Question

Shah, Patel, Bhide were partners in a business sharing profits and losses in the ratio of 2 : 1 : I respectively. Their Balance sheet as on 31st March 2022 was as follows:

Balance Sheet as on 31-03-2022
Liabilities	Amount (₹)	Assets	Amount (₹)
Capital A/c:		Plant & Machinery	84,000
Shah	84,000	Debtors	70,000
Patel	98,000	Furniture	42,000
Bhide	47,600	Bank	84,000
Creditors	25,200
Bills Payable	2,800
General Reserve	22,400
	2,80,000		2,80,000

Bhide died on 1st July, 2022: 

(1) Plant and Machinery was to be revalued to ₹ 98,000 and R.D.D. is to be created of ₹ 2,800.

(2) The drawings of Bhide up to the date of his death amounted to ₹ 14,000.

(3) Charge interest on drawings ₹ 1,400.

(4) His share of goodwill should be calculated at three year purchase of the profits for the last four years which were I year ₹ 2,30,000, II year ₹ 1,82,000, III year ₹ 98,000, IV ₹ 70,000.

(5) The deceased partner's share of profit up to the date of death to be calculated on the basis of average profit of last two years (III & IV year).

Prepare: Profit and Loss Adjustment Account, Partner's Capital Accounts, Balance Sheet of the continuing firm. Give working note of profit up to the date of death of Bhide and Goodwill.

Answer 1

Dr.	In the Books of Partnership firm Profit and Loss Adjustment Account				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To R.D.D. A/c		2,800	By Plant & Machinery A/c		14,000
To Profit (Transfer to Partners Capital A/c)
Shah	5,600	11,200
Patel	2,800
Bhide	2,800
		14,000			14,000

 

Dr.	Partner's Capital Accounts						Cr.
Particulars	Shah	Patel	Bhide	Particulars	Shah	Patel	Bhide
To Drawing			14,000	By Balance b	84,000	98,000	47,600
To Interest on Drawing			1,400	By General Reserve	11,200	5,600	5,600
To Bhide’s Executors Loan A/c			1,50,850	By Profit and Loss Adjustment A/c (Profit)	5,600	2,800	2,800
To Balance c/d	1,00,800	1,06,400		By Goodwill A/c			1,05,000
				By Profit and Loss Suspense A/c			5,250
	1,00,800	1,06,400	1,66,250		1,00,800	1,06,400	1,66,250

 

Balance Sheet as on 1st July, 2022
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)	Amount (₹)
Creditors		25,200	Plant and Machinery	84,000
Bills payable		2,800	Add: Appreciation	14,000	98,000
Capital Accounts:			Debtors	70,000
Shah		1,00,800	Less: R.D.D	2,800	67,200
Patel		1,06,400	Furniture		42,000
Bhide’s Executors Loan A/c		1,50,850	Bank		70,000
			Profit and Loss Suspense A/c (5,250 – 1,400 Int. on drawing)		3,850
			Goodwill		1,05,000
		3,86,050			3,86,050

Working Notes :

(1) Calculation of Share of Profit

Profit of current year = Average of the profit of last 2 year

`= (98,000 + 70,000)/2 = (1,68,000)/2 =  ₹ 84000`

Profit for proportionate period from 1st April, 2022 to 1st July, 2022 = `84,000 xx 3/12 =  ₹ 21,000`

Bhide’s share in proportionate profit = `21,000 xx 1/4 = ₹ 5250` (Profit and loss suspense A/c)

(2) Valuation of Goodwill

Total profit of 4 years = 2,10,000 + 1,82,000 + 98,000 + 70,000 = ₹ 5,60,000

Average profit = `(5,60,000)/4` = ₹ 1,40,000

Goodwill = Average profit × No. of years purchases = 1,40,000 × 3

Bhide’s share in Goodwill = `4,20,000 xx 1/4 = ₹ 1,05,000.`