Question

Virad, Vishad and Roma were partners in a firm sharing profits in the ratio of 5 : 3 : 2 respectively. On 31st March, 2103, their Balance Sheet was as under:
Virad died on 1st October, 2013. It was agreed between his executors and the remaining partners that:
(i) Goodwill of the firm be valued at 2 years purchase of average profits for the last three years. The average profits were ₹ 1,50,000.
(ii) Interest on capital be provided at 10% p.a.
(iii) Profits for the 2013-14 be taken as having accrued at the same rate as that of the previous year which was ₹ 1,50,000.
Prepare Virad’s Capital Account to be presented to his Executors as on 1st October, 2013.

Answer 1

Explanation:

Working Notes:

Calculation of Gaining Ratio of Vishad and Roma:

Old Ratio (Virad, Vishad and Roma) = 5: 3 : 2

New Ratio (Vishad and Roma) = 3: 2

Gaining Ratio = New Ratio - Old Ratio

$\begin{aligned}&\text { Vishad's }=\frac{3}{5}-\frac{3}{10}=\frac{6-3}{10}=\frac{3}{10}\\\end{aligned}$

$&\text { Roma's }=\frac{2}{5}-\frac{2}{10}=\frac{4-2}{10}=\frac{2}{10}$

Gaining Ratio (Vishad and Roma) = 3: 2

1. Calculation of Virad's Share of Goodwill:

Goodwill = $Average profit \times Number of Years Purchase$

$=1,50,000 \times 2 \frac{1}{2}=3,75,000$

Goodwill Virad's = $=3,75,000 \times \frac{5}{10}= 1,87,500$

Virads share of goodwill is to be distributed between Ushad and Roma in their = 3: 2 (Gaining Ratio)

Vishad = $=1,87,500 \times \frac{3}{5}=1,12,500$

Roma = $=1,87,500 \times \frac{2}{5} = 75,500$

2. Calculation of Profit share of Virad:

Profit for the year = $Rs. 1,50,000$

Virad's Profit = $1,50,000 \times \frac{5}{10} \times \frac{6}{12}=37,500$

3. Calculation of Interest on Virad's Capital:

Virad's Capital =3,00,000

4. Virad's share Reserve fund:

Reserve Fund = $=60,000 \times \frac{5}{10}=30,000$