Question

The following is the Balance Sheet of Shikha, Divit and Naman, who were partners sharing profits and losses in the ratio of 2 : 2 : 1.

Balance sheet as on 31st March 2020
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital A/cs:			Investment		1,40,000
Shikha	80,000	2,20,000	Stock		48,000
Divit	60,000		Debtors	81,600	80,000
Naman	80,000		Less: R.D.D.	1,600
Creditors		48,000	Cash		12,000
Outstanding Salaries		12,000
		2,80,000			2,80,000

Naman died on 1st July, 2020 and the following adjustment were made in the books of the firm:

(1) All debtors were considered as good and the Reserve for Doubtful Debts was no longer necessary.

(2) A contingent liability for compensation of ₹ 3,600 was to be provided.

(3) Investment worth ₹ 80,000 were taken over by the executor of Naman and the remaining investments were sold ₹ 60,000.

(4) Stock was revalued at ₹ 60,000.

(5) The goodwill of the firm was valued at ₹ 40,000 and was to be shown in the books.

(6) The deceased partner's share in profit up to the date of his death was to be calculated on the basis of the preceding year's profit which was ₹ 32,000.

Prepare the Profit and Loss Adjustment Account, Capital Accounts of Partners and the Balance Sheet of the new firm after the death of Naman.

Answer 1

In the books of Partnership Firm

Dr.	Profit and Loss Adjustment Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Provision for contingent liability		3,600	By R.D.D. A/c (R.D.D. cancelled)		1,600
To Partners' Capital A/cs:			By Stock A/c (Appreciation)		12,000
Shikha	4,000	10,000
Divit	4,000
Naman	2,000
		13,600			13,600

 

Dr.	Partners' Capital Accounts						Cr.
Particulars	Shikha (₹)	Divit (₹)	Naman (₹)	Particulars	Shikha (₹)	Divit (₹)	Naman (₹)
To Investments A/cs (Taken over)	-	-	80,000	By Balance b/d	80,000	60,000	80,000
To Naman's Executor's Loan A/c (Transfer)	-	-	11,600	By Goodwill A/c (Raised)	16,000	16,000	8,000
To Balance c/d	1,00,000	80,000	-	By Profit and Loss Suspense A/c (Share in accrued profit)	-	-	1,600
				By Profit and Loss Adjustment A/c (Profit)	4,000	4,000	2,000
	1,00,000	80,000	91,600		1,00,000	80,000	91,600

 

Balance sheet as on 1st July, 2020
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital A/cs:			Goodwill		40,000
Shikha	1,00,000	1,80,000	Debtors		81,600
Divit	80,000		Stock		60,000
Naman's Executor's Loan A/c		11,600	Cash		72,000
Creditors		48,000	Profit and Loss Suspense A/c		1,600
Outstanding Salaries		12,000
Provision for Contingent Liabilities for Compensation		3,600
		2,55,200			2,55,200

Working Notes:

(1) Goodwill valued at ₹ 40,000 is debited to Goodwill A/c and credited to all partners' Capital A/cs in their profit sharing ratio. Show balance in the Goodwill A/c then transfers to the Assets side of the Balance Sheet.

(2) The deceased partner's (Naman) share in profit up to the date of his death

= (Preceding year's profit) × (Proportionate profit) × Naman's share in profit

= `32,000 xx 3/12 xx 1/5`

= ₹ 1,600

(3) A provision for contingent liability for compensation ₹ 3,600 is debited to Profit and Loss Adjustment A/c and then shown at the Liabilities side of the Balance Sheet.

(4) The following ledger accounts are prepared to ascertain their closing balances:

Dr.	Investments A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	1,40,000	By Naman's Executor's A/c	80,000
		By Cash A/c	60,000
	1,40,000		1,40,000

 

Dr.	Cash A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	12,000	By Balance c/d	72,000
To Investment A/c	60,000
	72,000		72,000