reconstitution of a partnership firm retirement/death of a partner pdf

class 12 accountancy chapter retirement or death of a partner ncert solutions

class 12 accountancy chapter retirement or death of a partner ncert

On the retirement or death of a partner, the existing partnership deed comes to an end, and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions.

Ascertainment of new profit sharing ratio and gaining ratio;
Treatment of goodwill;
Revaluation of assets and liabilities;
Adjustment in respect of unrecorded assets and liabilities;
Distribution of accumulated profits and losses;
Ascertainment of share of profit or loss up to the date of retirement/death;
Adjustment of capital, if required;
Settlement of the amounts due to retired/deceased partner;

New Profit Sharing Ratio – New profit sharing ratio is the ratio in which the remaining partners will share future profits after the retirement or death of any partner. The new share of each of the remaining partner will consist of his own share in the firm plus the share acquired from the retiring/decreased partner.

Gaining Ratio – The ratio in which the continuing partners have acquired the share from the retiring/deceased partner is called the gaining ratio. Normally, the continuing partners acquire the share of retiring/deceased partner in their old profit sharing ratio. In that case, the gaining ratio of the remaining partners will be the same as their old profit.

Gaining share of Continuing Partner = New share – Old share

Treatment of Goodwill – The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/death because the goodwill has been earned by the firm with the efforts of all the existing partners. Hence, at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners the retiring /deceased partner compensated for his share of goodwill by the continuing partners (who have gained due to acquisition of share of profit from the retiring/ deceased partner) in their gaining ratio.

Hidden Goodwill – If the firm has agreed to settle the retiring or deceased partner’s account by paying him a lump sum amount, then the amount paid to him in excess of what is due to him, based on the balance in his capital account after making necessary adjustments in respect of accumulated profits and losses and revaluation of assets and liabilities, etc., shall be treated as his share of goodwill.

Adjustment for Revaluation of Assets and Liabilities – At the time of retirement or death of a partner there may be some assets which may not have been shown at their current values. Similarly, there may be certain liabilities which have been shown at a value different from the obligation to be met by the firm.

Adjustment of Accumulated Profits and Losses – Sometimes, the Balance Sheet of a firm may show accumulated profits in the form of general reserve on reserve find and/on accumulated losses in the form of profit and loss account debit balance. The retiring/deceased partner is entitled to his/her share in the accumulated profits and is also liable to share the accumulated losses, if any.

Disposal of Amount Due to Retiring Partner – The outgoing partner’s account is settled as per the terms of partnership deed i.e., in lumpsum immediately or in various instalments with or without interest as agreed or partly in cash immediately and partly in instalment at the agreed intervals. In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his/her money.

Death of a Partner – As stated earlier, the accounting treatment in the event of death of a partner is similar to that in case of retirement of a partner, and that in case of death of a partner his claim is transferred to his executors and settled in the same manner as that of the retired partner. However, there is one major difference that, while the retirement normally takes place at the end of an accounting period, the death of a partner may occur any time.

Short Answer questions

What are the different ways in which a partner can retire from the firm?

Ans. A partner may retire from the firm in any of the following ways:

With the consent of all the other partners.
In accordance with an express agreement among the partners.
In the case of a partnership at will, by giving notice in writing to all the other partners of his intention to retire.

2. Write the various matters that need adjustments at the time of retirement of a partner.

Ans. The following matters need adjustment at the time of retirement of a partner:

Determination of new profit-sharing ratio and gaining ratio.
Treatment of goodwill.
Revaluation of assets and reassessment of liabilities.
Adjustment of accumulated profits, reserves and losses.
Adjustment of capital accounts of partners.
Settlement of the amount due to the retiring partner.

3. Distinguish between Sacrificing Ratio and Gaining tab.

Ans.

4. Why do firm revaluate assets and reassers their liabilities on retirement or on the event of death of a partners.

Ans. At the time of retirement of death of a partner, assets are revalued and liabilities are reassessed so that the profit or loss arising from such revaluation may be shared by all partners, including the retiring or deceased partner, in their old profit-sharing ratio.

5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm.

Ans. A retiring or deceased partner is entitled to his share of goodwill because goodwill has been built up by the efforts of all the partners and the retiring or deceased partner has contributed towards its creation. Since the continuing partners will enjoy the future benefits of goodwill, the retiring or deceased partner must be compensated for his share.

Long Answer Questions

1. Explain the modes of payment to a retiring partner.

Ans. The amount due to a retiring partner is paid in the following ways:

(i) Payment in Lump Sum – The entire amount due to the retiring partner may be paid immediately in cash.

(ii) Transfer to Loan Account – If the firm is unable to pay the entire amount immediately, the amount due is transferred to the Retiring Partner’s Loan Account. The loan is repaid later according to the agreement among the partners. Interest is paid on such loan if agreed upon.

(iii) Partly in Cash and Partly as Loan – A portion of the amount due may be paid immediately and the balance may be transferred to the Retiring Partner’s Loan Account. Thus, payment to a retiring partner may be made either in cash, through a loan account, or partly by both methods.

