Question

Jay, Ajay and Vijay were partners sharing profit and losses in the ratio 2 : 2 : 1 respectively.

Their balance sheet as on 31st March, 2020 was as follows:

Balance Sheet as on 31st March, 2020
Liabilities	Amt. (₹)	Assets	Amt. (₹)
Capital Account:	40,000	Building	40,000
Jay		Furniture	30,000
Ajay	50,000	Debtors	30,000
Vijay	30,000	Bank	80,000
General Reserve	20,000
Creditors	30,000
Bills Payable	10,000
	1,80,000		1,80,000

Vijay died on 1st July, 2020.

1. Building was revalued at ₹ 60,000 and reserve for doubtful debts is to be created at ₹ 5,000 on debtors.
2. Furniture was to be revalued at ₹ 35,000.
3. The drawings of Vijay upto the date of his death amounted to ₹ 12,000.
4. Interest on drawing of ₹ 1,000 is to be charged.
5. Vijay’s share of goodwill should be calculated at 2 years purchases of the average profit for the last 5 years which were:
   I year ₹ 60,000; II year ₹ 50,000; III year ₹ 80,000; IV year ₹ 1,00,000; V year ₹ 1,20,000
6. The deceased partner’s share of profit upto his death to be calculated on the basis of average profit of last two years (IV and V years).

Prepare:

1. Working of Vijay’s share of profit.
2. Working of Vijay’s share of goodwill.
3. Revaluation Account

Answer 1

(a) Working of Vijay’s share in Profit:

i. Profit of current year = Average profit of last 2 years

Average Profit = `(1,20,000+1,00,000)/2`

= `(2,20,000)/2`

= ₹ 1,10,000

ii. Proportionate profit for 3 months, i.e., from 1st April, 2020 to 1st July, 2020 = `(1,10,000)/1xx3/12 =` ₹ 27,500

iii. Vijay’s share in profit = (Proportionate profit) × Vijay’s profit sharing ratio

= `27,500 xx 1/(2+2+1)`

= `(27,500)/5`

= ₹ 5,500
∴ Vijay’s share in profit = ₹ 5,500

(b) Working of Vijay’s share in Goodwill:

i. Goodwill = Average Profit of Last 5 years × No. of year’s purchase

= `"Total Profit of Last 5 years"/5 xx 2  "years"`

= `(60,000+50,000+80,000+1,00,000+1,20,000)/5xx2`

= `(4,10,000)/5xx2`

= ₹ 1,64,000

∴ Value of firm’s Goodwill = ₹ 1,64,000

ii. Vijay’s share in Goodwill = Firm’s Goodwill × Vijay's profit sharing ratio

= `1,64,000xx1/5`

= ₹ 32,800

∴ Vijay’s share in Goodwill = ₹ 32,800 

(c) Preparation of Revaluation A/c:

Dr.	Revaluation Account				Cr.
Particulars	Amt. (₹)	Amt. (₹)	Particulars	Amt. (₹)	Amt. (₹)
To R.D.D. A/c (New created)		5,000	By Building A/c (Increase in value)		20,000
To Partner’s Capital A/c:		20,000	By Furniture A/c (Increase in value)		5,000
Jay	8,000
Ajay	8,000
Vijay	4,000
		25,000			25,000