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Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. - Accountancy

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Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. Vaibhav's share of profit in the year of his death was to be calculated on the basis of the average profit of last five years. The average profit of last five years was Rs. 75,000.

Pass necessary journal entries in the books of the firm on Vaibhav's death.

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Solution

Journal

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
 

Vikas’s Capital A/c                                                                                                                          Dr

Vishal’s Capital A/c                                                                                                                         Dr

            To Vaibhav’s Capital A/c

(Being adjustment of goodwill done in gaining ratio)

 

Vikas’s Capital A/c                                                                                                                           Dr

Vishal’s Capital A/c                                                                                                                          Dr

Vaibhav’s Capital A/c                                                                                                                       Dr

             To Profit and Loss A/c

(Being debit balance in P & L written off among all partners in old ratio)

 

Profit and Loss Suspense A/c                                                                                                            Dr

             To Vaibhav’s Capital A/c

(Being Vaibhav’s share of profit up to date of death dispensed through P&L Suspense A/c)

 

Vaibhav’s Capital A/c                                                                                                                       Dr

              To Vaibhav’s Executor A/c

(Being amount due to Vaibhav transferred to his Executor A/c)

 

12,000

12,000

 

 

 

20,000

20,000

10,000

 

 

 

11,250

 

 

 

4,05,250

 

 

 

 

24,000

 

 

 

 

 

50,000

 

 

 

11,250

 

 

 

4,05,250

 

 

Working Notes:

WN 1: Calculation of Vaibhav’s Share of Goodwill

Vaibhav's Share of Goodwill = Firm's Goodwill x His Profit Share

                                         = 1,20,000 x (1/5)

                                         = 24,000

24,000 will be borne by gaining partners in gaining ratio

Since, nothing is specified; it is assumed that continuing partners gain in their old profit sharing ratio of 2:2

Vikas's gain = 24,000 x (2/4) = 12,000

Vishal's gain = 24,000 x (2/4) = 12,000

 

WN 2 : Calculation of Share of Debit balance in P&L A/c

Vikas's Share = 50,000 x (2/5) = 20,000

Vishal's Share = 50,000 x (2/5) = 20,000

Vaibhav's Share = 50,000 x (1/5) = 10,000

 

WN 3 : Calculation of Share in Profit (earned during the year)

Vaibhav's Share = Average Profits x Number of Months Vaibhav Remained x His Profit Share

                        = 75,000 x (9/12) x (1/5) = 11,250

 

WN 4 : Calculation of Amount transferred to Vaibhav's Executor A/c

Amount due to Vaibhav = Capital + Credit Items - Debit Items

                                   = 3,80,000 + 24,000 - 10,000 + 11,250

                                   = 4,05,250

Concept: Concept of Goodwill
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