Ncert Solutions for Class 12 Accountancy Chapter 3 Reconstitution of a Partnership Firm Retirement/Death of a Partner

Class 12 accountancy chapter 3 exercise solutions: Accountancy Class 12 Chapter 3 questions and answers

Textbook	NCERT
Class	Class 12
Subject	Accountancy
Chapter	Chapter 3
Chapter Name	Reconstitution of a Partnership Firm Retirement/Death of a Partner class 12 ncert solutions
Category	Ncert Solutions
Medium	English

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Short Answer Questions

Question 1: What are the different ways in which a partner can retire from the firm.

Answer 1: A partner can retire from a firm in the following ways:

1. Voluntary Retirement: By personal choice.
2. Mutual Consent: Agreement of all partners.
3. Insolvency/Bankruptcy: Due to financial incapacity.
4. Disqualification: Legal or professional ineligibility.
5. Expulsion: Removal as per partnership terms.
6. Death/Incapacity: Unable to continue duties.
7. Age/Term Limit: Retirement as per agreement.
8. Buy-Out: Selling their share to others.
9. Merger/Dissolution: Firm ceases to exist.

These methods depend on the partnership deed and legal provisions.

Question 2: Write the various matters that need adjustments at the time of retirement of a partners.

Answer 2: At the time of a partner’s retirement, the following matters typically require adjustments:

• Calculation of Gaining Ratio: Determine the gaining ratio of the remaining partners.
• Calculation of New Profit Sharing Ratio: Establish the new ratio among the remaining partners.
• Goodwill Adjustment: Value the firm’s goodwill and account for its treatment among all partners.
• Revaluation of Assets and Liabilities: Reassess the firm’s assets and liabilities to reflect current values.
• Distribution of Reserves, Profits, and Losses: Allocate accumulated reserves, profits, and losses among all partners, including the retiring one.
• Treatment of Joint Life Policy: Adjust for the policy based on its surrender value or amount receivable.
• Settlement of Retiring Partner’s Dues: Calculate and settle the amount payable to the retiring partner, including their share of goodwill, capital, and revaluation surplus/deficit.
• Adjustment of Remaining Partners’ Capitals: Align the remaining partners’ capital accounts according to their new profit-sharing ratio.

Question 3: Distinguish between sacrificing ratio and gaining tab.

Answer 3:

Basis of Difference	Sacrificing ratio	Gaining Ratio
1. Meaning	It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partners/partner	It is the ratio in which continuing partner acquires the share of profit from outgoing partner/partner
2. Calculation	Sacrificing Ratio = Old Ratio – New Ratio	Gaining Ratio = New Ratio – Old Ratio
3. Time	It is calculated at the time of admission of new partners/partner.	It is calculated at the time of retirement/death of old partners/partner.
4. Objective	It is calculated to ascertain the share of profit and loss given up by the existing partners in favour of new partners/partner.	It is calculated to ascertain the share of profit and loss acquired by the remaining partners (of the new firm in case of retirement) from the retiring or deceased partner.
5. Effect	It reduces the profit share of the existing partners.	It increases the profit share of the remaining partners.

Question 4: Why do firm revaluate assets and reassers their liabilities on retirement or on the event of death of a partner.

Answer 4: At the time of retirement or death of a partner, it becomes inevitable to revalue the assets and liabilities of the firm for ascertaining their true and fair values. The revaluation is necessary as the value of assets and liabilities may increase or decrease with the passage of time. Further, it may be possible that there are certain assets and liabilities that remained unrecorded in the books of accounts.

The retiring or the deceased partner may be benefited or may bear loss due to change in the values of assets and liabilities. Therefore, the revaluation of the assets and liabilities is necessary in order to ascertain the true profit or loss that is to be divided among all the partners in their old profit sharing ratio.

Question 5: Why a retiring/deceased partner is entitled to a share of goodwill of the firm.

Answer 5: A firm earns goodwill through the efforts of its partners and is regarded as one of the most important intangible assets. After a partner retires or is dead, the good work that was done by that partner should be acknowledged, and hence proper compensation should be provided to the partner in the form of a part of the goodwill of the firm.

Long Answer Questions

Question 1: Explain the modes of payment to a retiring partner.

Answer 1: The modes of payment to a retiring partner are listed below:

i. When the amount due to the retiring partner is paid back in a lump sum amount on the day of retirement, journal entries are as mentioned below:

Retiring Partner’s Capital A/c		Dr.
	To Cash/Bank A/c
(Payment made to the retired partner)

ii. The amount to be paid to the retiring partner can be paid in instalments to the loan account, which helps the partner earn interest on the loan.

Retiring Partner’s Capital A/c		Dr.
	To Retiring Partner’s Loan A/c
(Capital account balance of retiring partner transferred to account to the loan account of retiring partner).

iii. Part payment: When the retiring partner needs to be paid some amount in cash and some as equal instalments, then a certain sum of money is paid on the day of retirement, and the rest of the sum is paid on a monthly basis to the partner’s loan account. The following entries show this type of transaction:

Retiring Partner’s Capital A/c (total due amount payable to partner) Dr.

To Retiring Partner’s Loan A/c (amount transferred to loan account)

To Cash A/c (part payment in the form of cash)

(Part payment to retiring partner in cash as well as transfer to loan account)

Question 2: How will you compute the amount payable to a deceased partner?

Answer 2: In case of a death, the legal executor of the deceased partner is entitled for a claim which includes his share of profit or loss, interest on capital, interest on drawings In that case for computing the amount payable is calculated by preparing the deceased partner’s capital account as follows:

Deceased Partner’s Capital Account
Dr.							Cr.
Date	Particulars	J.F.	Amount₹	Date	Particulars	J.F.	Amount₹
	Revaluation A/c (Loss)				Balance b/d
	Profit and Loss Suspense A/c(Loss share till the date of death)				Profit and Loss Suspense A/c(Share of profit up to the date of the death)
					Goodwill
	Accumulated Losses A/c				Reserves and Profits
	Goodwill A/c (Written off)				Revaluation A/c (gain)
	Partner Executor’s A/c				Joint Life Policy A/c
	(Balancing Figure)				Interest on Capital A/c
					Salary A/c
					Commission A/c

Note: In the above capital account, the legal executor will be entitled for the balancing
figure that is the excess of the credit side over the debit side of the deceased partner’s capital account.

Question 3: Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?

Answer 3: Goodwill is subjected to treatment on the following two conditions:

• i. When goodwill is present in the books of the firm.
• ii. When goodwill is not present in the books of the firm
• i. When goodwill is present in books

The first step is to write off the goodwill if it is present in the books and must be distributed among the partners in the firm in the agreed profit-sharing ratio. The journal entry will be like the following:

All Partners’ Capital A/c Dr.

