Question

Vishnu, Prabhakar and Krishna were partners in a business sharing profits and losses in the ratio of 3:1:1 respectively. Their Balance Sheet as on 31^st March, 2012 was as follows:

         Balance Sheet as on 31^st March, 2012

Liabilities	Amount (Rs)	Assets	Amount (Rs)
Capital		Plant and Machinery	35,000
Vishnu	40,000	Stock	25,000
Prabhakar	30,000	Debtors	20,000
Krishna	25,000	Cash	20,000
Creditors	5,000
Reserve Fund	10,000
	1,10,000		1,10,000

Krishna died on 1^st October, 2012 and the partnership deed provided that:

1) The deceased partner to be given his share of profit to the date of death on the basis of the profits of the previous year.

2) His share of goodwill will be calculated on two years purchase of average profit of the last 4 years. The net profit for last 4 years were Rs 70,000, Rs 55,000, Rs 45,000, Rs 30,000

3) Plant and Machinery to be valued at Rs 40,000. Reserve for doubtful debts of Rs 2,000 to be created.

4) The drawings of Krishna upto the death amounted to Rs 20,000

5) Interest on capital at 10% p.a. is to be allowed and 6% p.a. to be charged on drawings. Both the interest should be calculated for 6 months. 
Prepare:
1) Krishna’s capital A/c and P/L Adjustment A/c

Answer 1

                     Krishna’s Capital Account 
Dr.                                                                               Cr.

Particulars	Amount	Particulars	Amount
Drawings	20,000	Balance b/d	25000
Interest on Drawings	600	Reserve fund	2000
Legal Heir's Loan A/c	31,250	Profit and Loss Adjustment A/c (Profit)	600
		Goodwill	20000
		Profit and Loss Suspense A/c	3000
		Interest on Capital	1250
	51850		51850

                Profit and Loss Adjustment Account

Dr.                                                                                Cr.

Particulars		Amount (Rs)	Particulars	Amount (Rs)
Reserve for Doubtful Debts		2000	Plant and Machinery	5000
Profit transferred to:
Vishnu	1800	3000
Prabhakar	600
Krishna	600
		5000		5000

Working Notes:

WN 1: Krishna’s share of Reserve Fund

Krishna's share of Reserve = `10000 xx 1/5 = 2000`

WN 2: Calculation of Share of Goodwill of Krishna 

Total Profit = 70000+55000+45000+30000 = 200000

Average Profit =` 200000 /4 = 50000`

Share of goodwill of krishna =`50000 xx 2 xx 1/5 = 20000`

WN 3: Calculation of Share of Profit of Krishna

Share of profit for the period = `30000 xx 6/12 = 15000`

Share of Profit =`15000 xx 1/5 = 3000`

Note: As no information is given regarding the New Ratio of Vishnu and Prabhakar, hence, it is 3:1 and Gaining Ratio is same as the New Ratio.