock 13,000; Debtors 8,000; Bank 8,000 (total 1,00,000). Mithya dies on August 1, 2020. The agreement between the executors of Mithya and the partners stated that: (a) Goodwill of the firm be valued at 2½ times the average profits of last four years. The profits of four years were: in 2016-17 ₹ 13,000; in 2017-18 ₹ 12,000; in 2018-19 ₹ 16,000; and in 2019-20 ₹ 15,000. (b) The patents are to be valued at ₹ 8,000, Machinery at ₹ 25,000 and Premises at ₹ 25,000. (c) The share of profit of Mithya should be calculated on the basis of the profit of 2019-20. (d) ₹ 4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments 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, 2020 after giving effect to the adjustments.

Answer

(The book prints the fourth year as “2014-15”; it is taken as 2019-20, ₹ 15,000.)

Workings - Goodwill = 2.5 × (56,000 ÷ 4) = ₹ 35,000; Mithya’s share = ₹ 7,000 → Nithya ₹ 4,375, Sathya ₹ 2,625 (gaining ratio 5 : 3). - Existing goodwill ₹ 5,000 written off 5 : 3 : 2. - Revaluation: patents +2,000, premises +5,000, machinery –5,000 → gain ₹ 2,000. - Profit to date = 15,000 × 4/12 × 2/10 = ₹ 1,000.

Journal

Mithya: 20,000 – 1,000 + 400 + 1,200 + 7,000 + 1,000 = ₹ 28,600.

Mithya’s Executors Loan Account (instalments of ₹ 6,100 plus 5 % half-yearly interest)

Balance Sheet of Nithya and Sathya as on 1 August 2020

(The textbook key’s ₹ 25,400 does not write off the existing goodwill of ₹ 5,000. That write-off is required by AS-26 and reduces Mithya’s share by ₹ 1,000.)

Amount due to Mithya’s executors ₹ 28,600; ₹ 4,200 paid at once and ₹ 24,400 transferred to the executors’ loan (₹ 25,400 in the key, which does not write off the existing goodwill), repaid in four half-yearly instalments of ₹ 7,320, ₹ 7,015, ₹ 6,710 and ₹ 6,405; Balance Sheet total ₹ 93,800.

Topic checklist

• ☒ Gaining ratio and treatment of goodwill (Num 1, 2, 5–14)
• ☒ Revaluation of assets and liabilities (Num 3, 5–7, 10–12, 14)
• ☒ Reserves and accumulated profits/losses (Num 4–7, 9–14)
• ☒ Settlement – loan, bank loan, instalments, executors (Num 5–8, 13, 14)
• ☒ Profit up to death – time and turnover basis (Num 7–9, 13, 14)
• ☒ Capital adjustment (Num 10, 11)

Total questions answered: 23 of 23