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Question 76 Chapter 6 of +2-A
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76. R, S and T were partners sharing profits and losses in the ratio of 5 : 3 : 2 respectively. On 31st March, 2018, their Balance Sheet stood as:
| Liabilities | Amount | Assets | Amount | |
| Sundry Creditors | 40,000 | Goodwill | 25,000 | |
| Bills Payable | 15,000 | Leasehold | 1,00,000 | |
| Workmen Compensation Reserve | 30,000 | Patents | 30,000 | |
| Capital A/cs: | Machinery | 1,50,000 | ||
| R | 1,50,000 | Stock | 50,000 | |
| S | 1,25,000 | Debtors | 40,000 | |
| T | 75,000 | 3,50,000 | Cash at Bank | 40,000 |
| 4,35,000 | 4,35,000 |
T died on 1st August 2018. It was agreed that:
a Goodwill be valued at 212 years’ purchase of average of last 4 years’ profits which were: 2014-15: 65,000; 2015-16: 60,000; 2016-17: 80,000 and 2017-18: 75,000.
b Machinery be valued at 1,40,000; Patents be valued at 40,000; Leasehold be valued at 1,25,000 on 1st August, 2018.
c For the purpose of calculating T’s share in the profits of 2018-19, the profits in 2018-19 should be taken to have accrued on the same scale as in 2017-18.
d A sum of 21,000 to be paid immediately to the Executors of T and the balance to be paid in four equal half-yearly instalments together with interest @ 10% p.a.
Pass necessary Journal entries to record the above transactions and T’s Executors’ Account.
The solution of Question 76 Chapter 6 of +2-A: –
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| Date | Particulars | L.F. | Debit | Credit | |
| Revaluation A/c | Dr. | 75,000 | |||
| To Machinery A/c | 75,000 | ||||
| (Being Decrease in value of Machinery transferred to Revaluation Account) | |||||
| Patents A/c | Dr. | 10,000 | |||
| Leasehold A/c | Dr. | 25,000 | |||
| To Revaluation A/c | 35,000 | ||||
| (Being Increase in value Patents and Leasehold transferred to Revaluation Account) | |||||
| Revaluation A/c | Dr. | 25,000 | |||
| To R’s Capital A/c | 12,500 | ||||
| To S’s Capital A/c | 7,500 | ||||
| To T’s Capital A/c | 5,000 | ||||
| (Being Revaluation profit distributed among partners in their old ratio) | |||||
| R’ Capital A/c | Dr. | 12,500 | |||
| S’s Capital A/c | Dr, | 7,500 | |||
| T’s Capital A/c | Dr. | 5,000 | |||
| To Goodwill A/c | 25,000 | ||||
| (Being Goodwill written off among partners in their old ratio) | |||||
| R’s Capital A/c | Dr. | 21,875 | |||
| S’s Capital A/c | Dr. | 13,125 | |||
| To T’s Capital A/c | 35,000 | ||||
| (Being T’s share of goodwill adjusted) | |||||
| Profit and Loss Suspense A/c | Dr. | 5,000 | |||
| To T’s Capital A/c | 5,000 | ||||
| (Being T’s share of profit transferred to his capital account) | |||||
| Workmen’s Compensation Reserve A/c | Dr. | 30,000 | |||
| To R’s Capital A/c | 15,000 | ||||
| To S’s Capital A/c | 9,000 | ||||
| To T’s Capital A/c | 6,000 | ||||
| (Being Workmen’s Compensation Reserve distributed among partners in their old ratio) | |||||
| T’s Capital A/c | Dr. | 1,21,000 | |||
| To T’s Executors A/c | 1,21,000 | ||||
| (Being Amount due to T after all adjustments transferred to his Executor’s Account) | |||||
| T’s Executor’s A/c | Dr. | 21,000 | |||
| To Bank A/c | 21,000 | ||||
| (Being Amount due to T after all adjustments transferred to his Executor’s Account) | |||||
| T’s Executor’s Account | ||||||
| Date | Particular | Amount | Date | Particular | Amount | |
| 2018 | ||||||
| Aug. 01 | To Cash A/c | 21,000 | Aug. 01 | By T’s Capital A/c | 1,21,000 | |
| 2019 | ||||||
| Jan. 31 | To Cash A/c 25,000 + 5,000 | 30,000 | Aug. 01 | By Interest 1,00,000 ×10% for 6 months | 5,000 | |