To Goodwill A/c

(Goodwill written off among partners)

The next step will be adjusting goodwill using the partners’ capital account with the share of goodwill of the deceased or retired partner

Remaining Partner’s Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c (partners’ capital account debited and retiring/deceased partners account credited)

ii. When goodwill is not present in the books of the firm

As goodwill is not present in the books of the firm, it gets adjusted from the partners’ capital account along with the deceased/retired partners’ share. The following entry is passed:

Remaining Partner’s Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c

(Partners’ capital account debited and retiring/deceased partners account credited)

Question 4: Discuss the various methods of computing the share in profits in the event of death of a partner.

Answer 4: In case of death of a partner during the year, his/her executer is entitled for share of profit up to the date of death of the partner. The share of profit can be calculated by one of the two methods.

1) On time basis: Under this method, profit up to the date of the death of the partner is calculated on the basis of the last year’s/years’ profit or average profit of last few years. In this approach, it is assumed that the profit will be uniform throughout the current year. The deceased partner will be entitled for the share of the profit proportionately up to the date of his/her death.

Share of Deceased Partner in Profit =

Previous Year/Average Profit × \(\frac{Time Period from date of balance sheet till death}{12 months / 52 weeks / 365 days}\)×Profit Share of decreased Partner

Example- A, B and C are equal partners. The profit of the firm for the years 2008, 2009 and 2010 are Rs 10,00,000, Rs 7,00,000 and Rs 13,00,000 respectively. C dies on April 30, 2011. The share of C in the firm’s profit will be calculated on the basis of average profit of last three years. Firm closes its books every year on December 31.

In this case, C’s share in the profits will be calculated for four months, i.e. from January 01, 2011 to April 30, 2011.

Average Profit = \(\frac{10,00,000+7,00,000+13,00,0003}{3}\) = Rs. 10,00,000

C’s share of profit = 10,00,000 × \(\frac{4}{12}\) × \(\frac{1}{3}\) = Rs.1,11,111 approx.

2) On the sale basis: Under this method, profit is calculated on the basis of last year’s sale. In this situation, it is assumed that the net profit margin of the current year’s sale is similar to that of the last year’s.

Share of Deceased Partner’s Profit = \(\frac{Previous Year’s Profit}{Previous Year’s Sales}\)×Share of deceased partner.

Example- X Y and Z are equal partners. The last year’s sales and profit were Rs 25,00,000 and Rs 2,50,000. Z died on the April 30, 2011. Sales of the current year till the date of Z’s death amounts to Rs 12,00,000. Firm closes its books on December 31 every year.

Z’s share of Profit = \(\frac{2,50,000}{25,00,000}\) x 12,00,000 x \(\frac{1}{3}\) = Rs. 40,000.

Numerical Questions

Question 1: Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3 : 2 : 1. Manisha retires and goodwill of the firm is valued at Rs. 1,80,000. Aparna and Sonia decided to share future in the ratio of 3 : 2. Record necessary journal entries.

Answer 1:

Books of Aparna and Sonia Journal
Date	Particulars		L.F.	Amount₹	Amount₹
	Aparna’s Capitals A/c	Dr.		18,000
	Sonia’s Capital A/c	Dr.		42,000
	To Manisha’s Capital A/c				60,000
	(Manisha’s share of goodwill adjusted to Aparna’s andSonia’s Capital Account in their gaining ratio )

Working Notes:

Manisha’s Share in Goodwill = \(1,80,000 \times \frac{2}{6}\) = 60,000

Gaining Ratio = New Ratio − Old Ratio

Aparna = \(\frac{3}{5} – \frac{3}{6} = \frac{18-15}{30} = \frac{3}{30}\)

sonia = \(\frac{2}{5} – \frac{1}{6} = \frac{12-5}{30} = \frac{7}{30}\) or 3:7

iii. Aparna’s share in the goodwill = 60,000 x \(\frac{3}{10}\) = 18,000

Sonia’s share in the goodwill = 60,000 x \(\frac{7}{10}\) = 42,000

Question 2: Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2 : 3 : 5. Goodwill is appearing in the books at a value of Rs. 60,000. Sangeeta retires and goodwill is valued at Rs. 90,000. Saroj and Shanti decided to share future profits equally. Record necessary journal entries.

Answer 2:

Books of Saroj and Shanti Journal
Date	Particulars		L.F.	Amount₹	Amount₹
	Sangeeta’s Capital A/c	Dr.		12,000
	Saroj’s Capital A/c	Dr.		18,000
	Shanti’s Capital A/c	Dr.		30,000
	To Goodwill A/c				60,000
	(Goodwill written off)
	Saroj’s Capital A/c	Dr.		18,000
	To Sangeeta’s Capital A/c				18,000
	(Sangeeta’s share of goodwill adjusted to Saroj’s CapitalAccount in her gaining ratio)

Working Notes:

i. Sangeeta’s share of goodwill

Total goodwill of the firm × Retiring partner’s share = 90,000 x \(\frac{2}{10}\) = Rs. 18,000.

ii. Gaining Ratio = New Ratio – Old Ratio

Saroj’s Gaining Share = \(\frac{1}{2} – \frac{3}{10} = \frac{10-6}{20} = \frac{4}{20}\)

Shanti’s Gaining Share = \(\frac{1}{2} – \frac{5}{10} = \frac{10-10}{20} = \frac{0}{20}\)

Question 3: Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3 : 2 : 1. On March 31, 2019, Naman retires.
The various assets and liabilities of the firm on the date were as follows:
Cash Rs. 10,000, Building Rs. 1,00,000, Plant and Machinery Rs. 40,000, Stock Rs. 20,000, Debtors Rs. 20,000 and Investments Rs. 30,000.
The following was agreed upon between the partners on Naman’s retirement:
(i) Building to be appreciated by 20%.
(ii) Plant and Machinery to be depreciated by 10%.
(iii) A provision of 5% on debtors to be created for bad and doubtful debts.
(iv) Stock was to be valued at Rs. 18,000 and Investment at Rs. 35,000.
Record the necessary journal entries to the above effect and prepare the revaluation account.

