Question

X, Y and Z were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 31.3.2023 their Balance Sheet was as follows:

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Capital Accounts:		1,75,000	Building	50,000
X	75,000		Patents	15,000
Y	62,500		Machinery	75,000
Z	37,500		Stock	37,500
Sundry Creditors		42,500	Debtors	20,000
			Cash at Bank	20,000
		2,17,500		2,17,500

Z died on 31.7.2023. It was agreed that:

(a) Goodwill be valued at 2½ year’s purchased of the average profits of the last four year which were as follows:  

Years	Profits ₹
2019 - 20	32,500
2020 - 21	30,000
2021 - 22	40,000
2022 - 23	37,500

(b) Machinery be valued at ₹ 70,000; Patents at ₹ 20,000 and Building at ₹ 62,500.

(c) For the purpose of calculating Z’s share of profits in the year of his death the profits in 2023-24 should be taken to have been accrued on the same scale as in 2022-23.

(d) A sum of ₹ 17,500 was paid immediately to the executors of Z and the balance was paid in four half yearly instalments together with interest at 12% p.a. starting from 31.1.2024.

Give necessary journal entries to record the above transactions and Z’s executor's account till the payment of instalments due on 31.1.2024.

Answer 1

Journal
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2023
July 31	X’s Capital A/c      ...Dr.		10,938
	Y’s Capital A/c      ...Dr.		6,562
	To Z’s Capital A/c			17,500
	(Being Z’s share of goodwill adjusted into the Capital A/cs of existing partners in their gaining ratio of 5 : 3)
July 31	Profit and Loss Suspense A/c      ...Dr.		2,500
	To Z’s Capital A/c			2,500
	(Being Transfer of `2/10`th share of profit upto 31st July, 2023 i.e., ₹ `37,500xx4/12xx2/10`)
July 31	Revaluation A/c      ...Dr.		5,000
	To Machinery A/c			5,000
	(Being Decreased in the value of machinery)
July 31	Patent A/c          ...Dr.		5,000
	Building A/c     ...Dr.		12,500
	To Revaluation A/c			17,500
	(Being Increase in Patents and Building)
July 31	Revaluation A/c      ...Dr.		12,500
	To X’s Capital A/c			6,250
	To Y’s Capital A/c			3,750
	To Z’s Capital A/c			2,500
	(Being Profit on revaluation transferred to partners capital)
July 31	Z’s Capital A/c       ...Dr.		60,000
	To Z’s Executor A/c			60,000
	(Being Amount due to Z transferred to his executor’s account)
July 31	Z’s Executor A/c      ...Dr.		17,500
	To Bank A/c			17,500
	(Being Part payment to Z’s executor’s)

 

Dr.	Z’s Capital A/c				Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010			2010
July 31	Z’s Executors A/c	60,000	April 1	By Balance b/d	37,500
			July 31	By X’s Capital A/c (Goodwill)	10,938
			July 31	By Y’s Capital A/c (Goodwill)	6,562
			July 31	By Profit & Loss Suspense A/c	2,500
			July 31	By Revaluation A/c	2,500
		60,000			60,000

 

Dr.	Z’s Executors A/c				Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2023			2023
July 31	To Bank A/c	17,500	July 31	By Z’s Capital A/c	60,000
2024			2024
Jan 31	To Bank A/c (10,625 + 2,550)	13,175	Jan 31	By Interest A/c (`42,500xx12/100xx6/12`)	2,550
Jan 31	To Balance c/d	31,875
		62,550			62,550
2024			2024
Mar 31	To Balance c/d	32,513	Feb 1	By Balance b/d	31,875
			Mar 31	By Interest A/c (31,875xx12/100xx2/12)	638
		32,513			32,513

Working notes:

(1) Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase

Average Profit = `(32,500+30,000+40,000+37,500)/4`

= `(1,40,000)/4`

= ₹ 35,000 

Goodwill = Average Profit × Number of Year’s Purchase

= `35,000xx 2 1/2`

= ₹ 87,500 

Z’s share = `87,500xx2/10`

(2) ₹ `(42,500)/4`

= ₹ 10,625