| Mar. 31 | To Balance c/d | 76,250 | Mar. 31 | By Interest 75,000 ×10% for 2 months | 1,250 | |
| 1,27,250 | 1,27,250 | |||||
| 2019 | ||||||
| Aug. 01 | To Cash A/c 25,000 + 1,250 + 2,500 | 28,750 | Aug. 01 | By Balance b/d | 76,250 | |
| 2020 | ||||||
| Jan. 31 | To Cash A/c 25,000 + 2,500 | 27,500 | Aug. 01 | By Interest 75,000 × 10% for 4 months | 2,500 | |
| Mar. 31 | To Balance c/d | 25,417 | Mar. 31 | By Interest 50,000 × 10% for 6 months | 2,500 | |
| Mar. 31 | By Interest 25,000 × 10% for 2 months | 417 | ||||
| 81,667 | 81,667 | |||||
| 2020 | ||||||
| Aug. 01 | To Cash A/c 25,000 + 417 + 833 | 26,250 | Aug. 01 | By Balance b/d | 25,417 | |
| Aug. 01 | By Interest 25,000 × 10% for 4 months | 833 | ||||
| 26,250 | 26,250 | |||||
Working Notes:
Calculation of Goodwill
Goodwill = Average Profit × Number of Year’s Purchase
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| Average Profit | = | 65,000 +60,000 +80,000 + 75,000 |
| 4 | ||
| = | Rs 70,000 |
∴ Goodwill = Average Profit × Number of Years’ Purchase
= 70,000 × 2.5 = Rs 1,75,000
Adjustment of Goodwill
Old Ratio R, S and T = 5 : 3: 2
T died.
∴ New Ratio R and S = 5 : 3
Gaining Ratio = 5 : 3
| T’s Share in Goodwill | = | 1,75,000 | X | 2 |
| 10 | ||||
| = | Rs 35,000 |
This share of goodwill is to be distributed between R and S in their gaining ratio i.e. 5 : 3.
| R’s Share in Goodwill | = | 35,000 | X | 5 |
| 8 | ||||
| = | Rs 21,875 |
| S’s Share in Goodwill | = | 35,000 | X | 3 |
| 8 | ||||
| = | Rs 13,125 |
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Calculation of T’s Share of Profit
Profit for 2017-18 = Rs 75,000
| T’s Share of Profit for 2018-19 | = | 75,000 | X | 2 | X | 4 |
| 10 | 12 | |||||
| = | Rs 5,000 |
| Revaluation Account | ||||
| Particular | Amount | Particular | Amount | |
| To Machinery | 10,000 | By Patents | 10,000 | |
| Profit transferred to: | By Leasehold | 25,000 | ||
| R’s Capital A/c | 12,500 | |||
| S’s Capital A/c | 7,500 | |||
| T’s Capital A/c | 5,000 | |||
| 81,350 | 81,350 | |||
| T’s Capital Account | ||||
| Particular | Amount | Particular | Amount | |
| To Executor’s A/c | 1,21,000 | By Balance b/d | 75,000 | |
| To Goodwill A/c | 5,000 | By Workmen’s Compensation Reserve | 6,000 | |
| By Profit and Loss Suspense A/c | 5,000 | |||
| By R’s Capital A/c | 21,875 | |||
| By S’s Capital A/c | 13,125 | |||
| By Revaluation A/c Profit | 5,000 | |||
| 1,26,000 | 1,26,000 | |||
T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)
- Chapter No. 1 – Financial Statement of Not-For-Profit Organisations
- Chapter No. 2 – Accounting for Partnership Firms – Fundamentals
- Chapter No. 3 – Goodwill: Nature and Valuation
- Chapter No. 4 – Change in Profit-Sharing Ratio Among the Existing Partners
- Chapter No. 5 – Admission of a Partner
- Chapter No. 6 – Retirement/Death of a Partner
- Chapter No. 7 – Dissolution of a Partnership Firm
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 8 – Company Accounts – Accounting for Share Capital
- Chapter No. 9 – Company Accounts – Issue of Debentures
- Chapter No. 10 – Redemption of Debentures
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 1 – Financial Statements of a Company
- Chapter No. 2 – Financial Statement Analysis
- Chapter No. 3 – Tools of Financial Statement Analysis – Comparative Statements and Common- Size Statements
- Chapter No. 4 – Accounting Ratios
- Chapter No. 5 – Cash Flow Statement
Check out T.S. Grewal +2 Book 2020@ Official Website of Sultan Chand Publication
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