Question

Prem, Verma, Sharma, were partners sharing profits and losses in the ratio 2: 1: 1 Their Balance Sheet as on 31st March 2019 is as follows.

Balance Sheet as on 31st March, 2019
Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	20,000	Premises	2,40,000
Bank Loan	90,000	Debtors	2,00,000
Bill Payable	10,000	Furniture	60,000
General Reserve	64,000	Stock	1,00,000
Capital Accounts:		Cash	2,00,000
Prem	2,40,000
Verma	2,00,000
Sharma	1,76,000
	8,00,000		8,00,000

1.  Prem died on 30th June 2019 and the following adjustments were made Prem’s share of profit is to be calculated on the average profit of the last two years.
2. Prem’s share in the Goodwill of the firm be given him. Goodwill will be valued at three times of the average profits of the last four years. The profits were.
   

   2015-16	₹ 1,60,000	2016-17	₹ 1,20,000
   2017-18	₹ 80,000	2018-19	₹ 40,000

3. Premises be valued at ₹ 2,80,000 and R.D.D. of ₹ 8,000 be created on debtors.
4. Drawing of Prem up to the date of his death were ₹ 15000 per month.
5. Interest on capital is allowed at 10% p.a. and to be charged on drawing at ₹ 4000.
6. The amount due to Prem be transferred to his executors loan account.

Prepare: Prem’s Capital Account, Give working of Prem’s share in Goodwill, and Interest on capital.

Answer 1

Dr.	Prem’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	45,000	By Balance b/d	2,40,000
To Interest on Drawings	4,000	By General Reserve A/c	32,000
To Prem’s Executors loan A/c	4,02,500	By Profit and Loss Adjustment A/c	16,000
		By Interest on Capital A/c	6,000
		By Goodwill A/c	1,50,000
		By Profit and Loss Suspense A/c	7,500
	4,51,500		4,51,500

Working Note :

1. Calculation of Prem’s share in the goodwill of the Firm:

a. `"Average Profit" = "Total Profit"/"No. of Years"`

= `(4,00,000)/4`

= ₹ 1,00,000

b. Goodwill of Firm = Average Profit × No. of Year Purchases

= 1,00,000 × 3

= ₹ 3,00,000

c. Prem’s Share of Goodwill = Goodwill of the firm × Prem’s share

= `3,00,000 × 2 /4`

= ₹ 1,50,000

2. Calculation of Prem’s share in the profit:

Average Profit of the last two years

a. `"Average Profit" = "Total Profit"/"No. of Years"`

= `(80,000 + 40,000)/2`

=  `(1,20,000)/2`

= ₹ 60,000

b. Average Profit = ₹ 60,000

3 months profit is = `60,000 xx 3/12` = ₹ 15,000

Prem’s share is `2/4 = 15,000 × 2/4` = ₹ 7,500

3. Calculation of Interest on Prem’s Capital:

Prem died on 30th June 2019

His capital balance is 2,40,000 for three months

`2,40,000 × 10 /100 × 3/ 12` = ₹ 6,000