Q.8. Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on March 31, 2017 was as follows:
Books of Puneet, Pankaj and Pammy
Balance Sheet as on March 31, 2017
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
| Sundry Creditors | 1,00,000 | Cash at Bank | 20,000 |
| Capital Accounts: | Stock | 30,000 | |
| Puneet 60,000 | Sundry Debtors | 80,000 | |
| Pankaj 1,00,000 | Investments | 70,000 | |
| Pammy 40,000 | 2,00,000 | Furniture | 35,000 |
| Reserve | 50,000 | Buildings | 1,15,000 |
| 3,50,000 | 3,50,000 |
Mr. Pammy died on September 30, 2017. The partnership deed provided the following:
(i) The deceased partner will be entitled to his share of profit up to the date of death calculated on the basis of previous year’s profit.
(ii) He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchase of average of last 4 years’ profit. The profits for the last four financial years are given below: for 2013–14; Rs 80,000; for 2014–15, Rs 50,000; for 2015–16, Rs 40,000; for 2016–17, Rs 30,000.
The drawings of the deceased partner up to the date of death amounted to Rs 10,000. Interest on capital is to be allowed at 12% per annum. Surviving partners agreed that Rs 15,400 should be paid to the executors immediately and the balance in four equal yearly instalments with interest at 12% p.a. on outstanding balance.
Show Mr. Pammy’s Capital account, his Executor’s account till the settlement of the amount due.
Mr. Pammy’s Capital account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| To Drawings | 10,000 | By balance b/d | 40,000 |
| To Executor’s A/c | 75,400 | By Reserve | 10,000 |
| By Interest on Capital | 2,400 | ||
| By Pankaj’s Capital A/c | 15,000 | ||
| By Puneet’s Capital A/c | 15,000 | ||
| By Profit and loss A/c | 3,000 | ||
| 85,400 | 85,400 | ||
Pammy’s Executor Account
| Date | Particulars | J.F. | Amount (Rs.) | Date | Particulars | J.F. | Amount (Rs.) |
| 2017-18 Sep. 30 | Bank | 15,400 | 2017-18 Sep. 30 | Pammy’s Capital A/c | 75,400 | ||
| Mar. 31 | Balance c/d | 63,600 | Mar. 31 | Interest | 3,600 | ||
| 79,000 | 79,000 | ||||||
| 2018-19 Sep. 30 | Bank (15,000+3,600+3,600) | 22,200 | April 01 | Balance b/d | 63,600 | ||
| Sep. 30 | Interest | 3,600 | |||||
| Mar. 31 | Balance c/d | 47,700 | Mar. 31 | Interest | 2,700 | ||
| 69,900 | 69,900 | ||||||
| 2019-20 Sep. 30 | Bank | 20,400 | 2019-20 April 01 | Balance b/d | 47,700 | ||
| Mar. 31 | Balance c/d | 31,800 | Sep. 30 | Interest | 2,700 | ||
| Mar. 31 | Interest | 1,800 | |||||
| 52,200 | 52,200 | ||||||
| 2020-21 Sep. 30 | Bank (15,000+1,800+1,800) | 18,600 | 2020-21 April 01 | Balance b/d | 31,800 | ||
| Sep. 30 | Interest | 1,800 | |||||
| Mar. 31 | Balance c/d | 15,900 | Mar. 31 | Interest | 900 | ||
| 34,500 | 34,500 | ||||||
| 2021-22 Sep. 30 | Bank (15,000+900+900) | 16,800 | 2021-22 April 01 | Balance b/d | 15,900 | ||
| Sep. 30 | Interest | 900 | |||||
| 16,800 | 16,800 |
Working Notes:
1) Pammy’s Share of Profit
= Previous Year’s Profit x Proportionate Period x Share of Deceased Partner
= 30,000 x 6/12 x 1/5
= Rs. 3,000
2) Pammy’s Share of Goodwill
Goodwill of the firm = Average Profit x Numbers of Year’s Purchase
Average Profit = 80,000+50,000+40,000+30,0004
=2,00,000/4
=Rs.50,000
Goodwill of the firm = 50,000 x 3
= Rs 1,50,000
Pammy’s Share = 1,50,000 x 1/5
= Rs. 30,000.
3) Gaining Ratio = New Ratio – Old Ratio
Puneet’s Share = 2/4-2/5
=2/20
Pankaj’s Share = 2/4-2/5
=2/20
Gaining Ratio between Puneet and Pankaj = 2 : 2 or 1 : 1
4) Interest on Capital for 6 months, i.e. from April 1, 2007 to September 30, 2007
Amount of Capital x Rate of Interest x Period
= 40,000 x 12100 x 612 = Rs. 2,400.
5) Interest Amount
The firm closes its books every year on March 31, while installments to Pammy’s Executor are paid on September 30 every year.
Amount outstanding on 30 September = 75,400 – 15,400 = Rs 60,000
Calculation of Interest
| Periods | Amount Outstanding | Yearly Interest |
| 2017-18 | 60,000 | 60,000 x 12/100 = 7,200 |
| 2018-19 | 45,000 | 45,000 x 12/100 = 5,400 |
| 2019-20 | 30,000 | 30,000 x 12/100 = 3,600 |
| 2020-21 | 15,000 | 15,000 x 12/100 = 1,800 |