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The following is the Balance Sheet of Shikha, Divit, and Naman, who were partners sharing profits and losses in the ratio of 2 : 2 : 1.

Balance Sheet as of 31st March 2020

Naman died on 1st July 2020 and the following adjustments were made in the books of the firm:

1. All debtors were considered as good and the Reserve for Doubtful Debts was no longer necessary.

2. A contingent liability for compensation of ₹ 1,800 was to be provided.

3. Investments worth ₹ 40,000 were taken over by the executor of Naman and the remaining investments were sold for ₹ 30,000.

4. Stock was revalued at ₹ 30,000.

5. The goodwill of the firm was valued at ₹ 20,000 and was to be shown in the books.

6. The deceased partner’s share in profit up to the date of his death was to be calculated on the basis of the preceding year’s profit which was ₹ 16,000.

Prepare the Profit and Loss Adjustment Account, Capital Accounts of Partners, and the Balance Sheet of the new firm after the death of Naman.

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In the books of Partnership Firm

Profit and Loss Adjustment Account

Partner's Current Accounts

Balance Sheet as of 1st July 2020

Working Notes:

1. Goodwill valued at ₹ 20,000 is debited to Goodwill A/c and credited to all Partners’ Capital A/cs in their profit sharing ratio. Show balance in the Goodwill A/c then transfers to the Assets side of the Balance Sheet.

2. The deceased partner’s (Naman) share in profit up to the date of his death = (Preceding year’s profit) × (Proportionate profit) × Naman’s share in profit

= 16,000 × \(\frac{3}{12}\times\frac{1}{5}\)

= ₹ 800.

3. A provision for contingent liability for compensation ₹ 1,800 is debited to Profit and Loss-Adjustment A/c and then shown at the Liabilities side of the Balance Sheet.

4. The following ledger accounts are prepared to ascertain their closing balances:

Investments A/c

Cash A/c

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