Question

Brown and Smith are partners. The partnership deed provides:

1. That the Accounts be balanced on 31st December each year.
2. That the profits be divided as follows: Brown 1/2; Smith 1/3 and carried to a Reserve account 1/6.
3. That in the event of the death of a partner, his executors be entitled to be paid out:
   1. The Capital to his credit at the date of death.
   2. His proportion of Reserve at the date of last Balance Sheet.
   3. His proportion of profit to date of death based on the average profits of the last three completed years.
   4. By way of goodwill his proportion of the total profits for the three preceding years.

On 31st December, 2023, the ledger balances were:

	₹	₹
Brown's Capital		9,000
Smith's Capital		6,000
Reserve		3,000
Creditors		3,000
Bills Receivable	2,000
Investments	5,000
Cash	14,000
	21,000	21,000

The profits for three years were:

2021 ₹ 4,200; 2022 ₹ 3,900; 2023 ₹ 4,500. Smith died on 1st May, 2024.

Show the accounts as between the firm and Smith's executors as on May 1st, 2024.

Answer 1

Smith's Capital Account
Date (2024)	Particulars	Amount (₹)	Date (2024)	Particulars	Amount (₹)
May 1	To Smith's Executor's A/c	12,800	Jan 1	By Balance b/d	6,000
	(Balance transferred)		May 1	By Reserve A/c	1,200
			May 1	By Profit & Loss	560
			May 1	By Balance b/d By Reserve A/c By Profit & Loss Suspense A/c (Profit)	5,040
				By Brown's Capital A/c (Goodwill)
	Total	12,800		Total	12,800

 

Smith's Executor's Account
Date (2024)	Particulars	Amount (₹)	Date (2024)	Particulars	Amount (₹)
May 1	To Balance c/d	12,800	May 1	By Smith's Capital A/c	12,800
	Total	12,800		Total	12,800

Working note:

1. Profit Sharing Ratio

Profits are allocated as: Brown = `1/2 (3/6), "Smith" = 1/3 (2/6), "and Reserve" = 1/6`

Therefore, the mutual profit-sharing ratio between Brown and Smith is 3 : 2, making Smith's share `2/5`.

2. Smith's Share of Reserve

Total Reserve = 3,000

Smith's Share = `3,000 xx 2/5 = 1,200`

3. Smith's Share of Profit (from Jan 1, 2024, to May 1, 2024 = 4 months)

Average Profit = `(4,200 + 3,900 + 4,500)/3 = 4,200`

Smith's Share = `4,200 xx 4/12 xx 2/5 = 560`

4. Smith's Share of Goodwill

Total Profit of 3 years = 4,200 + 3,900 + 4,500 = 12,600

Smith's Share = `12,600 xx 2/5 = 5,040`