Question

The Balance Sheet of X, Y and Z as at 31st March, 2018 was:
The profit-sharing ratio was 3 : 2 : 1. Z died on 31st July, 2018. The Partnership Deed provides that:
(a) Goodwill is to be calculated on the basis of three years purchase of the five years average profit. The profits were : 2017-18: ₹ 24,000; 2016-15: ₹ 20,000; 2014-15: ₹ 10,000 and 2013-14: ₹ 5,000.
(b) The deceased partner to be given share of profits till the date of death on the basis of profits for the previous year.
(c) The Assets have been revalued as: Stock – ₹ 10,000; Debtors – ₹ 15,000; Furniture – ₹ 1,500; Plant and Machinery – ₹ 5,000; Building – ₹ 35,000. A Bill Receivable for ₹ 600 was found worthless.
(d) A Sum of ₹ 12,233 was paid immediately to Z’s Executors and the balance to be paid in two equal annual installments together with interest @ 10% p.a. on the amount outstanding.
Give journal entries and show the Z’s Executors Account till it is finally settled.

Answer 1

Explanation:

1. Calculation of Goodwill

Goodwill = $= Average Profit \times Number of Year's Purchase$

∴ $Goodwill = Average Profit \times No. of Years Purchase$

$=15,000 \times 3=\mathrm{Rs} .45,000$

Average Profit = $\frac{24,000+16,000+20,000+10,000+5,000}{5}=\frac{75,000}{5}=15,000$

2. Adjustment of Goodwill

$\mathrm{X}: \mathrm{Y}: \mathrm{Z}=3: 2: 1 (Old Ratio)$

Z died.

Gaining Ratio $(\mathrm{X} \text { and } \mathrm{Y})=3: 2$

$Z^{\prime} \text { 's Goodwill }=45,000 \times \frac{1}{6} = R s7,500$

Z's share of goodwill is to be distributed between X and Y in their 3 : 2 (Gaining ratio)

$X^{\prime} s=7,500 \times \frac{3}{5} = 4,500$

$Y^{\prime} s=7,500 \times \frac{2}{5} = 3,000$

3. Calculation of Z's Share of Profit

Profit for past year = Rs 24, 000.

$Z^{\prime} \text { s Profit }=24,000 \times \frac{1}{6} \times \frac{4}{12}=1,333$