Question

B, C and D were partners in a firm sharing profits in the ratio of 5 :3 : 2. On 31st December, 2008, their Balance Sheet was as follows:
 

Liabilities		Amount (₹)	Assets	Amount (₹)
Creditors		43,000	Cash	10,200
Bills Payable		17,000	Stock	24,500
General Reserve		70,000	Debtors	27,300
Capital A/cs:			Land and Building	1,40,000
B	40,000		Profit and Loss A/c	70,000
C	50,000
D	52,000	1,42,000
		2,72,000		2,72,000

   
B died on 31st March, 2009. The Partnership Deed provided for the following on the death of a partner:
(a) Goodwill of the firm was to be valued at 3 years' purchase of the average profit of last 5 years. The  profits for the years ended 31st December, 2007, 31st December, 2006, 31st December, 2005, and 31st December, 2004 were ₹ 70,000; ₹ 60,000; ₹ 50,000 and ₹ 40,000 respectively. 
(b) B's share of profit or loss till the date of his death was to be calculated on the basis of the profit or loss for the year ended 31st December, 2008.
You are required to calculate the following:
(i) Goodwill of the firm and B's share of goodwill at the time of his death.
(ii) B's share in the profit or loss of the firm till the date of his death.
(iii) Prepare B's Capital Account at the time of his death to be presented to his Executors.

 

Answer 1

(i) Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase

`"Average profit" = (-70,000 + 70,000 + 60,000 + 50,000 + 40,000)/5 = (1,50,000)/5 = "Rs" 30,000`

∴ Goodwill = Average Profit × Number of Years’ Purchase

= 30,000 × 3 = Rs 90,000

Old Ratio (B, C and D) = 5 : 3 : 2

B Died.

New Ratio (C and D) = 3 : 2

B’s Share in Goodwill = `90,000 xx 5/10 = "Rs" 45,000`

This share of goodwill is to be distributed between C and D in their gaining ratio (i.e. 3 : 2).

C's share in goodwill = `45,000 xx 3/5 = "Rs"  27,000`
D's share in goodwill = `45,000 xx 2/5 = "Rs"  18,000`
(ii) Calculation of B’s Share of Profit or Loss

Loss for the Year (2008) = Rs 70,000

B's share of loss = `"Loss of 2008" xx 5/10 xx 3/12`
                          = `70,000 xx 5/10 xx 3/12 = "Rs"  8,750`
(iii)

B’s Capital Account

Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Profit and Loss A/c	35,000	Balance b/d	40,000
Profit and Loss Suspense A/c	8,750	General Reserve	35,000
		C’s Capital A/c (Goodwill)	27,000
B’s Executor’s A/c	76,250	D’s Capital A/c (Goodwill)	18,000
	1,20,000		1,20,000