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Q. [tex]$A, B,$[/tex] and [tex]$C$[/tex] were partners in a firm sharing profits in the ratio of [tex]$5:3:2$[/tex]. The Balance Sheet as at 31.3.2023 was as follows:

[tex]\[
\begin{array}{|c|c|c|}
\hline
\text{Liabilities} & \text{₹} & \text{Assets} \\
\hline
\text{Creditors} & 12,000 & \text{Building} \\
\hline
\text{Reserves} & 6,000 & \text{Plant and Machinery} \\
\hline
\text{A's Capital} & 24,000 & \text{Stock} \\
\hline
\text{B's Capital} & 12,000 & \text{Debtors} \\
\hline
\text{C's Capital} & 8,000 & \text{Cash at Bank} \\
\hline
& & \text{Advertisement Suspense} \\
\hline
& 62,000 & \\
\hline
\end{array}
\][/tex]

[tex]$A$[/tex] died on 30.9.2023, and [tex]$B$[/tex] and [tex]$C$[/tex] decided to share future profits in the ratio [tex]$7:3$[/tex]. Under the partnership agreement, the executors of a deceased partner are entitled to:

(a) Amount standing to the credit of the partner's capital account.
(b) Interest on capital at [tex]$12\%$[/tex] per annum.
(c) Share of goodwill on the basis of four years' purchase of the last three years' average profit.
(d) Share of profit from the closing of the last financial year to the date of death on the basis of last year's profit.

Profits for the years 2021, 2022, and 2023 were ₹ 8,000, ₹ 12,000, and ₹ 7,000 respectively.

Prepare [tex]$A$[/tex]'s Capital account to be rendered to his executors.

[Ans. Amount due to [tex]$A$[/tex]'s Executors: ₹ 44,190]



Answer :

GinnyAnswer
To prepare A's Capital account and determine the amount due to A’s executors, let’s list and compute the necessary components as per the partnership agreement:

1. Amount standing to the credit of A's capital account:
[tex]\[ \text{A's Capital} = \text{₹} 24,000 \][/tex]

2. Interest on capital from April 1 to September 30 (6 months):
[tex]\[ \text{Interest per annum} =12\% \][/tex]
[tex]\[ \text{Interest for 6 months} =\text{₹} 24,000 \times 12\% \times \frac{6}{12} = \text{₹} 1,440 \][/tex]

3. Share of goodwill:
- Average profit of last three years:
[tex]\[ \text{Profits: ₹}8,000, \text{₹}12,000, \text{₹}7,000 \][/tex]
[tex]\[ \text{Average Profit} = \frac{8,000 + 12,000 + 7,000}{3} = \text{₹} 9,000 \][/tex]
- Goodwill (4 years' purchase of average profit):
[tex]\[ \text{Goodwill} = 9,000 \times 4 = \text{₹} 36,000 \][/tex]
- A’s share of the goodwill:
[tex]\[ \text{A's Share} = 36,000 \times \frac{5}{10} = \text{₹} 18,000 \][/tex]

4. Share of profit from April 1 to September 30 (6 months) based on last year's profit:
- Last year’s profit (2023):
[tex]\[ \text{₹} 7,000 \][/tex]
- A’s share of last year's profit:
[tex]\[ \text{A's Share} = 7,000 \times \frac{5}{10} = \text{₹} 3,500 \][/tex]
- Share of profit for 6 months:
[tex]\[ \text{Profit for 6 months} = 3,500 \times \frac{6}{12} = \text{₹} 1,750 \][/tex]

Now, let's sum these components to find the total amount due to A's executors:

[tex]\[ \text{Total Due} = \text{A's Capital} + \text{Interest} + \text{A's Share of Goodwill} + \text{A's Share of Profit} \][/tex]
[tex]\[ \text{Total Due} = 24,000 + 1,440 + 18,000 + 1,750 = \text{₹} 45,190 \][/tex]

Therefore, the amount due to A's executors is ₹ 45,190.

To present this in A's Capital account format:

A's Capital Account

[tex]\[ \begin{array}{|c|c|} \hline \text{Dr.} & \text{Cr.} \\ \hline \text{Details} & \text{₹} \\ \hline \text{Interest on Capital} & 1,440 \\ \text{Profit } & 1,750 \\ \text{Goodwill} & 18,000 \\ \text{To Balance c/d (Executor)} & 45,190 \\ \hline \text{By Balance b/d} & 24,000 \\ \hline \end{array} \][/tex]

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