Answer 3:

Books of Himanshu and Gagan Journal
Date	Particulars		L.F.	Amount₹	Amount₹
	Building A/c	Dr.		20,000
	Investment A/c	Dr.		5,000
	To Revaluation A/c	Dr.			25,000
	(Value of Building and Investment increased at the timeof Naman’s retirement)
	Revaluation A/c	Dr.		7,000
	To Plant and Machinery A/c				4,000
	To Provision for Bad and Doubt Debts A/c				1,000
	To Stock A/c				2,000
	(Assets revalued and provision for Bad and Doubtful Debtsmade at the time of Naman’s retirement)
	Revaluation A/c	Dr.		18,000
	To Himanshu’s Capital A/c				9,000
	To Gagan’s Capital A/c				6,000
	To Naman’s Capital A/c				3,000
	(Profit on revaluation transferred to all Partners’ CapitalAccounts in their old profit-sharing ratio)

Revaluation Account
Dr.					Cr.
Particular			Amount₹	Particular	Amount₹
Plant and Machinery			4,000	Building	20,000
Stock			2,000	Investment	5,000
Provision for Bad and Doubtful Debts			1,000
Profit Transferred to Capital Account:
Himanshu		9,000
Gagan		6,000
Naman		3,000	18,000
			25,000		25,000

Question 4: Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserves Rs 36,000 and Profit and Loss Account (Dr.) Rs 15,000.
Pass the necessary journal entries to the above effect.

Answer 4:

Books of Naresh and BishwajeetJournal
Date	Particulars			L.F.	Amount₹	Amount₹
	General Reserve A/c		Dr.		36,000
	To Naresh’s Capital A/c					12,000
	To Raj Kumar’s Capital A/c					12,000
	To Bishwajeet’s Capital A/c					12,000
	(General Reserve distributed among old partners in old ratio)
	Naresh’s Capital A/c		Dr.		5,000
	Raj Kumar’s Capital A/c		Dr.		5,000
	Bishwajeet’s Capital A/c		Dr.		5,000
	To Profit and Loss A/c					15,000
	(Debit balance of Profit and Loss Account written off)

Question 5: Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2020 was as follows:

Liabilities	Amt (Rs.)	Assets	Amt (Rs.)
Creditors	49,000	Cash	8,000
Reserves	18,500	Debtors	19,000
Digvijay’s Capital	82,000	Stock	42,000
Brijesh’s Capital	60,000	Buildings	207,000
Parakaram’s Capital	75,500	Patents	9,000
	2,85,000		2,85,000

Brijesh retired on March 31, 2020 on the following terms:

1. Goodwill of the firm was valued at Rs 70,000 and was not to appear in the books.
2. Bad debts amounting to Rs 2,000 were to be written off.
3. Patents were considered as valueless.

Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

Answer 5:

Books of Digvijay and ParakaramRevaluation Account
Dr.				Cr.
Particular		Amount₹	Particular		Amount₹
Bad Debts		2,000
Patents		9,000	Loss Transferred to Capital Account:
			Digvijay		4,400
			Brijesh		4,400
			Parakaram		2,200
		11,000			11,000

Partners’ Capital Account
Dr.						Cr.
Particulars	Digvijay	Brijesh		Parakaram	Particulars		Digvijay	Brijesh	Parakaram
Brijesh’s Capital A/c	18,667			9,333	Balance b/d		82,000	60,000	75,500
Revaluation (Loss)	4,400	4,400		2,200	Digvijay’s Capital A/c			18,667
Brijesh’s Loan		91,000			Parakaram’s Capital A/c			9,333
Balance c/d	66,333			67,667	Reserves		7,400	7,400	3,700
	89,400	95,400		79,200			89,400	95,400	79,200

Balance Sheet as on March 31, 2017
Liabilities	Amount₹	Assets		Amount₹
Creditors	49,000	Cash		8,000
Brijesh’s Loan	91,000	Debtors	19,000
		Less: Bad Debts	2,000	17,000
Digvijay’s Capital A/c	66,333	Stock		42,000
Parakaram’s Capital A/c	67,667	Buildings		2,07,000
	2,74,000			2,74,000

Note: As sufficient balance is not available to pay the amount due to Brijesh, the balance of his Capital Account transferred to his Loan Account.

Working Note:

1. Brijesh’s Share of Goodwill
Total goodwill of the firm x Retiring Partner’s Share = 70,000 x \(\frac{2}{5}\) = Rs. 28,000.

2. Gaining Ratio = New Ratio – Old Ratio

• Digvijay’s Share = \(\frac{2}{3} – \frac{2}{5} = \frac{10-6}{15} = \frac{4}{15}\)
• Parakaram’s Share = \(\frac{1}{3} – \frac{1}{5} = \frac{5-3}{15} = \frac{2}{15}\)

Gaining ratio between Digvijay and Parakaram = 4 : 2 or 2 : 1

Question 6: Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

Liabilities	Amt (Rs.)	Amt (Rs.)	Assets	Amt (Rs.)
Trade Creditors		3,000	Cash-in-Hand	1,500
Bills Payable		4,500	Cash at Bank	7,500
Expenses Owing		4,500	Debtors	15,000
General Reserve		13,500	Stock	12,000
Capitals:		45,000	Factory Premises	22,500
Radha	15,000		Machinery	8,000
Sheela	15,000		Losse Tools	4,000
Meena	15,000
		70,500		70,500

The terms were:
a) Goodwill of the firm was valued at Rs 13,500.
b) Expenses owing to be brought down to Rs 3,750.
c) Machinery and Loose Tools are to be valued at 10% less than their book value.
d) Factory premises are to be revalued at Rs 24,300.

Prepare:
1. Revaluation account
2. Partner’s capital accounts and
3. Balance sheet of the firm after retirement of Sheela.

Answer 6:

Books of Radha and MeenaRevaluation Account
Dr.			Cr.
Particulars		Amount₹	Particulars	Amount₹
Machinery		800	Expenses Owing	750
Loose Tools		400	Factory Premises	1,800
Profit transferred to Capital Account:
Meena	675
Radha	450
Sheela	225	1,350
		2,550		2,550

Parters’ Capital Account
Dr.				Cr.
Particulars	Radha	Sheela	Meena		Particulars	Radha	Sheela	Meena
Sheela’s Capital A/c	3,375		1,125		Balance b/d	15,000	15,000	15,000
Sheela’s Loan A/c		24,450			General Reserve	6,750	4,500	2,250
Balance c/d	19,050		16,350		Revaluation (Profit)	675	450	225
					Radha’s Capital A/c		3,375
					Meena’s Capital A/c		1,125
	22,425	24,450	17,475			22,425	24,450	17,475

Balance Sheet as on April 01, 2017
Liabilities		Amount₹	Assets		Amount₹
Trade Creditors		3,000	Cash in Hand		1,500
Bills Payable		4,500	Cash at Bank		7,500
Expenses Owing		3,750	Debtors		15,000
Sheela’s Loan		24,450	Stock		12,000
			Factory Premises		24,300
Capitals:			Machinery	8,000
Radha	19,050		Less: 10%	(800)	7,200
Meena	16,350	35,400	Loose Tools	4,000
			Less: 10%	(400)	3,600
		71,100			71,100

Working Notes:

1) Sheela’s share of goodwill

Total goodwill of the firm × Retiring Partner’s share
= 13,500 x \(\frac{2}{6}\) = 4,500.

