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Numerical Questions · Q9
Q.

Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2020

LiabilitiesAmount (₹)AssetsAmount (₹)
Sundry Creditors16,000Bills Receivable16,000
General Reserve16,000Furniture22,600
Capital Accounts:Stock20,400
Prateek30,000Sundry Debtors22,000
Rockey20,000Cash at Bank18,000
Kushal20,000Cash in Hand3,000
Total1,02,000Total1,02,000

Rockey died on June 30, 2020. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

  1. Amount standing to the credit of the Partner's Capital account.
  2. Interest on capital at 5% per annum.
  3. Share of goodwill on the basis of twice the average of the past three years' profit.
  4. Share of profit from the closing date of the last financial year to the date of death on the basis of last year's profit. Profits for the years ending March 31, 2018, March 31, 2019 and March 31, 2020 were ₹12,000, ₹16,000 and ₹14,000 respectively. Profits were shared in the ratio of capitals. Pass the necessary journal entries and draw up Rockey's capital account to be rendered to his executor.
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Rockey's executor is entitled to ₹33,821 = capital ₹20,000 + interest on capital ₹250 + share of General Reserve ₹4,571 + share of goodwill ₹8,000 + share of profit to date of death ₹1,000. The question prescribes no revaluation of assets or liabilities.

Profit-sharing ratio = capital ratio = 30,000 : 20,000 : 20,000 = 3 : 2 : 2, so Rockey's share is 2/7.

Working notes

  • Interest on capital (1 Apr – 30 Jun, 3 months): 20,000 × 5% × 3/12 = ₹250.
  • General Reserve ₹16,000 in 3:2:2 → Prateek ₹6,857, Rockey ₹4,571, Kushal ₹4,572.
  • Goodwill: average profit = (12,000 + 16,000 + 14,000)/3 = ₹14,000; firm's goodwill = 2 × 14,000 = ₹28,000; Rockey's share = 28,000 × 2/7 = ₹8,000, borne by Prateek and Kushal in their gaining ratio 3:2 → Prateek ₹4,800, Kushal ₹3,200.
  • Profit to date of death: 14,000 × 3/12 × 2/7 = ₹1,000 (through P&L Suspense A/c).

Journal Entries

ParticularsDebit (₹)Credit (₹)
Interest on Capital A/c Dr.250
To Rockey's Capital A/c250
(Interest on capital @ 5% p.a. for 3 months)
General Reserve A/c Dr.16,000
To Prateek's Capital A/c6,857
To Rockey's Capital A/c4,571
To Kushal's Capital A/c4,572
(Reserve distributed in old ratio 3:2:2)
Prateek's Capital A/c Dr.4,800
Kushal's Capital A/c Dr.3,200
To Rockey's Capital A/c8,000
(Rockey's share of goodwill charged to gaining partners in 3:2)
Profit & Loss Suspense A/c Dr.1,000
To Rockey's Capital A/c1,000
(Rockey's share of profit to date of death)
Rockey's Capital A/c Dr.33,821

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