On December 31, 2015, the Balance Sheet of Pinki, Qureshi and Rakesh showed as under: [Balance Sheet Data Provided] The partnership deed provides that the profit be shared in the ratio of 2:1:1 and that in the event of death of a partner, his executors be entitled to be paid out: (a) The capital of his credit at the date of last Balance Sheet. (b) His proportion of reserves at the date of last Balance Sheet. (c) His proportion of profits to the date of death based on the average profits of the last three completed years, plus 10%, and (d) By way of goodwill, his proportion of the total profits for the three preceding years. The net profit for the last three years were: (Rs.) 2013 16,000 2014 16,000 2015 15,400 Rakesh died on April 1, 2015. He had withdrawn Rs.5,000 to the date of his death. The investment were sold at par and R’s Executors were paid off. Prepare Rakesh’s Capital Account that of his executors.
Working Notes:
1. Calculation of Share of General Reserve: Total Reserve = Rs. 20,000 Rakesh’s Share = 20,/4 = Rs. 5,000
2. Calculation of Share of Goodwill: Total Profits for three preceding years = 16,000 + 16,000 + 15,400 = Rs. 47,400 Rakesh’s Share = 47,/4 = Rs. 11,850
3. Calculation of Share of Profit to Date of Death: Average Profit = (16,000 + 16,000 + 15,400) / 3 = Rs. 15,800 Profit Basis = Average Profit + 10% = 15,800 + 1,580 = Rs. 17,380 Time Period (Jan 1 to April 1) = 3 months Rakesh’s Share = 17,//12 = Rs. 1,086.25
Dr. Rakesh’s Capital Account
| Date | Particulars | Amount (Rs.) | Date | Particulars | Amount (Rs.) |
|---|---|---|---|---|---|
| 2015 | 2015 | ||||
| Apr 01 | Drawings | 5,000 | Jan 01 | Balance b/d | 10,000 |
| Apr 01 | Balance c/d (transferred to Executors) | 22,936.25 | Apr 01 | General Reserve | 5,000 |
| Apr 01 | Goodwill | 11,850 | |||
| Apr 01 | Profit & Loss Suspense | 1,086.25 | |||
| Total | 27,936.25 | Total | 27,936.25 |
Dr. Rakesh’s Executor’s Account
| Date | Particulars | Amount (Rs.) | Date | Particulars | Amount (Rs.) |
|---|---|---|---|---|---|
| 2015 | 2015 | ||||
| Apr 01 | Bank | 22,936.25 | Apr 01 | Rakesh’s Capital A/c | 22,936.25 |
| Total | 22,936.25 | Total | 22,936.25 |
Explanation
The solution calculates the amount due to Rakesh's executors based on the partnership deed provisions. The share of reserve and goodwill are credited to his capital account. The profit share is calculated based on the average profits of the last three years plus a 10% increase, proportioned for the 3 months until his death (Jan 1 to April 1). The final amount due is transferred to his Executor's Account and paid off via bank, assuming the investments sold at par facilitated the payment.
Solution Steps
Step 1: Calculate Rakesh's share of General Reserve (1/4th of Rs. 20,000).
Step 2: Calculate Rakesh's share of Goodwill (1/4th of the total profits of the three preceding years: Rs. 47,400).
Step 3: Calculate Rakesh's share of Profit to the date of death. First, find the average profit of the last three years (Rs. 15,800), add 10% (Rs. 1,580) to get Rs. 17,380. Then, calculate his share for 3 months (Rs. 17,380 * 1/4 * 3/12).
Step 4: Prepare Rakesh's Capital Account by crediting his opening balance, reserve share, goodwill share, and profit share, and debiting his drawings.
Step 5: Prepare Rakesh's Executor's Account showing the payment made to settle the account.