2) Gaining Ratio = New Ratio − Old Ratio

Radha’s Share = \(\frac{3}{3} – \frac{3}{6} = \frac{18-12}{24} = \frac{6}{24}\)

Meena’s Shares = \(\frac{1}{4} – \frac{1}{6} = \frac{6-4}{24} = \frac{2}{6}\)

Gaining Ratio between Radha and Meena = 6 : 2 or 3 : 1.

Question 7: Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness on September 30, 2017. On that date the Balance Sheet of the firm was as follows:

Books of Pankaj, Naresh and Saurabh
Balance Sheet as on September 30, 2017

Liabilities		Amount Rs	Assets		Amount Rs
General Reserve		12,000	Bank		7,600
Sundry Creditors		15,000	Debtors	6,000
Bills Payable		12,000	Less:Provision for Doubtful Debt	400	5,600
Outstanding Salary		2,200
Provision for Legal Damages		6,000	Stock		9,000
Capitals:			Furniture		41,000
Pankaj	46,000		Premises		80,000
Naresh	30,000
Saurabh	20,000	96,000
		1,43,200			1,43,200

Additional Information:

• Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for Rs 1,200 and furniture to be brought up to Rs 45,000.
• Goodwill of the firm be valued at Rs 42,000.
• Rs 26,000 from Naresh’s Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank.
• Naresh share of profit till the date of retirement is to be calculated on the basis of last year’s profit, i.e., Rs. 60,000.
• New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1.
  Give the firm’s necessary ledger accounts and balance sheet after Naresh’s retirement.

Answer 7:

Revaluation Account
Dr.			Cr.
Particulars		Amount₹		Particulars	Amount₹
Stock		900		Premises	16,000
Provision for Legal Damages		1,200		Provision for Doubtful Debts	100
Profit Transferred to Capital:				Furniture	4,000
Pankaj	9,000
Naresh	6,000
Saurabh	3,000	18,000
		20,100			20,100

Partners’ Capital Accounts
Dr.				Cr.
Particulars	Pankaj	Naresh	Saurabh		Particulars	Pankaj	Naresh	Saurabh
Naresh’s Capital A/c	14,000				Balance b/d	46,000	30,000	20,000
Naresh’s Loan A/c		26,000			General Reserve	6,000	4,000	2,000
Bank		28,000			Revaluation (Profit)	9,000	6,000	3,000
Balance c/d	47,000		25,000		Pankaj’s Capital A/c		14,000
	61,000	54,000	25,000			61,000	54,000	25,000

Bank Account
		Cr.
Particulars	Amount₹	Particulars	Amount₹
Balance b/d	7,600	Naresh’s Capital A/c	28,000
Bank Loan (Balancing Figure)	20,400
	28,000		28,000

Balance Sheet as on March 31, 2017
Liabilities		Amount₹	Assets		Amount₹
Sundry Creditors		15,000	Debtors	6,000
Bills Payable		12,000	Less: Provision for Doubtful Debts	300	5,700
Bank Loan/overdraft		20,400	Stock		8,100
Outstanding Salaries		2,200	Furniture		45,000
Provision for Legal Damages		7,200	Premises		96,000
Naresh’s Loan		26,000
Capitals:
Pankaj	47,000
Saurabh	25,000	72,000
		1,54,800			1,54,800

Question 8: 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 8:

Pammy’s Capital Account
Dr.		Cr.
Particulars	Amount₹		Particulars	Amount₹
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₹		Date	Particulars	J.F.	Amount₹
2017-18					2017-18
Sep. 30	Bank		15,400		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					2018-19
Sep. 30	Bank		22,200		April 01	Balance b/d		63,600
	(15,000+3,600+3,600)				Sep. 30	Interest		3,600
Mar. 31	Balance c/d		47,700		Mar. 31	Interest		2,700
			69,900					69,900
2019-20					2019-20
Sep. 30	Bank		20,400		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					2020-21
Sep. 30	Bank		18,600		April 01	Balance b/d		31,800
	(15,000+1,800+1,800)				Sep. 30	Interest		1,800
Mar. 31	Balance c/d		15,900		Mar. 31	Interest		900
			34,500					34,500
2021-22					2021-22
Sep. 30	Bank		16,800		April 01	Balance b/d		15,900
	(15,000+900+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 \(\frac{6}{12}\) x \(\frac{1}{5}\) = Rs. 3,000

2) Pammy’s Share of Goodwill
Goodwill of the firm = Average Profit  x Numbers of Year’s Purchase
Average Profit = \(\frac{80,000+50,000+40,000+30,000}{4}\) = \(\frac{2,00,000}{4}\) = Rs.50,000
Goodwill of the firm = 50,000  x  3 = Rs 1,50,000
Pammy’s Share = 1,50,000 x \(\frac{1}{5}\) = Rs. 30,000.

3) Gaining Ratio = New Ratio – Old Ratio

Puneet’s Share = \(\frac{2}{4} – \frac{2}{5} = \frac{10-8}{20} = \frac{2}{20}\)

Pankaj’s Share = \(\frac{2}{4} – \frac{2}{5} = \frac{10-8}{20} = \frac{2}{20}\)

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 \(\frac{12}{100}\) x \(\frac{6}{12}\) = 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

Question 9: Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2020.

Books of Prateek, Rockey and Kushal
Balance Sheet as on March 31, 2020

Liabilities		Amt (Rs.)	Assets	Amt (Rs.)
Sundry Creditors		16,000	Bills Receivable	16,000
General Reserve		16,000	Furniture	22,600
Capital Accounts:			Stock	20,400
Prateek	30,000		Sundry Debtors	22,000
Rockey	20,000		Cash at Bank	18,000
Kushal	20,000	70,000	Cash in Hand	3,000
		1,02,000		1,02,000

Rockey died on June 30, 2020. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

1. Amount standing to the credit of the Partner’s Capital account.
2. Interest on capital at 5% per annum.
3. Share of goodwill on the basis of twice the average of the past three years’ profit and
4. Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.

Profits for the year ending on March 31, 2018, March 31, 2019 and March 31, 2020 were Rs 12,000, Rs 16,000 and Rs 14,000 respectively. Profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up Rockey’s capital account to be rendered to his executor.

