Question

Akhil, Nikhil and Sunil were partners sharing profits and losses equally. Following was their Balance Sheet as at 31st March, 2018:
Sunil died on 1st August, 2018. The Partnership Deed provided that the executor of a deceased partner was entitled to:
(a) Balance of Partners Capital Account and his share of accumulated reserve.
(b) Share of profits from the closure of the last accounting year till the date of death on the basis of the profit of the preceding completed year before death.
(c) Share of goodwill calculated on the basis of three times the average profit of the last four years.
(d) Interest on deceased partner’s capital @ 6% p.a.
(e) ₹ 50,000 to be paid to deceased executor immediately and the balance to remain in his Loan Account.
Profits and Losses for the preceding years were: 2014-15: ₹ 80,000 Profit ; 2015-16: ₹ 1,00,000 Loss; 2016-17: ₹ 1,20,000 Profit; 2017-18: ₹ 1,80,000 Profit.
Pass necessary journal entries and prepare Sunil’s Capital Account and Sunil’s Executor Account.

Answer 1

Explanation:

Working Notes:

1. Calculation of Sunil's Share of Profit

Profit for year (2017-18) =  $Rs 1,80,000$

$\text { Sunil's Profit }(2017-18) = 1,80,000 \times \frac{1}{3} \times \frac{4}{12}= 20,000$

2. Calculation of Goodwill Goodwill

$Goodwill = Average Profit \times No.of Year's Purchase \\Goodwill = Average Profit \times No. of Years Purchase$

Average Profit = $=\frac{80,000-1,00,000+1,20,000+1,80,000}{4}=\frac{2,80,000}{4}=70,000$

$70,000 \times 3 = Rs 21,000$

3. Adjustment of Goodwill

Alkil's: Nikhil's : Sunil's = 1 : 1 : 1  (Old Ratio)

Sunil died

Gaining Ratio (Akhil's and Nikhil's) = 1 : 1

Sunil's Goodwill = $=2,10,000 \times \frac{1}{3}=210,000$

Sunil's share of goodwill is to be distributed between Akhil and Nikhil in their = 1 : 1 (Gaining Ratio)

$\begin{aligned}&\text { Akhil's }=70,000 \times \frac{1}{2}=35,000\\\end{aligned}$

$&\text { Nikhil's }-70,000 \times \frac{1}{2}-35,000$

4. Calculation of Interest on Sunil's Capital

Sunil's Capital = Rs 80,000

$\text { Interest on Capital }=80,000 \times \frac{6}{100} \times \frac{4}{12}=1,600$