Question

A, B and C were partners in a firm sharing profits in the ratio of 5 : 3 : 2. The Balance Sheet as at 31 -3-2023 was as follows:

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	12,000	Building	20,000
Reserves	6,000	Plant and Machinery	16,000
A’s Capital	24,000	Stock	5,100
B’s Capital	12,000	Debtors	6,000
C’s Capital	8,000	Cash at Bank	6,900
		Advertisement Suspense	8,000
	62,000		62,000

A died on 30-9-2023 and B and C decided to share future profits in the ratio of 7 : 3. Under the partnership agreement the executors of a deceased partner were entitled to:

1. Amount standing to the credit of partner's capital account.
2. Interest on capital at 12% per annum.
3. Share of goodwill on the basis of four years purchase of last three years average profit.
4. Share of profit from the closing of the last financial year to the date of death on the basis of last year’s profit. Profits for the year 2021, 2022 and 2023 were ₹ 8,000; ₹ 12,000 and ₹ 7,000 respectively.

Prepare A’s Capital account to be rendered to his executors.

Answer 1

Dr.	A’s Capital		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Advertisement Suspense A/c	4,000	By Balance b/d	24,000
To A’s Executor A/c	44,190	By Interest on Capital A/c	1,440
		By B’s Capital A/c	14,400
		By C’s Capital A/c	3,600
		By B’s Capital A/c	1,400
		By C’s Capital A/c	350
		By Reserve A/c	3,000
	48,190		48,190

Working notes:

1. Old ratio of A, B & C = 5 : 3 : 2

A died,

New ratio of B & C = 7 : 3

Gaining ratio = New share - Old share

B gains = `7/10-3/10`

= `4/10`

C gains = `3/10-2/10`

= `1/10`

Gaining ratio of B & C = 4 : 1 

2. Average profit = `(8,000+12,000+7,000)/3`

= ₹ 9,000

Goodwill = Average Profit × No. of year’s Purchase

= 9,000 × 4

= ₹ 36,000

A’s share of Goodwill = `36,000xx5/10`

= ₹ 18,000

3. Interest on capital = `24,000xx12/100xx6/12`

= ₹ 1,440

4. 6 months (i.e., from 1st April 2020 to 30th september 2020)

A’s share of profit = `7,000xx5/10xx6/12`

= ₹ 1,750