Answer 9:

Books of Prateek and KushalJournal
Date	Particulars			L.F.	Amount₹	Amount₹
2017
June 30	Interest on Capital A/c		Dr.		250
	Profit and Loss (Suspense) A/c		Dr.		1,000
	General Reserve A/c		Dr.		4,571
	To Rockey’s Capital A/c					5,821
	(Share of profit, interest on capital and share of GeneralReserve credited to Rockey’s Capital Account)
June 30	Prateek’s Capital A/c		Dr.		4,800
	Kushal’s Capital A/c		Dr.		3,200
	To Rockey’s Capital A/c					8,000
	(Rockey’s share of goodwill adjusted to Prateek’s andKushal’s Capital Account in their gaining ratio, 3:2)
June 30	Rockey’s Capital A/c		Dr.		33,821
	To Rockey Executor’s A/c					33,821
	(Balance of Rockey’s Capital Account transferred to hisExecutor’s Account)

Rockey’s Capital Account
Dr.					Cr.
Date	Particulars	J.F.	Amount₹	Date		Particulars	J.F.	Amount₹
2017				2017
April 1	Rockey’s Executor A/c		33,821	April 1		Balance b/d		20,000
						Interest on Capital		250
						Profit and Loss (Suspense) A/c		1,000
						General Reserve		4,571
						Prateek’s Capital		4,800
						Kushal’s Capital		3,200
			33,821					33,821

Working Notes:

(1) Rockey’s Share of Profit

= Previous year’s profit × Proportionate Period × Share of Deceased Partner

= 14,000 x 3/12 x 2/7 = Rs. 1,000. 

(2) Rockey’s Share of Goodwill

Goodwill of a firm = Average profit × Numbers of year’s Purchase

Average profit = 12,000+16,000+14,000/3 = 42,000/3 = Rs.14,000

Goodwill of a firm = 14,000 × 2 = Rs 28,000

Rockey’s Share = 28,000 x 2/7 = Rs. 8,000

(3) Gaining Ratio = New Ratio − Old Ratio

Prateek’s Share = 3/5 – 3/7 = 21-15/35 = 9/35

Kushal’s Share = 2/5 – 2/7 = 14-10/35 = 4/35

Gaining Ratio between Prateek and Kushal = 9:4 or 3:2

(4) Interest on Capital for 3 months i.e. from April 1, 2017 to June 30, 2017

Amount of × Rate of Interest × Period 

= 20,000 x 5/100 x 3/12 = Rs.250.

Question 10: Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2 , 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2015 was as follows:

Books of Suri, Narang and Bajaj
Balance Sheet as on April 1, 2015

Liabilities		Amt (Rs.)	Assets		Amt (Rs.)
Bills Payable		12,000	Freehold Premises		40,000
Sundry Creditors		18,000	Machinery		30,000
Reserves		12,000	Furniture		12,000
Capital Accounts:			Stock		22,000
Narang	30,000		Sundry Debtors	20,000
Suri	20,000		Less: Reserve	1,000	19,000
Bajaj	28,000	88,000	for Bad Debt
			Cash		7,000
		1,30,000			1,30,000

Bajaj retires from the business and the partners agree to the following:
a) Freehold premises and stock are to be appreciated by 20% and 15% respectively.
b) Machinery and furniture are to be depreciated by 10% and 7% respectively.
c) Bad Debts reserve is to be increased to Rs 1,500.
d) Goodwill is valued at Rs 21,000 on Bajaj’s retirement.
e) The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts.
Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.

Answer 10:

Revaluation Account
Dr.			Cr.
Particulars		Amount₹		Particulars	Amount₹
Machinery		3,000		Freehold Properties	8,000
Furniture		840		Stock	3,300
Reserve for Bad debts		500
Capitals:
Narang	3,480
Suri	1,160
Bajaj	2,320	6,960
		11,300			11,300

Partners’ Capital Account
Dr.					Cr.
Particulars	Narang	Suri	Bajaj	Particulars		Narang	Suri	Bajaj
Bajaj’s Capital A/c	5,250	1,750		Balance b/d		30,000	30,000	28,000
Bajaj’s Loan			41,320	Reserves		6,000	2,000	4,000
				Revaluation (Profit)		3,480	1,160	2,320
Balance c/d	34,230	31,410		Narang’s Capital A/c				5,250
				Suri’s Capital A/c				1,750
	39,480	33,160	41,320			39,480	33,160	41,320
Suri’s Current A/c		15,000		Balance b/d		34,230	31,410
				Narang’s Current A/c		15,000
Balance c/d	49,230	16,410
	49,230	31,410				49,230	31,410

Balance Sheet as on April 01, 2015
Liabilities		Amount₹	Assets			Amount₹
Bills Payable		12,000	Freehold Premises			48,000
Sundry Creditors		18,000	Machinery			27,000
Bajaj’s Loan		41,320	Furniture			11,160
Suri’s Current		15,000	Stock			25,300
Capital Account:			Sundry Debtors		20,000
Narang	49,230		Less: Reserve for Bad Debt		1,500	18,500
Suri	16,410	65,640	Cash			7,000
			Narang’s Current Account			15,000
		1,51,960				1,51,960

Working Notes:
1. Bajaj Share in Goodwill = Total Goodwill of the firm´Retiring Partner’s Share = 21,000 x 1/3 = Rs. 7,000.

2.Gaining Ratio = New Ratio – Old Ratio

Narang’s Gaining Share = 3/4 – 3/6 = 9-6/12 = 3/12

Suri’s Gaining Share = 1/4 – 1/6 = 3-2/12 = 1/12

Gaining Ratio between Narang and Suri = 3:1

3. Calculation of New Capitals of the existing partners.

Balance in Narang’s Capital	=	34,230
Balance in Suri’s Capital	=	31,410
Total Capital of the New firm after revaluation of assets and
liabilities and adjustment of  Goodwill and Reserves	=	Rs 65,640

Based on new profit sharing ratio of 3:1
Narang’s Capital = 65,640 x 3/4 = Rs. 49,230
Suri’s Capital = 65,640 x 1/4 = Rs. 16,410
NOTE:
i. In the given Question Suri’s Capital is Rs 30,000 instead of Rs 20,000.

ii. Due to insufficient balance in Bajaj’s Capital Account, the amount due to Bajaj is transferred to his Loan Account.

