Question

Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2015 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, 2015. The agreement between the executors of Mithya and the partners stated that:
(a) Goodwill of the firm be valued at `2 1/2` times the average profits of last four years. The profits of four years were : in 2011-12, Rs 13,000; in 2012-13, Rs 12,000; in 2013-14, 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 2014-15.
(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, 2015 after giving effect to the adjustments.

Answer 1

 Books of Nithya and Sathya
Journal Entries

Date	Particulars		L.F.	Amt (Rs.)	Amt (Rs.)
2015 Aug. 1	Nithya’s Capital A/c Sathya’s Capital A/c Mithya’s Capital A/c     To Goodwill A/c (Goodwill written off among all the partners)	Dr. Dr. Dr.		2,500 1,500 1,000	5,000
Aug. 1	Patents A/c Premises A/c     To Revaluation A/c (Increase in the value of patents and premises)	Dr. Dr.		2,000 5,000	7,000
Aug. 1	Revaluation A/c     To Machinery A/c (Decrease in the value of machinery)	Dr.		5,000	5,000
Aug. 1	Revaluation A/c   To Nithya’s Capital A/c   To Sathya’s Capital A/c   To Mithya’s Capital A/c (Profit on revaluation of assets and liabilities transferred to Partners’ Capital Account)	Dr		2,000	1,000 600 400
Aug. 1	Reserve Fund A/c        To Nithya’s Capital A/c   To Sathya’s Capital A/c   To Mithya’s Capital A/c (Reserve Fund transferred to Partners’ Capital Account)	Dr		6,000	3,000 1,800 1,200
Aug. 1	Nithya’s Capital A/c Sathya’s Capital A/c   To Mithya’s Capital A/c (Mithya’s share of goodwill adjusted to Nithya’s and Sathya’s Capital Account in their gaining ratio, 5:3)	Dr Dr		4,375 2,625	7,000
Aug. 1	Profit and Loss A/c (Suspense)   To Mithya’s Capital A/c (Profit till date of death credited to Mithya’s Capital Account)	Dr		1,000	1,000
Aug. 1	Mithya’s Capital A/c   To Mithya Executors A/c (Mithya’s Capital Account transferred to her executor account)	Dr		28,600	28,600
Aug. 1	Mithya Executor’s A/c      To Cash A/c (Cash paid to Mithya's executor)	Dr		4,200	4,200

                              Mithya Executor’s Account
Dr.                                                                                             Cr.

Date	Particulars	J.F.	Amount Rs		Date	Particulars		J.F.	Amount Rs
2015 Aug. 1 2016	Bank		4,200		2015 Aug. 1 2016	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 July 31 2017	Bank (6,100 + 305 + 610)		7,015		2016 April 01 July 31 2017	Balance b/d Interest  (18,300×10100×412) (18,300×10100×412)			18,605 610
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 July 31	Bank (6,100 + 102 + 203)		6,405		2017 April 01	Balance b/d			6,202
					July 31	Interest  (6,100×10100×412) (6,100×10100×412)			203
			6,405						6,405

Balance Sheet
As on August 31, 2015

Liabilities		Amount Rs	Assets	Amount Rs
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 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