Question

X, Y and Z were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 31.3.2010 their Balance Sheet was as follows:

Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Capital Accounts:		1,75,000	Building	50,000
X	75,000		Patents	15,000
Y	62,500		Machinery	75,000
Z	37,500		Stock	37,500
Sundry Creditors		42,500	Debtors	20,000
			Cash at Bank	20,000
		2,17,500		2,17,500

Z died on 31.7.2010. It was agreed that:

(a) Goodwill be valued at 2½ year’s purchased of the average profits of the last four year which were as follows:  

Years	Profit ₹
2006 – 2007	32,500
2007 – 2008	30,000
2008 – 2009	40,000
2009 – 2010	37,500

(b) Machinery be valued at ₹ 70,000; Patents at ₹ 20,000 and Building at ₹ 62,500.

(c) For the purpose of calculating Z’s share of profits on the year of his death the profit in 2010 − 2011 should be taken to have been accrued on the same scale as in 2009 − 2010.

(d) A sum of ₹ 17,500 was paid immediately to the executors of Z the balance was paid in four half yearly installments together with interest at 12% p.a. starting from 31.1.2011.

Given necessary journal entries to record the above transaction and Z’s executor’s account till the payment of installments due on 31.1.2011.

Answer 1

Journal
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2010
July 31	X’s Capital A/c         ...Dr.		10,938
	Y’s Capital A/c         ...Dr.		6,562
	To Z’s Capital A/c			17,500
	(Being Z’s share of goodwill adjusted)
July 31	Profit and Loss Suspense A/c      ...Dr.		2,500
	To Z’s Capital A/c			2,500
	(Being Z’s share of profit transferred to his capital account)
July 31	Revaluation A/c     ...Dr.		5,000
	To Machinery A/c			5,000
	(Being Decreased in the value of machinery recorded)
July 31	Patent A/c           ...Dr.		5,000
	Building A/c       ...Dr.		12,500
	To Revaluation A/c			17,500
	(Being Increase in assets recorded)
July 31	Revaluation A/c        ...Dr.		12,500
	To X’s Capital A/c			6,250
	To Y’s Capital A/c			3,750
	To Z’s Capital A/c			2,500
	(Being Profit on revaluation transferred to partners capital)
July 31	Z’s Capital A/c      ...Dr.		60,000
	To Z’s Executor A/c			60,000
	(Being Amount due to Z transferred to his executors’ account)
July 31	Z’s Executor A/c       ...Dr.		17,500
	To Bank A/c			17,500
	(Being Z’s executor are paid cash partly)
July 31	Interest A/c       ...Dr.		2,550
	To Z’s Executor A/c			2,550
	(Being Interest due on Z’s executor)
July 31	Z’s Executor A/c       ...Dr.		13,175
	To Bank A/c			13,175
	(Being Half-yearly installment paid to Z’s Executor)

 

Dr.	Z’s Capital A/c				Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010			2010
July 31	Z’s Executors A/c	60,000	April 1	By Balance b/d	37,500
			July 31	By X’s Capital A/c (Goodwill)	10,938
			July 31	By Y’s Capital A/c (Goodwill)	6,562
			July 31	By Profit & Loss Suspense A/c	2,500
			July 31	By Revaluation A/c	2,500
		60,000			60,000

 

Dr.	Z’s Executors A/c				Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2010			2010
July 31	To Bank A/c	17,500	July 31	By Z’s Capital A/c	60,000
2011			2011
Jan 31	To Bank A/c	13,175	Jan 31	By Interest A/c	2,550
Jan 31	To Balance c/d	31,875
		62,550			62,550

Working notes:

(1) Calculation of Goodwill

Goodwill = Average Profit × Number of Year’s Purchase

Average Profit = `(32,500+30,000+40,000+37,500)/4`

= `(1,40,000)/4`

= ₹ 35,000 

Goodwill = Average Profit × Number of Years’ Purchase

= 35,000 × 2.5

= ₹ 87,500 

(2) Adjustment of Goodwill

Old Ratio (X, Y and Z) = 5 : 3 : 2

Z died.

New Ratio (X and Y) = 5 : 3 and

Gaining Ratio = 5 : 3 

Z’s Share in Goodwill = `87,500xx2/10` = ₹ 7,500   

This share of goodwill is to be distributed between R and S in their gaining ratio (i.e. 5 : 3).

X’s Share in Goodwill = `17,500xx5/8` = ₹ 10,938  

Y’s Share in Goodwill = `17,500xx3/8` = ₹ 6,562 

Calculation of Z’s Share of Profit

Profit for 2011 = ₹ 37,500 

T’s Share of Profit in `2012=37,500xx2/10xx4/12` = ₹ 2,500