Question 11: The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015:
                      Books of Rajesh, Pramod and Nishant
                       Balance Sheet as on March 31, 2015

Liabilities		Amt (Rs.)	Assets		Amt(Rs.)
Bills Payable		6,250	Factory Building		12,000
Sundry Creditors		10,000	Debtors	10,500
Reserve Fund		2,750	Less: Reserve	500	10,000
Capital Accounts:			Bills Receivable		7,000
Rajesh	20,000		Stock		15,500
Pramod	15,000		Plant and Machinery		11,500
Nishant	15,000	50,000	Bank Balance		13,000
		69,000			69,000

Pramod retired on the date of Balance Sheet and the following adjustments were made:
a) Stock is to be reduced by 10%.
b) Factory buildings were appreciated by 12%.
c) Provision for doubtful debts be created up to 5%
d) Provision for legal charges to be made at Rs. 265.
e) The goodwill of the firm be fixed at Rs 10,000.
f) The capital of the new firm be fixed at Rs 30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.
Record journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.

Answer 11:

Journal
Date	Particulars			L.F.	Amount₹	Amount₹
2015
Mar. 31	Revaluation A/c		Dr.		1,840
	To Stock A/c					1,550
	To Reserve for Doubtful Debts A/c					25
	To Reserve for Legal Charges A/c					265
	(Assets and Liabilities are revalued)
Mar. 31	Factory Building A/c		Dr.		1,440
	To Revaluation A/c					1,440
	(Factory Building appreciated)
Mar. 31	Rajesh’s Capital A/c		Dr.		160
	Pramod’s Capital A/c		Dr.		120
	Nishant’s Capital A/c		Dr.		120
	To Revaluation A/c					400
	(Loss on Revaluation adjusted to Partners’ Capital Account)
Mar. 31	Rajesh’s Capital A/c		Dr.		2,000
	Nishant’s Capital A/c		Dr.		1,000
	To Pramod Capital’s A/c					3,000
	(Pramod’s share of goodwill adjusted to Rajesh’s and Nishant’s Capital Account in their gaining ratio)
Mar. 31	Reserve Fund A/c		Dr.		2,750
	To Rajesh’s Capital A/c					1,100
	To Pramod’s Capital A/c					825
	To Nishant’s Capital A/c					825
	(Reserve Fund distributed all the partners)
Mar. 31	Pramod’s Capital A/c		Dr.		18,705
	To Pramod’s Loan A/c					18,705
	(Pramod’s Capital was transferred to his Loan Account)
Mar. 31	Rajesh’s Capital A/c		Dr.		940
	Nishant’s Capital A/c		Dr.		2,705
	To Rajesh’s Current A/c					940
	To Nishant’s Current A/c					2,705
	(Excess in Capital Account is transferred to Current Account)

Parters’ Capital Account
Dr.				Cr.
Particulars	Rajesh	Pramod	Nishant		Particulars	Rajesh	Pramod	Nishant
Revaluation (Loss)	160	120	120		Balance b/d	20,000	15,000	15,000
Pramod’s Capital A/c	2,000		1,000		Reserve Fund	1,100	825	825
Pramod’s Loan A/c		18,705			Rajesh’s Capital A/c		2,000
Rajesh’s Current A/c	940				Nishant’s Capital A/c		1,000
Nishant’s Current A/c			2,705
Balance c/d	18,000		12,000
	21,100	18,825	15,825			21,100	18,825	15,825

Balance Sheet as on March 31, 2015
Liabilities		Amount₹	Assets		Amount₹
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Current Account:			Stock	15,500
Rajesh	940		Less: 10% Depreciation	(1,550)	13,950
Nishant	2,705	3,645
Capital Account:			Factory Building	12,000	13,440
Rajesh	18,000		Add: 12% Appreciation	1,440
Nishant	12,000	30,000	Bank Balance		13,000
		68,865			68,865

Working Notes:
1) Pramod’s share of goodwill
= Total goodwill of the firm × Retiring Partner’s Share
= 10,000 x 3/10 = Rs. 3,000

2) Gaining Ratio = New Ratio − Old Ratio

Rajesh’s Gaining Share = 3/5 – 4/10 = 6-4/10 = 2/10

Nishant Gaining Share = 2/5 – 3/10 = 4-3/10 = 1/10

Gaining Ratio between Rajesh and Nishant = 2:1

NOTE : In the above solution, in order to adjust the capital of remaining partners in the new firm according to their new profit sharing ratio, the surplus or the deficit of Capital Account is transferred to their Current Account. But, in order to match the answer with that of given in the book, the surplus or the deficit amount of the Partners’ Capital Account, will either be withdrawn or brought in by the old partners. This treatment will be shown in the Partners’ Capital itself and no need to transfer the surplus or deficit capital balance to their Current Accounts. The following Journal entry is passed to record the withdrawal of surplus capital by the partners.

If existing partners withdraw their excess capital,

Journal entry will be as follows:

Rajesh’s Capital A/c	Dr.	940
Nishant’s Capital A/c	Dr.	2,705
To Bank A/c			3,645
(Surplus Capital withdrawn)

Balance Sheet as on March 31, 2015
Liabilities		Amount₹	Assets		Amount₹
Bills Payable		6,250	Plant and Machinery		11,500
Sundry Creditors		10,000	Debtors	10,500
Reserve for Legal Charges		265	Less: Reserve	(525)	9,975
Pramod’s Loan		18,705	Bills Receivable		7,000
Capital:			Stock	15,500
Rajesh	18,000		Less: 10% Depreciation	(1,550)	13,950
Nishant	12,000	30,000
			Factory Building	12,000
			Add: 12% Appreciation	1,440	13,440
			Bank Balance		9,355
		65,220			65,220

Question 12: Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2020.
                         Books of Jain, Gupta and Malik
                    Balance Sheet as on March 31, 2016    

Liabilities		Amt (Rs.)	Assets	Amt (Rs.)
Sundry Creditors		19,800	Land and Building	26,000
Telephone Bills Outstanding		300	Bonds	14,370
Accounts Payable		8,950	Cash	5,500
Accumulated Profits		16,750	Bills Receivable	23,450
			Sundry Debtors	26,700
Capitals :			Stock	18,100
Jain	40,000		Office Furniture	18,250
Gupta	60,000		Plants and Machinery	20,230
Malik	20,000	1,20,000	Computers	13,200
		1,65,800		1,65,800

The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 1, 2020 and his share in the business is to be calculated as per the following terms of revaluation of assets and liabilities :
Stock, Rs.20,000; Office furniture, Rs.14,250; Plant and Machinery Rs.23,530; Land and Building Rs.20,000.
A provision of Rs.1,700 to be created for doubtful debts. The goodwill of the firm is valued at Rs.9,000.
The continuing partners agreed to pay Rs.16,500 as cash on retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The balance in the capital account of Malik will be treated as loan.
Prepare Revaluation account, capital accounts, and Balance Sheet of the
reconstituted firm.

