Question

Akhil, Nikhil and Sunil were partners sharing profits and losses equally. Following was their Balance Sheet as at 31st March, 2018:

Liabilities	₹	₹	Assets	₹
Trade Creditors		40,000	Building	2,00,000
General Reserve		45,000	Plant and Machinery	80,000
Capital A/cs:			Stock	35,000
Akhil	1,95,000		Debtors	80,000
Nikhil	1,20,000		Cash at Bank	85,000
Sunil	80,000	3,95,000
		4,80,000		4,80,000

Sunil died on 1st August, 2018. The Partnership Deed provided that the executor of a deceased partner was entitled to:

1. Balance of Partner’s Capital Account and his share of accumulated reserve.
2. Share of profits from the closure of the last accounting year till the date of death on the basis of the profit of the preceding completed year before death.
3. Share of goodwill calculated on the basis of three times the average profit of the last four years.
4. Interest on deceased partner’s capital @ 6% p.a.

₹ 50,000 to be paid to deceased’s executor immediately and the balance to remain in his Loan Account.

Profits and Losses for the preceding years were: 2014-15 − ₹ 80,000 Profit; 2015-16 − ₹ 1,00,000 Loss; 2016-17 − ₹ 1,20,000 Profit; 2017-18 − ₹ 1,80,000 Profit.

Pass necessary Journal entries and prepare Sunil’s Capital Account and Sunil's Executor Account. 

Akhil, Nikhil and Sunil were partners sharing profits and losses equally. Following was their Balance Sheet as at 31st March, 2023:

Liabilities	₹	₹	Assets	₹
Trade Creditors		40,000	Building	2,00,000
General Reserve		45,000	Plant and Machinery	80,000
Capital A/cs:			Stock	35,000
Akhil	1,95,000		Debtors	80,000
Nikhil	1,20,000		Cash at Bank	85,000
Sunil	80,000	3,95,000
		4,80,000		4,80,000

Sunil died on 1st August, 2023. The Partnership Deed provided that the executor of a deceased partner was entitled to:

1. Balance of Partner’s Capital Account and his share of accumulated reserve.
2. Share of goodwill calculated on the basis of three times the average profit of the last four years.
3. Share of profits from the closure of the last accounting year till the date of death on the basis of the profit of the preceding completed year before death.
4. Interest on deceased partner’s capital @ 6% per annum.

₹ 50,000 to be paid to deceased’s executor immediately and the balance to remain in his Loan Account.

Profits and losses for the preceding years ending 31st March were:

• 2020 − ₹ 80,000 Profit
• 2021 − ₹ 1,00,000 Loss
• 2022 − ₹ 1,20,000 Profit
• 2023 − ₹ 1,80,000 Profit

Pass necessary Journal entries and prepare Sunil’s Capital Account and Sunil’s Executor Account. 

Answer 1

Journal
Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
	General Reserve A/c     ...Dr.		45,000
	To Akhil’s Capital A/c			15,000
	To Nikhil’s Capital A/c			15,000
	To Sunil’s Capital A/c			15,000
	(General Reserve distributed among partners in their old ratio)
	Akhil’s Capital A/c         ...Dr.		35,000
	Nikhil’s Capital A/c        ...Dr.		35,000
	To Sunil’s Capital A/c			70,000
	(Sunil’s share of goodwill adjusted)
	Interest on Capital A/c       ...Dr.		1,600
	To Sunil’s Capital A/c			1,600
	(Interest allowed on Sunil’s Capital)
	Profit and Loss Suspense A/c      ...Dr.		20,000
	To Sunil’s Capital A/c			20,000
	(Sunil’s profit share transferred to his capital account)
	Sunil’s Capital A/c      ...Dr.		1,86,600
	To Sunil’s Executor’s A/c			1,86,600
	(Amount due to Sunil after all adjustments transferred to his Executor’s Account)
	Sunil’s Executor’s A/c     ...Dr.		50,000
	To Bank A/c			50,000
	(Amount paid to Sunil’s Executor)

 

Dr.	Sunil’s Capital A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Sunil’s Executor’s A/c	1,86,600	By Balance b/d	80,000
		By Interest on Capital A/c	1,600
		By General Reserve	15,000
		By Profit and Loss Suspense A/c	20,000
		By Akhil’s Capital A/c	35,000
		By Nikhil’s Capital A/c	35,000
	1,86,600		1,86,600

 

Dr.	Sunil’s Executor’s A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Bank A/c	50,000	Sunil’s Capital A/c	1,86,600
Balance c/d	1,36,600
	1,86,600		1,86,600

Working Notes:

1. Calculation of Sunil’s Share of Profit

Profit = ₹ 1,80,000

Sunil's share of profit = `1,80,000 xx 1/3 xx 4/12`

= ₹ 20,000

2. Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase

Average profit = `(80,000 - 1,00,000 + 1,20,000 + 1,80,000)/4 = (2,80,000)/4`

= ₹ 70,000

∴ Goodwill = Average Profit × Number of Years’ Purchase

= 70,000 × 3

= ₹ 2,10,000

3. Adjustment of Goodwill

Old Ratio = 1 : 1 : 1

Sunil died,

∴ New Ratio = 1 : 1 and

Gaining Ratio = 1 : 1

Sunil’s Share in Goodwill = `2,10,000 xx 1/3`

= ₹ 70,000

This share of goodwill is to be distributed between Akhil and Nikhil in their gaining ratio (i.e. 1 : 1).

Akhil’s share in goodwill = `70,000 xx 1/2` = ₹ 35,000

Nikhil’s share in Goodwill = `70,000 xx 1/2` = ₹ 35,000

4. Calculation of Interest on Sunil’s Capital

Sunil’s Capital Balance = ₹ 80,000

∴ Interest on Capital (for 4 months) = `80,000 xx 6/100 xx 4/12` =

= ₹ 1,600