Question

Pravin, Prakash and Paresh were partners sharing profits and losses in the proportion to their capitals. Their balance sheet of the firm on 31^st March 2013 was as under.

Balance sheet as on 31st March 2013
Liabilities	Amount Rs	Assets	Amount Rs
Capital A/c's: Pravin Prakash Paresh Creditors Reserve Fund	60,000 40,000 20,000 56,000 36,000	Land and Building Investments Debtors             32,000 Less: R.D.D.       4,000 Stock Cash	80,000 40,000   28,000 36,000 28,000
	2,12,000		2,12,000

Paresh died on 1st August 2013 and the following adjustments were made:

(1) Assets were valued as – Land and building Rs. 88,000. Investments Rs. 36,000 and Stock Rs. 34,000.

(2) All debtors were good.

(3) Goodwill of the firm valued at two times the average profit of the last 4 years' profit.

(4) Paresh's share of profit up to his death to be calculated on the basis of average profit of the last two years.

(5) Profits for the last four years were: Rs. 12,000, Rs. 24,000, Rs. 14,000 and Rs. 22,000.

Prepare:

i. Profit and Loss Adjustment Account.

ii. Paresh's Capital Account, showing the amount payable to his executor.

iii. Give working with Paresh's share in Goodwill and Profit.

Answer 1

Profit and Loss Adjustment Account
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Investments Stock Profit transferred to (Balancing Figure) Pravin’s Capital      3,000 Prakash’s Capital   2,000 Paresh’s Capital    1,000	4,000 2000       6000	Land & Building Provision for Doubtful Debts	8,000 4,000
	12,000		12,000

 

Paresh’s Capital Account
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Paresh’s Executors A/c (Balancing Figure)	34,000	Balance b/d	20,000
		Reserve Fund	6,000
		Profit & Loss Adjustment A/c	1000
		Pravin’s Capital	3600
		Prakash’s Capital	2400
		Profit & Loss A/c	1000
	34,000		34,000

1. Calculation of Profit Sharing Ratio
Ratio to Capital = 6 : 4 : 2 = 3 : 2 : 1

2. Calculation of amount transferred to Reserve Fund

Reserve Fund = 36,000 × 1/6 = Rs 6,000

3. Calculation of Valuation of Goodwill

Valuation of Goodwill = Average Profit × Number of Year's of Purchase

= 18,000 × 2 = Rs 36,000

Average Profit  `=(12000 + 24000 + 14000 + 22000)/4 = Rs 18000`

Paresh Goodwill = 36,000 × 16 = Rs 6,000

Goodwill given to Paresh should be shared between Pravin and Prakash in the Ratio 3:2.

Pravin's Contribution = 6,000 × 3/5= Rs 3,600

Prakash's Contribution = 6,000 × 2/5= Rs 2,400

4. Calculation of Paresh's share of Profit upto his death

Average amount for last two years = `(14000 + 22000)/2` = Rs 18,000

Profit & Loss A/c= 18,000 × `4/12 × 1/6` = Rs 1,000