Answer 12:

In the books of Jain and GuptaRevaluation Account
Dr.		Cr.
Particulars	Amount₹		Particulars		Amount₹
Office Furniture	4,000		Stock		1,900
Land and Building	6,000		Plant and Machinery		3,300
Provision for Doubtful Debts	1,700		Loss transferred to
			Jain’s Capital A/c	3,250
			Gupta’s Capital A/c	1,950
			Malik’s Capital A/c	1,300	6,500
	11,700				11,700

Partners’ Capital Account
Dr.				Cr.
Particulars	Jain	Gupta	Malik		Particulars	Jain	Gupta	Malik
Revaluation (Loss)	3,250	1,950	1,300		Balance b/d	40,000	60,000	20,000
Malik’s Capital	1,125	675			Accumulated Profits	8,375	5,025	3,350
Cash			16,500		Jain’s Capital A/c			1,125
Malik’s Loan			7,350		Gupta’s Capital A/c			675
Balance c/d	53,900	69,000			Cash	9,900	6,600
	58,275	71,625	25,150			58,275	71,625	25,150

Balance Sheet
Liabilities		Amount₹	Assets		Amount₹
Sundry Creditors		19,800	Stock (18,100 + 1,900)		20,000
Telephone Bills Outstanding		300	Bonds		14,370
Accounts Payable		8,950	Cash		5,500
Malik’s Loan		7,350	Bills Receivable		23,450
			Sundry Debtors	26,700
Partners’ Capital:			Less: Provision for Bad Debts	1,700	25,000
Jain	53,900		Land and Building (26,000 – 6,000)		20,000
Gupta	69,000	1,22,900	Office Furniture (18,250 – 4,000)		14,250
			Plant and Machinery (20,230 + 3,300)		23,530
			Computers		13,200
		1,59,300			1,59,300

Working Note:
1) Malik’s share of goodwill = Total Goodwill × Retiring Partner Share = 9,000 x 2/10 = Rs. 1,800

2) Gaining Ratio = New Ratio – Old Ratio
Jain’s Gaining Share = 5/8 – 5/10 = 50-40/80 = 10/80

Gupta Gaining Share = 3/8 – 3/10 = 30-24/80 = 6/80

Gaining Ratio between Jain and Gupta = 10:6 or 5:3

Question 13: Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2016 stood as follows:

Books of Arti, Bharti and Seema
Balance Sheet as on March 31, 2016

Liabilities		Amt (Rs.)	Assets	Amt (Rs.)
Bills Payable		12,000	Buildings	21,000
Creditors		14,000	Cash in Hand	12,000
General Reserve		12,000	Bank	13,700
Capitals:			Debtors	12,000
Arti                      20,000			Bills Receivable	4,300
Bharti	12,000		Stock	1,750
Seema	8,000	40,000	Investment	13,250
		78,000		78,000

Bharti died on June 12, 2020 and according to the deed of the said partnership, her executors are entitled to be paid as under:(a) The capital to her credit at the time of her death and interest thereon @ 10% per annum.
(b) Her proportionate share of reserve fund.
(c) Her share of profits for the intervening period will be based on the sales during that period, which were calculated as Rs 1,00,000. The rate of profit during past three years had been 10% on sales.
(d) Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous years were:
2017 – Rs 8,200
2018 – Rs 9,000
2019 – Rs 9,800
The investments were sold for Rs 16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

Answer 13:

Books of Arti and SeemaJournal
Date	Particulars			L.F.	Amount₹	Amount₹
2020
June 12	Interest on Capital A/c		Dr.		240
	General Reserve A/c		Dr.		4,000
	Profit and Loss (Suspense) A/c		Dr.		3,333
	To Bharti’s Capital A/c					7,573
	(Profit, interest and general reserve are credited toBharti’s Capital account)
June 12	Arti’s Capital A/c		Dr.		3,600
	Seema’s Capital A/c		Dr.		1,200
	To Bharti’s Capital A/c					4,800
	(Bharti’s share of goodwill adjusted to Arti’s andSeema’s Capital Account in their gaining ratio, 3:1)
June 12	Bharti’s Capital A/c		Dr.		24,373
	To Bharti’s Executor’s A/c					24,373
	(Bharti’s capital account is transferred to her executor’saccount)
June 12	Bank A/c		Dr.		16,200
	To Investment A/c					13,250
	To Profit on the Sale of Investment					2,950
	(Investment sold)
June 12	Bharti’s Executor A/c		Dr.		24,373
	To Bank A/c					24,373
	(Bharti Executor paid)

Bharti’s Capital Account
Dr.			Cr.
Date	Particulars	J.F.	Amount₹	Date	Particulars	J.F.	Amount₹
2020				2016
June 12	Bharti’s Executor’s A/c		24,373	Mar. 31	Balance b/d		12,000
				June 12	Interest on Capital		240
					Profit and Loss (Suspense)		3,333
					General Reserve		4,000
					Arti’s Capital A/c		3,600
					Seema’s Capital A/c		1,200
			24,373				24,373

Bharti’s Executor’s Account
Dr.				Cr.
Date	Particulars	J.F.	Amount₹		Date	Particulars	J.F.	Amount₹
2020					2016
June 12	Bank		24,373		June 12	Bharti’s Capital A/c		24,373
			24,373					24,373

Working Notes:
1. Bharti’s share of profit = Profit is 10% of sales
Sales during the last year for that period were Rs 1,00,000
If sales are Rs 1,00,000, then the profit is Rs 10,000

Bharti’s share = 10,000 x 2/6 = Rs. 3,333.

2. Bharti’s Share of Goodwill
Goodwill of the firm = Average Profit × Number of Years Purchase

Average Profit = Rs.8,200+9,000+9,800/3 = Rs.9,000
Or, 9,000 − 20% of 9,000 = 9,000 − 1,800 = Rs 7,200
Goodwill of the firm = 7,200 × 2 = Rs 14,400

3. Gaining Ratio = New Ratio − Old Ratio
Arti’s Gaining Share = 3/4 – 3/6 = 9-6/12 = 3/12

Seema’s Gaining Share = 1/4 – 1/6 = 3-2/12 = 1/12

Gaining ratio between Arti and Seema = 3:1

4. Interest on Capital for 73 days, i.e. from April 1, 2016 to June 12, 2016
Interest on capital = Amount of Capital × Ratio of Interest × Period 
= 12,000 x 10/100 x 73/365 = Rs. 240.

