Question

X, Y, and Z carried on business in partnership, sharing profits in the ratio 3:2:1. The balance sheet on 31^st December, 2003 showed their capitals to be Rs. 8,400; Rs. 6,800 and Rs. 7,400. On 31^st March, 2004 X died. Write journal entries and prepare an account for presentation to his legal representatives having regard to the following facts:

1. Capital earned interest at 5 percent per annum. 

2. X’s drawings from 1st January, 2004 to the date of his death amounted to Rs. 800; interest on drawings for the period Rs. 45. 

3. X’s share of profit for the portion of current financial year for which he lived was to be taken a sum calculated on the average of the last three completed years. 

4. Goodwill was to be raised on the basis of two year’s purchase of average profits of those three years.

The annual profits for the three years were Rs. 4,800; Rs. 3,500 and Rs. 4,300

Answer 1

Journal:

Notes 

1. Share of profit to date of death: 

Average profit for past 3 years

\(\frac{4,800+3,500+4,300}{2}\) = Rs. 4,200

∴ X’s share (\(\frac{3}{6}\)) for 3 months 3 = 4,200 × \(\frac{3}{6}\) × = RS. 525 12.

2. Calculation of goodwill: 

Average profit for past 3 years = Rs. 4,200 2 years purchase = Rs. 4,200× 2 = Rs. 8,400

X’s share (\(\frac{3}{6}\)) of goodwill = Rs. 8,400 × \(\frac{3}{6}\) = Rs. 4,200.