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Question
Keith, Bina, and Veena were partners in firm sharing profits and losses equally. Their balance sheet as on 31-3-2019 was as follows:
|
Balance Sheet of Keith, Bina, and Veena as on 31-3-2019 |
||||
| Liabilities |
Amount (₹) |
Amount (₹) |
Assets | Amount (₹) |
| Capitals: |
|
3,25,000 |
Plant and Machinery | 2,40,000 |
| Keith | 1,50,000 | Stock | 60,000 | |
| Bina | 1,00,000 | Sundry debtors | 35,000 | |
| Veena |
75,000 |
Cash at bank | 50,000 | |
| General Reserve |
|
30,000 |
||
| Sundry creditors |
|
30,000 |
||
| 3,85,000 | 3,85,000 | |||
Veena died on 30th June 2019. According to the partnership deed, the executors of the deceased partner were entitled to :
- Balance in the capital account
- Salary till the date of death @ ₹ 25,000 per annum.
- Share of goodwill calculated on the basis of twice the average profits of the past three years.
- Share of profit from the closure of the last accounting year till the date of death on the basis of the average of three completed years profits before death.
- Profits for 2016-17, 2017-18 and 2018-19 were ₹ 1,20,000, ₹ 90,000 and ₹ 1,50,000 respectively.
Veena withdrew ₹ 15,000 on 1st June 2019 for paying her daughter’s school fees.
Prepare Veena’s capital account to be rendered to her executors.
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Solution
| Dr. | Veena’s Capital A/c | Cr. | |
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Drawings A/c | 15,000 | By balance b/d | 75,000 |
| To Veena’s Executors A/c | 1,66,250 | By General Reserve A/c (`30,000xx1/3`) | 10,000 |
| By Salary A/c (`25,000xx3/12`) | 6,250 | ||
| By Keith’s Capital A/c (WN: 1) | 40,000 | ||
| By Bina’s Capital A/c (WN1) | 40,000 | ||
| By Profit & Loss Suspense A/c (Share of profit) (WN: 2) |
10,000 | ||
| 1,81,250 | 1,81,250 | ||
Working Notes:
1) Calculation of deceased Veena’s share of goodwill
| Average Profit for the last three years | = `(1,20,000 + 90,000 + 1,50,000)/3` = ₹ 1,20,000 |
| Goodwill of the firm | = Average Profits of the last three years × Number of Years’ Purchase = ₹ (1,20,000 × 2) = ₹ 2,40,000 |
| Veena’s share of goodwill | = ₹ (2,40,000 × 1/3) = ₹ 80,000 |
| Gaining Ratio among the partners will be same as old ratio | = 1 : 1 |
2) Calculation of Veena’s Share of Profit
| Average Profits of last three years | = ₹ 1,20,000 |
| Profits till the date of death | = ₹ (1,20,000 × 3/12) = ₹ 30,000 |
| Veena’s Share of Profits | = ₹ (30,000 × 1/3) = ₹ 10,000 |
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Amount Rs |
Assets |
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|
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| Year | (₹) | |
| 2020-21 | Loss | 20,000 |
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- Danish’s capital contribution.
Choose the components required to calculate goodwill of a firm by capitalisation of average profits method.
P: The normal profits of a similar firm in the industry.
Q: The average profits of the firm.
R: The number of years purchase.
S: The actual capital employed in the business.
