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Illustrations · Illustration 19
Q.

You are given the Balance Sheet of Mohit, Sohan and Rahul, who are partners sharing profits in the ratio of 2 : 2 : 1, as on March 31, 2017:

LiabilitiesAmount (₹)AssetsAmount (₹)
General Reserve25,000Goodwill30,000
Capitals:Fixed assets60,000
Mohit30,000Stock10,000
Sohan25,000Sundry Debtors20,000
Rahul15,000Cash at bank15,000
Creditors40,000
Total1,35,000Total1,35,000

Sohan died on June 15, 2017. According to the Deed, his legal representatives are entitled to:

  1. Balance in Capital Account;
  2. Share of goodwill valued on the basis of thrice the average of the past 4 years' profits;
  3. Share in profits up to the date of death on the basis of average profits for the past 4 years;
  4. Interest on capital account @ 12% p.a.;
  5. The new profit sharing ratio of the firm will be 3 : 2 among Mohit and Rahul, who take over Sohan's share equally. Profits for the years ending March 31 of 2014, 2015, 2016 and 2017 were ₹15,000, ₹17,000, ₹19,000 and ₹13,000 respectively. Work out the amount payable to Sohan's legal representatives.
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After writing off the existing ₹30,000 goodwill (2 : 2 : 1), Sohan's ₹25,000 capital is credited with his reserve share (₹10,000), new-goodwill share (₹19,200, borne equally by Mohit and Rahul), intervening profit (₹1,333) and interest on capital (₹625), and debited with his ₹12,000 goodwill write-off — leaving ₹44,158 payable to his legal representatives.

Working Notes

1. Goodwill: average profit = (15,000 + 17,000 + 19,000 + 13,000) / 4 = ₹16,000; firm's goodwill = 3 × ₹16,000 = ₹48,000; Sohan's share = 2/5 × ₹48,000 = ₹19,200. Mohit and Rahul take Sohan's share equally, so their gaining ratio is 1 : 1 and each bears ₹9,600.

2. Existing goodwill ₹30,000 is written off in the old ratio 2 : 2 : 1: Mohit ₹12,000, Sohan ₹12,000, Rahul ₹6,000.

3. General Reserve: Sohan's share = 2/5 × ₹25,000 = ₹10,000.

4. Intervening profit (Apr 1 – Jun 15, 2½ months): ₹16,000 × 2.5/12 = ₹3,333; Sohan's share = 2/5 × ₹3,333 = ₹1,333 (via P&L Suspense).

5. Interest on capital: ₹25,000 × 12% × 2.5/12 = ₹625.

Sohan's Capital Account …

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