Question

Rahul, Rohit, and Ramesh are in a business sharing profits and losses in the ratio of 3: 2: 1 respectively. Their balance sheet as on 31^st March 2017 was as follows.

Balance Sheet as on 31st March 2017
Liabilities	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Capital Account:		Debtors	1,00,000	90,000
Rahul	2,20,000	Less: R.D.D.	10,000
Rohit	2,10,000	Plant and Machinery		85,000
Ramesh	2,40,000	Investment		3,50,000
Creditors	80,000	Motor lorry		1,00,000
Bills Payable	7,000	Building		80,000
General Reserve	96,000	Bank		1,48,000
	8,53,000			8,53,000

On 1^st October 2017, Ramesh died and the Partnership deed provided that

1. R.D.D. was maintained at 5% on Debtors.
2. Plant and Machinery and Investment were valued at ₹ 80,000 and ₹ 4,10,000 respectively.
3. Of the creditors, an item of ₹ 6000 was no longer a liability and hence was properly adjusted.
4. Profit for 2017-18 was estimated at ₹ 120,000 and Ramesh share in it up to the date of his death was given to him.
5. Goodwill of the Firm was valued at two times the average profit of the last five years. Which were 
   

   2012-13	₹ 1,80,000
   2013-14	₹ 2,00,000
   2014-15	₹ 2,50,000
   2015-16	₹ 1,50,000
   2016-17	₹ 1,20,000

   Ramesh share in it was to be given to him.
6. Salary 5,000 p.m. was payable to him.
7. Interest on capital at 5% i.e. was payable and on Drawings ₹ 2000 were charged.
8. Drawings made by Ramesh up to September 2017 were ₹ 5,000 p.m.

Prepare:

Ramesh’s Capital A/c showing the amount payable to his executors.

Give Working of Profit and Goodwill.

Ramesh’s executors loan A/c ₹ 3,41,000.

Answer 1

In the books of the Partnership Firm
Dr.	Ramesh’s Capital Account				Cr.
Particulars		Amount (₹)	Particulars	Amount (₹)
To Drawings A/c		30,000	By Balance b/d	2,40,000
To Interest on Drawings A/c		2,000	By Goodwill A/c	60,000
To Executor’s Loan A/c		3,41,000	By Salary A/c (5,000 × 6 months)	30,000
			By Interest on Capital A/c	6,000
			By Profit and Loss Adjustment A/c – Profit	11,000
			By Profit and Loss Suspense A/c	10,000
			By General reserve A/c	16,000
		3,73,000		3,73,000

Working Notes:

1) Calculation of share of Goodwill:

(a) Average profit = `"Total profit"/"No. of years"`

=`(1,80,000 + 2,00,000 + 2,50,000 + 1,50,000 + 1,20,000)/5`

= `(9,00,000)/5`

= ₹ 1,80,000

(b) Goodwill = Average profit × No. of years

= 1,80,000 × 2

= ₹ 3,60,000

(c) Share of Goodwill to ramesh = Goodwill of the firm × Ramesh’s share

= `3,60,000 × 1/6`

= ₹ 60,000

(2) Calculation of share of profit due to Ramesh:

Share of profit = Last year profit × Share of profit × Period

= `1,20,000 × 1/6 × 6/12`

= ₹ 10,000 (Profit and Loss Suspense A/c)

(3) Interest on Capital is calculated for six months.

∴ Interest = `2,40,000 × 6/12 × 5/100` = ₹ 6,000

(4)

Dr.	Profit and Loss Adjustment Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Plant and Machinery A/c		5,000	By R.D.D. A/c	5,000
To Partners’ Capital A/cs:		66,000	By Investments A/c	60,000
Rahul	33,000		By Creditors A/c	6,000
Rohit	22,000
Ramesh	11,000
		71,000		71,000