Question

Bina and Anita are partners. Their partnership agreement provides for the following:

1. Accounts are to be balanced on 31st December each year:
2. Profits are to divided as follows: Bina: one-half Anita: one third and carrried to Reserve Account: one sixth.
3. That in the event of death of a partner, her executors will be entitled to the following:
   1. The capital to her credit at the date of death.
   2. Proportionate profit to date of death based on the average profits of the last three completed years.
   3. Share of goodwill based on three year’s purchases of the average profits for the three preceding completed years.

The profit for the three years were: year 2005 - ₹ 42,000; year 2006 - ₹ 39,000 and year 2007 - ₹ 45,000.

On 31.12.07, Anita’s capital stood at ₹ 60,000 and firm’s General Reserve Account stood at ₹ 30,000 Anita expired on 1.5.08.

From the above, prepare Anita’s Executors Account as would appear in the firm’s ledger transferring the amount to her Loan Account with proper working notes.

Answer 1

Dr.	Anita’s Capital A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Anita’s Executors A/c	1,28,000	By Balance b/d	60,000
		By Reserve A/c	12,000
		By Profit & Loss Suspense A/c	5,600
		By Bina Capital A/c	50,400
	1,28,000		1,28,000

Working notes:

1. Calculation of profit sharing ratio of Bina & Anita

Old share of Bina = `1/2`; Anita = `1/3` and Carried to reserve `1/6`

Making back equal = `1/2xx3/3:1/3xx2/2:1/6`

= 3 : 2 : 1

Discarding reserve portion

Profit sharing of Bina & Anita is 3 : 2

2. Calculation of Anita’s share in the profit

Profit for the year = Average profit of cost 3 years

= `(42,000+39,000+45,000)/3`

= `(1,26,000)/3`

= ₹ 42,000

Anita’s share in profit = `42,000xx4/12xx2/5`

= ₹ 5,600

3. Calculation of Anita’s share in Goodwill of the firm 

Goodwill of the firm = Total profits of three Preceding year

= 42,000 + 39,000 + 45,000

= ₹ 1,26,000

Anita’s share in Goodwill = `1,26,000xx2/5`

= ₹ 50,400

Journal entry: 

Bina’s Capital A/c      ...Dr.	50,400	-
To Anita’s Capital A/c	-	50,400