Question

Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2017 was as follows:

Books of Puneet, Pankaj and Pammy
Balance Sheet as on March 31, 2017

Liabilities		Amt (Rs.)	Assets	Amt (Rs.)
Sundry Creditors		1,00,000	Cash at Bank	20,000
Capital Accounts:			Stock	30,000
Puneet	60,000		Sundry Debtors	80,000
Pankaj	1,00,000		Investments	70,000
Pammy	40,000	2,00,000	Furniture	35,000
Reserve		50,000	Buildings	1,15,000
		3,50,000		3,50,000

Mr. Pammy died on September 30, 2017. The partnership deed provided the following:
(i) The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year’s profit.
(ii)  He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of average of last 4 years’ profit. The profits for the last four financial years are given below: for 2013–14; Rs 80,000; for 2014–15, Rs 50,000; for 2015–16, Rs 40,000; for 2016–17, Rs 30,000.
The drawings of the deceased partner up to the date of death amounted to Rs 10,000. Interest on capital is to be allowed at 12% per annum. Surviving partners agreed that Rs 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance.
Show Mr. Pammy’s Capital account, his Executor’s account till the settlement of the amount due.

Answer 1

                             Pammy’s Capital Account
Dr.                                                                                          Cr.

Particulars	Amt  (Rs.)		Particulars	Amt (Rs.)
Drawings	10,000		Balance b/d	40,000
Pammy Executor’s A/c	75,400		Profit and Loss (Suspense)	3,000
			Puneet’s Capital A/c	15,000
			Pankaj’s Capital A/c	15,000
			Interest on Capital	2,400
			Reserve	10,000
	85,400			85,400

                                  Pammy's Executor Account
Dr.                                                                                             Cr.

Date	Particulars	J.F.	Amount Rs		Date	Particulars	J.F.	Amount Rs
2017-18 Sep. 30	Bank		15,400		2017-18 Sep. 30	Pammy’s Capital A/c		75,400
Mar. 31	Balance c/d		63,600		Mar. 31	Interest		3,600
			79,000					79,000
2018-19 Sep. 30	Bank (15,000+3,600+3,600)		22,200		April 01	Balance b/d		63,600
					Sep. 30	Interest		3,600
Mar. 31	Balance c/d		47,700		Mar. 31	Interest		2,700
			69,900					69,900
2019-20 Sep. 30	Bank		20,400		2019-20 April 01	Balance b/d		47,700
Mar. 31	Balance c/d		31,800		Sep. 30	Interest		2,700
					Mar. 31	Interest		1,800
			52,200					52,200
2020-21 Sep. 30	Bank (15,000+1,800+1,800)		18,600		2020-21 April 01	Balance b/d		31,800
					Sep. 30	Interest		1,800
Mar. 31	Balance c/d		15,900		Mar. 31	Interest		900
			34,500					34,500
2021-22 Sep. 30	Bank (15,000+900+900)		16,800		2021-22 April 01	Balance b/d		15,900
					Sep. 30	Interest		900
			16,800					16,800

Working Notes:

1) Pammy’s Share of Profit
= Previous Year’s Profit x  Proportionate Period x  Share of Deceased Partner 
= 30,000 x `6/12` x `1/5` = Rs. 3,000

2) Pammy’s Share of Goodwill
Goodwill of the firm = Average Profit  x Numbers of Year’s Purchase
Average Profit = `[ 80,000 + 50,000 + 40,000 + 30,000]/4 = [2,00,000]/4 = Rs. 50,000`
Goodwill of the firm = 50,000  x  3 = Rs 1,50,000
Pammy's Share = 1,50,000 x `1/5` = Rs. 30,000.

3) Gaining Ratio = New Ratio – Old Ratio

Puneet’s Share = `2/4 - 2/5 = [ 10 - 8]/20 = 2/20`

Pankaj’s Share = `2/4 - 2/5 = [10 - 8]/20 = 2/20`

Gaining Ratio between Puneet and Pankaj = 2 : 2 or 1 : 1

4) Interest on Capital for 6 months, i.e. from April 1, 2007 to September 30, 2007
Amount of Capital x  Rate of Interest x Period
= 40,000 x `12/100` x `6/12` = Rs. 2,400.

5) Interest Amount
The firm closes its books every year on March 31, while installments to Pammy's Executor are paid on September 30 every year.
Amount outstanding on 30 September = 75,400 – 15,400 = Rs 60,000

Calculation of Interest

Periods	Amount Outstanding	Yearly Interest	For 6 Months
2017-18	60,000	60,000 x `12/100` = 7,200	7,200 x `6/12` = 3,600
2018-19	45,000	45,000 x `12/100` = 5,400	5,400 x `6/12` = 2,700
2019-20	30,000	30,000 x `12/100` = 3,600	3,600 x `6/12` = 1,800
2020-21	15,000	15,000 x `12/100` = 1,800	1,800 x `6/12` = 900