Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2020 stood as follows: [Balance Sheet Data Provided] Bharti died on June 12, 2020 and according to the deed of the said partnership, her executors are entitled to be paid as under: (a) The capital to her credit at the time of her death and interest thereon @ 10% per annum. (b) Her proportionate share of reserve fund. (c) Her share of profits for the intervening period will be based on the sales during that period, which were calculated as Rs.1,00,000. The rate of profit during past three years had been 10% on sales. (d) Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous years were: 2017 – Rs.8,200 2018 – Rs.9,000 2019 – Rs.9,800 The investments were sold for Rs.16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.
(Bharti's Executors Account) Bharti's Executors Account shows a credit balance of Rs. 24,373 (or Rs. 25,356 including profit on investment).
(Journal Entries) Interest on Capital A/c Dr. 240 To Bharti's Capital A/c 240 (Being interest on capital paid @ 10% p.a. for 73 days),General Reserve A/c Dr. 4,000 To Bharti's Capital A/c 4,000 (Being Bharti's share of reserve transferred),Profit and Loss Suspense A/c Dr. 3,333 To Bharti's Capital A/c 3,333 (Being Bharti's share of profit for intervening period),Arti's Capital A/c Dr. 3,600 Seema's Capital A/c Dr. 1,200 To Bharti's Capital A/c 4,800 (Being Bharti's share of goodwill adjusted in gaining ratio 3:1),Bharti's Capital A/c Dr. 12,000 To Bharti's Executors A/c 12,000 (Being Bharti's capital transferred to executors account)
Explanation
The solution involves calculating Bharti's share based on the partnership deed. Interest on capital is calculated for 73 days (April 1 to June 12). The share of profit is based on sales of Rs. 1,00,000 with a 10% profit rate. Goodwill is calculated as twice the average profit less 20%. The gaining ratio for goodwill adjustment is 3:1 (Arti:Seema) as they continue in the original ratio 3:1. The investment sale profit is distributed among all partners.
Solution Steps
Step 1: Calculate Interest on Capital. Time period = April 1 to June 12 = 73 days. Interest = 12,000 * 10/100 * 73/365 = Rs. 240.
Step 2: Calculate Share of General Reserve. Reserve = Rs. 12,000. Bharti's Share = 12,000 * 2/6 = Rs. 4,000.
Step 3: Calculate Share of Profit. Sales = Rs. 1,00,000. Profit Rate = 10%. Profit = 1,00,000 * 10% = Rs. 10,000. Bharti's Share = 10,000 * 2/6 = Rs. 3,333.
Step 4: Calculate Share of Goodwill. Average Profit = (8,200+9,000+9,800)/3 = Rs. 9,000. Goodwill = 2 * Average Profit - 20% = 18,000 - 3,600 = Rs. 14,400. Bharti's Share = 14,400 * 2/6 = Rs. 4,800. Gaining Ratio (Arti:Seema) = 3:1.
Step 5: Calculate Profit on Sale of Investments. Sale Value = 16,200. Book Value = 13,250. Profit = 2,950. Bharti's Share = 2,950 * 2/6 = Rs. 983 (approx).
Step 6: Prepare Bharti's Capital Account. Credit side: Capital (12,000), Interest (240), Reserve (4,000), Profit (3,333), Goodwill (4,800), Investment Profit (983). Total = 25,356. (Note: If investment profit is not considered, Total = 24,373).