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Question
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
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Vivek, Viney and Vijay were partners in a firm sharing profits in the ratio of 2:1:2. The firm closes its books on 31st March every year. On 31-12-2014 Viney died. On that date his capital account showed a debit balance of Rs 10,000 and Goodwill of the firm was valued at Rs 2, 40,000. There was a debit balance of Rs 7,000 in the profit and loss account. Viney's share of profit in the year of his death will be calculated on the basis of average profit of last 5 years which was Rs 90,000.
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| Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Sundry Creditors General Reserve Capital Reserve Anant 30,000 Sampat 15,000 Gunvant 15,000 |
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60,000 |
Bank Bills Receivables Stock Tools Furniture
|
15,600 18,000 18,000 3,000 24,000
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| Year | Profit |
| 2011 - 2012 | 18.000 |
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|
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 | |||
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Write a word/phrase/term which can substitute the following statement.
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| Balance Sheet as at 31st March,2021 | |||||
| Liabilities | Amount (₹) | Assets | Amount (₹) | ||
| Sundry Creditors | 56,500 | Cash | 1,17,300 | ||
| Bank Overdraft | 61,500 | Debtors | 38,000 | ||
| Workmen’s Compensation Reserve | 32,000 | Less: Provision For Doubtful Debts | (2,300) | 35,700 | |
| Capitals: | Inventories | 1,34,000 | |||
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| Goodwill | 63,000 | ||||
| 12,00,000 | 12,00,000 | ||||
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Fill in the blank.
______ = `("Total Profit")/("Number of Years")`
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Complete the following Table:
| ? | = | `"Total Profit"/"Number of Years"` |
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| Year | (₹) | |
| 2020-21 | Loss | 20,000 |
| 2021-22 | Profit | 34,000 |
| 2022-23 | Profit | 46,000 |
From the year 2020-21 to the year 2022-23, Anish withdrew ₹ 30,000 from the firm for his personal use.
On 1st April, 2023, he admitted Danish into partnership on the following terms:
- Goodwill of the firm to be valued at two years’ purchase of the average profits of the last three years.
- Danish to have a `1/4` share in the future profits.
- Danish’s capital is to be equal to `1/4` of Anish’s capital determined on 1st April, 2023, after the goodwill compensation has been taken into account.
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- The formula to calculate goodwill by the Average Profit Method.
- The value of self-generated goodwill of the firm.
- 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.
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