Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2 : 2 : 1 respectively. Their balance sheet as on March 31, 2019 was as follows: [Balance Sheet Data Provided] Mr. Pammy died on September 30, 2019. The partnership deed provided the following: (i) The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year’s profit. (ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of average of last 4 years’ profit. The profits for the last four financial years are given below: for 2015–16; Rs. 80,000; for 2016–17, Rs. 50,000; for 2017–18, Rs. 40,000; for 2018–19, Rs. 30,000. The drawings of the deceased partner up to the date of death amounted to Rs. 10,000. Interest on capital is to be allowed at 12% per annum. Surviving partners agreed that Rs. 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance. Show Mr. Pammy’s Capital account, his Executor’s account till the settlement of the amount due.
Working Notes:
1. Calculation of Interest on Capital: Interest is calculated for 6 months (April 1, 2019 to September 30, 2019). Interest = Capital × Rate × Time = Rs. 40,% × (6/12) = Rs. 2,400
2. Calculation of Share of Profit: Profit is calculated on the basis of previous year's profit (2018-19 = Rs. 30,000) for 6 months. Profit for 6 months = Rs. 30,000 × (6/12) = Rs. 15,000 Pammy’s Share = Rs. 15,000 × (1/5) = Rs. 3,000
3. Calculation of Share of Goodwill: Average Profit = (80,000 + 50,000 + 40,000 + 30,000) / 4 = Rs. 50,000 Goodwill = Average Profit × 3 Years Purchase = Rs. 50, = Rs. 1,50,000 Pammy’s Share = Rs. 1,50,000 × (1/5) = Rs. 30,000
4. Calculation of Share of Reserve: Pammy’s Share = Rs. 50,000 × (1/5) = Rs. 10,000
Dr. Pammy’s Capital Account Cr.
| Date | Particulars | Amount (Rs.) | Date | Particulars | Amount (Rs.) |
|---|---|---|---|---|---|
| 2019 | 2019 | ||||
| Sep 30 | Drawings | 10,000 | Apr 1 | Balance b/d | 40,000 |
| Sep 30 | Executor’s A/c (Balancing Figure) | 75,400 | Sep 30 | Interest on Capital | 2,400 |
| Sep 30 | Profit & Loss Suspense A/c (Profit) | 3,000 | |||
| Sep 30 | Goodwill A/c | 30,000 | |||
| Sep 30 | Reserve A/c | 10,000 | |||
| Total | 85,400 | Total | 85,400 |
Dr. Pammy’s Executor’s Account Cr.
| Date | Particulars | Amount (Rs.) | Date | Particulars | Amount (Rs.) |
|---|---|---|---|---|---|
| 2019 | 2019 | ||||
| Sep 30 | Bank (Immediate Payment) | 15,400 | Sep 30 | Pammy’s Capital A/c | 75,400 |
| 2020 | 2020 | ||||
| Sep 30 | Bank (Installment + Interest) | 22,200 | Sep 30 | Interest (60,%) | 7,200 |
| 2021 | |||||
| 2021 | Sep 30 | Interest (45,%) | 5,400 | ||
| Sep 30 | Bank (Installment + Interest) | 20,400 | |||
| 2022 | 2022 | ||||
| Sep 30 | Bank (Installment + Interest) | 18,600 | Sep 30 | Interest (30,%) | 3,600 |
| 2023 | 2023 | ||||
| Sep 30 | Bank (Installment + Interest) | 16,800 | Sep 30 | Interest (15,%) | 1,800 |
| Total | 93,400 | Total | 93,400 |
Note: Balance due (75,400 - 15,400) = 60,000 is paid in 4 equal installments of Rs. 15,000 each.
Explanation
The solution calculates the amount due to the deceased partner, Pammy, by considering his capital balance, share of reserves, interest on capital, share of profits, and share of goodwill. The drawings are deducted from this total. The resulting amount due is transferred to the Executor's Account. The Executor's Account is then prepared showing the immediate payment and the subsequent annual payments including interest on the outstanding balance.
Solution Steps
Step 1: Calculate Interest on Capital for 6 months (Rs. 40,000 * 12% * 6/12) = Rs. 2,400.
Step 2: Calculate Share of Profit based on previous year's profit (Rs. 30,000 * 1/2 year * 1/5 share) = Rs. 3,000.
Step 3: Calculate Share of Goodwill based on 3 years' purchase of average profits of last 4 years. Average Profit = Rs. 50,000. Goodwill = Rs. 1,50,000. Pammy's Share = Rs. 30,000.
Step 4: Calculate Share of Reserve (Rs. 50,000 * 1/5) = Rs. 10,000.
Step 5: Prepare Pammy's Capital Account to find the total amount due (Credit side total - Drawings). Total Credit = 40,000 + 10,000 + 2,400 + 3,000 + 30,000 = 85,400. Amount Due = 85,400 - 10,000 = Rs. 75,400.
Step 6: Prepare Executor's Account. Immediate payment = Rs. 15,400. Balance = Rs. 60,000 paid in 4 installments of Rs. 15,000 each with 12% interest on the outstanding balance.