death of a partner topic test
this one of the questions from the topic test, it says goodwill is to be calculated on the basis of 5 years but figures for only 4 years are given and when calculated on the basis of 4 years [ assuming its a typo] the solution is inconsistent,,, pls help!! heres the question
Ram, Sita, and Lakshman are partners in a firm that is engaged in the business of making bottles. Before the lockdown, their business was promising, and they didn't need to worry about raw materials as they had long-term contracts with suppliers to get them at cheaper rates. However, after the lockdown, the cost of raw materials rose as well and labour was not available even at a high wage rate. On 30th June, 2024, Sita died.
They were sharing profits and losses in the ratio of 7:8:5. Balance sheet of the firm as at 31st March 2024 was as follows :
| Liabilites | ₹ | Assets | ₹ |
|---|---|---|---|
| Investment Fluctuation Fund | 60,000 | Builiding | 1,30,000 |
| Creditors | 80,000 | Machinery | 1,50,000 |
| Bills payable | 50,000 | Motor vehicles | 90,000 |
| General Reserve | 60,000 | Furniture | 45,000 |
| Capital : |
Ram: 2,40,000
Sita: 2,10,000
Lakshman: 1,80,000 | 6,30,000 | Debtors | 1,20,000 | | | | Stock | 60,000 | | | | Investment | 1,80,000 | | | | Bills Recivable | 30,000 | | | | Bank | 15,000 | | | | Profit and Loss A/c | 60,000 | | | | | | | | 8,80,000 | | 8,80,000 |
According to the partnership deed, in addition to the deceased partner's captial, the executors are entitled to the following:
(i) Goodwill is to be valued at 3 years' purchase of the average profit of the last five years ended 31st March, which were:
2020 = ₹40,000
2021 = ₹60,000
2022 = ₹80,000
2023 = ₹90,000
(ii) Sita's share of goodwill be adjusted against the Capital Accounts of continuing partners Ram and Lakshman who have decided to share future profits in the ratio of 3:2.
(iii) Stock was found undervalued by 20%; Motor Vehicles were revalued at 80% and Furniture at ₹35,000.
(iv) Market Value of Investment is ₹1,60,000.
(v) Sita's share of profit or loss up to the date of death on the basis of average profit of the last four years.
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Comments (6)
Ram: 2,40,000
Sita: 2,10,000
Lakshman: 1,80,000 | 6,30,000 | Debtors | 1,20,000 | | | | Stock | 60,000 | | | | Investment | 1,80,000 | | | | Bills Recivable | 30,000 | | | | Bank | 15,000 | | | | Profit and Loss A/c | 60,000 | | | | | | | | 8,80,000 | | 8,80,000 | What's this part? Also, I cannot see the profit or loss mentioned in the balance sheet as well, so there must be some error, if I take 2020 to 2023 sita's share of profit, 6750 is coming, which should be adjusted in gaining ratio of other two partners
In short, average profit hi nahi aa rha hai toh baki ka solution bhi samajh nhi aa rha hai, because how is it 1,70,000/4 in the first place. It's 2,70,000 divided by 4
exactlyy
and 2024 ka toh profit and loss vaise bhi nahi ho sakta hai abhi calculate, so last five years ke concept ke hisab se 2019 ka profit bhi hona chahiye tha
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Hey see that the profits of past 4 year upto 2023 is given but the death occured on 30th june 2024 which means profit of 2024 is missing but when we look at the balance sheet, the asset side comprises Profit and loss account ( accumulated loss ) so we need to take that into account as well
so total profit( past 5 year) becomes = 270000-60000=210000
goodwill = 210000*3/5=126000
and In addition if you read properly the problem asks to calculate Sita's share on the basis of past 4 years profit and not 5
so total profit ( past 4 years) = 230000-60000 = 170000 ( precisely what is shown in the solution )
oh yes! I was confused about that balance sheet part if it was actually in the question or not. And yes, it's 4 years profit, didn't pay enough attention.