Question 14: Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2020 was as follows:

Books of Nithya, Sathya and Mithya
Balance Sheet at March 31, 2015

Liabilities		Amt (Rs.)	Assets	Amt (Rs.)
Creditors		14,000	Investments	10,000
Reserve Fund		6,000	Goodwill	5,000
Capitals:			Premises	20,000
Nithya	30,000		Patents	6,000
Sathya	30,000		Machinery	30,000
Mithya	20,000	80,000	Stock	13,000
			Debtors	8,000
			Bank	8,000
		1,00,000		1,00,000

Mithya dies on August 1, 2020. The agreement between the executors of Mithya and the partners stated that:
(a) Goodwill of the firm be valued at 2\(\frac{1}{2}\) times the average profits of last four years. The profits of four years were : in 2016-17, Rs 13,000; in 2017-18, Rs 12,000; in 2018-19, Rs 16,000; and in 2014-15, Rs 15,000.
(b) The patents are to be valued at Rs 8,000, Machinery at Rs 25,000 and Premises at Rs 25,000.
(c) The share of profit of Mithya should be calculated on the basis of the profit of 2019-20.
(d) Rs 4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.

Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also prepare the Balance Sheet of Nithya and Sathya as it would appear on August 1, 2020 after giving effect to the adjustments.

Answer 14:

Books of Nithya and SathyaJournal
Date	Particulars			L.F.	Amount₹	Amount₹
2020
Aug. 1	Nithya’s Capital A/c		Dr.		2,500
	Sathya’s Capital A/c		Dr.		1,500
	Mithya’s Capital A/c		Dr.		1,000
	To Goodwill A/c					5,000
	(Goodwill written off among all the partners)
Aug. 1	Patents A/c		Dr.		2,000
	Premises A/c		Dr.		5,000
	To Revaluation A/c					7,000
	(Increase in the value of patents and premises)
Aug. 1	Revaluation A/c		Dr.		5,000
	To Machinery A/c					5,000
	(Decrease in the value of machinery)
Aug. 1	Revaluation A/c		Dr.		2,000
	To Nithya’s Capital A/c					1,000
	To Sathya’s Capital A/c					600
	To Mithya’s Capital A/c					400
	(Profit on revaluation of liabilities and assets transferredto Partners’ Capital Account)
Aug. 1	Reserve Fund A/c		Dr.		6,000
	To Nithya’s Capital A/c					3,000
	To Sathya’s Capital A/c					1,800
	To Mithya’s Capital A/c					1,200
	(Reserve Fund transferred to Partners’ Capital Account)
Aug. 1	Nithya’s Capital A/c		Dr.		4,375
	Sathya’s Capital A/c		Dr.		2,625
	To Mithya’s Capital A/c					7,000
	(Mithya’s share of goodwill adjusted to Nithya’s andSathya’s Capital Account in their gaining ratio, 5:3)
Aug. 1	Profit and Loss A/c (Suspense)		Dr.		1,000
	To Mithya’s Capital A/c					1,000
	(Profit till the date of death credited to Mithya’s CapitalAccount)
Aug. 1	Mithya’s Capital A/c		Dr.		28,600
	To Mithya Executors A/c					28,600
	(Mithya’s Capital Account transferred to her executoraccount)
Aug. 1	Mithya Executor’s A/c		Dr.		4,200
	To Cash A/c					4,200
	(Cash paid to Mithya’s executor)

Mithya Executor’s Account
Dr.				Cr.
Date	Particulars	J.F.	Amount₹		Date	Particulars		J.F.	Amount₹
2020					2015
Aug. 12016	Bank		4,200		Aug. 12016	Mithya’s Capital A/c			28,600
Jan. 31	Bank (6,100 + 1220)		7,320		Jan. 31	Interest (24,400×10100×612)(24,400×10100×612)			1,220
Mar. 31	Balance c/d		18,605		Mar. 31	Interest (18,300×10100×212)(18,300×10100×212)			305
			30,125						30,125
2016					2016
July 312017	Bank (6,100 + 305 + 610)		7,015		April 01July 312017	Balance b/dInterest (18,300×10100×412)(18,300×10100×412)			18,605610
Jan. 31	Bank (6,100 + 610)		6,710		Jan. 31	Interest (12,200×10100×612)(12,200×10100×612)			610
Mar. 31	Balance c/d		6202		Mar. 31	Interest (6,100×10100×212)(6,100×10100×212)			102
			19,927						19,927
2017					2017
July 31	Bank (6,100 + 102 + 203)		6,405		April 01	Balance b/d			6,202
					July 31	Interest (6,100×10100×412)(6,100×10100×412)			203
			6,405						6,405

Balance SheetAs on August 31, 2015
Liabilities		Amount₹	Assets	Amount₹
Creditors		14,000	Investments	10,000
Mithya’s Executor’s Loan A/c		24,400	Premises	25,000
Partners’ Capital A/c			Machinery	25,000
Nithya	27,125		Stock	13,000
Sathya	28,275	55,400	Debtors	8,000
			Patents	8,000
			Bank (8,000 – 4,200)	3,800
			Profit and Loss (Suspense)	1,000
		93,800		93,800

Working Notes:

1.

Partners’ Capital Accounts
Dr.				Cr.
Particulars	Nithya	Sathya	Mithya	Particulars	Nithya	Sathya	Mithya
Goodwill	2,500	1,500	1,000	Balance b/d	30,000	30,000	20,000
Mithya’s Capital A/c	4,375	2,625		Revaluation A/c	1,000	600	400
Mithya’s Executor’s A/c			28,600	Reserve Fund	3,000	1,800	1,200
Balance c/d	27,125	28,275		Profit and Loss A/c (Suspense)			1,000
				Nithya’s Capital A/c			4,375
				Sathya’s Capital A/c			2,625
	34,000	32,400	29,600		34,000	32,400	29,600

2. Mithya’s Share of Profit:
Previous year’s profit × Proportionate Period × Share of Profit 
= 15,000 x 4/12 x 2/10 = Rs. 1,000

3. Mithya’s share of Goodwill
Goodwill of a firm = Average Profit × Number of Year’s Purchase
Average Profit = 13,000+12,000+16,000+15,000/4 = Rs. 14,000

Goodwill of the Firm = 14,000 x 2(\frac{1}{2}) = Rs. 35,000

Mithya’s Share of goodwill = 35,000 x 2/10 = Rs. 7,000.

4. Gaining Ratio = New Ratio – Old Ratio

Nithya’s Gaining share = 5/8 – 5/10 = 25-20/40 = 5/40

Sathya’s Gaining Share = 3/8 – 3/10 = 15-12/40 = 3/40

Gaining Ratio between Nithya and Sathya = 5:3