A, B, and C are partners and sharing profits 2/5 th and 1/5 th respectively. The
ID: 2435059 • Letter: A
Question
A, B, and C are partners and sharing profits 2/5th and 1/5th respectively. The balance sheet on 31st December, 2008, is as follows:-
Liabilities
Rs
Assets
Rs
Creditors
29000
Cash at Bank
4000
Capital-A
30000
Debtors
30000
Capital-B
20000
Stock
45000
Capital-C
20000
Plant & Fixtures
20000
Total
99000
Total
99000
“C” dies on 1st September, 2009 and the deed provides that the estate of the deceased shall be entitled to a share of the profits up to the date of death based on the profits of the previous year, together with a share in repect of goodwill to be calculated on the basis of two years purchase of the average net profits of the previous three years. The net profits for the years 2006, 2007 and 2008 were Rs20,000, Rs22000 and Rs18000 respectively. Six percent interest was agreed to be credited on the capital of each partner. C has withdrawn Rs1500 from the date of the last balance sheet to the date of his death. The whole amount due to the deceased as at 1st September, 2009 was to be temporarily credited to his loan account opened in the name of the Executors. Show detail working and the amount to be credited.
Liabilities
Rs
Assets
Rs
Creditors
29000
Cash at Bank
4000
Capital-A
30000
Debtors
30000
Capital-B
20000
Stock
45000
Capital-C
20000
Plant & Fixtures
20000
Total
99000
Total
99000
Explanation / Answer
(a) Goodwill of the firm Profit for 2006 $20,000 Profit for 2007 $22,000 Profit for 2008 $18,000 Total $60,000 Average profit $20,000 (60,000 ÷ 3) Firm’s goodwill Two years purchase =20,000 x 2 = $40,000 C’s share (1/5th) = $8,000 (b) Profit share for the year 2009 Profit for 2008 $18,000 Profit for 8 months (up to 1st September 2009) = (18,000 ÷ 12) x 8 = $12,000 C’s share (1/5th) = $2,400 (c) Interest on capital Capital Balance as on 1st Jan 2009 = $20,000 Interest @ 6% per annum for 8 months = $800 (d) Calculation amount due to the deceased Capital Balance as on 1st January 2009 $20,000 Add: Share of Goodwill $ 8,000 Profit share up to date of death $ 2,400 Interest on capital $ 800 Total $31,200 Less: Amount withdrawn $1,500 Net Amount due to be credited $29,700 ======