2. How will you compute the amount payable to a deceased partner?

Ans. The amount payable to a deceased partner is calculated after making all adjustments

up to the date of death. The following items are credited to the Deceased Partner’s

Capital Account:

1. Balance of Capital Account.

2. Share of goodwill.

3. Share of accumulated profits and reserves.

4. Share in revaluation profit.

5. Interest on capital, if any.

6. Salary or commission due.

7. Share of profit up to the date of death.

The following items are debited:

1. Drawings.

2. Interest on drawings.

3. Share in revaluation loss.

4. Share of accumulated losses.

The balance of the Capital Account represents the amount payable to the legal

representative of the deceased partner.

3. Explain the treatment of goodwill at the time of retirement or on the event of death of a partner.

Ans. At the time of retirement or death of a partner, the retiring or deceased partner is entitled to his share of goodwill. The share of goodwill is calculated as:

Retiring/Deceased Partner’s Share of Goodwill = Goodwill of the Firm × Partner’s Share of Profit

The continuing partners compensate the retiring or deceased partner for his share of goodwill in their gaining ratio.

Journal Entry:

Continuing Partners’ Capital A/cs Dr.

To Retiring/Deceased Partner’s Capital A/c

(Being retiring/deceased partner’s share of goodwill adjusted through capital accounts

of gaining partners.)

4. Discuss the various methods of computing the share in profits in the event of death of a partner.

Ans. The share of profit of the deceased partner from the beginning of the accounting year till the date of death can be calculated by the following methods:

(i) On the Basis of Time – Under this method, profit is estimated on the basis of the profit earned during the previous accounting period.

Formula:

Share of Profit of Deceased Partner = Previous Year’s Profit × Time Ratio × Profit-sharing Ratio of Deceased Partner

(ii) On the Basis of Turnover or Sales – Under this method, profit is estimated on the basis of sales made from the beginning of

the year till the date of death.

Formula:

Estimated Profit = Sales up to Date of Death × Rate of Profit

The deceased partner’s share is then calculated according to his profit-sharing ratio. These methods help in determining the share of profit due to the deceased partner up to the date of death.

Numerical Questions

Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs.1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Record necessary journal entires.

Solution:-

Old Ratio of Aparna, Manisha and Sonia 3:2:1.

Manisha retires

New ratio of Aparna & Sonia = 3:2

Aparna gain = 3/5 – 3/6

= 18 -15 /30

= 3/30

Sonia gain = 2/5 – 1/6

= 12 – 5 / 30

= 7/30

Gaining ratio of Aparna & Sonia in 3:7

Calculation of share of goodwill

Goodwill of the firm = Rs.1,80,000

Manisha share in goodwill = 180,000 x 2/6

= 60,000

Aparna will sacrifice = 60,000 x 3/10

= 18000

Sonia will sacrifice = 60,000 x 7/10

= 42000

General Entry of goodwill

2. Sangeeta, saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of Rs.60,000. Sangeeta retires and goodwill is valued at Rs.90,000. Saroj and Shanti decided to share future profits equally. Record necessary journal entries.

Solution:-

Journal

Working Notes:-

Old ratio of Sangeeta, Saroj & shanti in 2:3:5

Sangeeta retires for 2/10

Gaining ratio of saroj & shanti = 3:5

Calculation of Goodwill appeared in the books

Goodwill appeared in the books = Rs.60,000

It would be written off in old ratio

Sangeeta would be debited = 60,000 x 2/10

= 12,000

Saroj would be debited = 60,000 x 3/10

= 18,000

Shanti would be debited = 60,000 x 5/10

= 30,000

Calculation of Goodwill valued

Goodwill valued at Rs.90,000

Sangeeta share in Goodwill = 90,000 x 2,10

= 18,000

Gaining ratio of Saroj & Shanti = 3:5

Saroj will contribute = 18,000 x 3/8

= Rs.6750

Shanti will contribute = 18,000 x 5/8

= Rs.11250

3. Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2019, Naman retires.

The various assets and liabilities of the firm on the date were as follows:

Cash Rs.10,000, Building Rs.1,00,000, Plant and Machinery Rs.40,000, Stock Rs.20,000, Debtors Rs.20,000 and Investments Rs.30,000.

The following was agreed upon between the partners on Naman’s retirement:

Building to be appreciated by 20%.
Plant and Machinery to be depreciated by 10%.
A provision of 5% on debtors to be created for bad and doubtful debts.
Stock was to be valued at Rs.18,000 and Investment at Rs.35,000.

Record the necessary journal entries to the above effect and prepare the revaluation account.

Solution:-

Books of Himanshu and Gagan

Journal

4. Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the firm showed the following: General Reserves Rs.36,000 and Profit and Loss Account (Dr.) Rs.15,000.

Record the necessary journal entries to the above effect.

Solution:-

Books of Naresh and Bishwajeet

Journal

5. Digivijay, Brijesh and Parakarm were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2020 was as follows:

Brijesh retired on March 31, 2020 on the following terms:

Goodwill of the firm was valued at Rs.70,000 and was not to appear in the books.
Bad debts amounting to Rs.2,000 were to be written off.
Patents were considered as valueless.

Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh’s retirement.

Solution:-

Book of Digivijay and Parakarma

Dr. Revaluation A/c Cr.

Working Note:-

Brijesh’s Share of Goodwill

Total goodwill of the firm * Retiring Partner’s Share = 70000 * 2/5

= Rs.28,000

Gaining Ratio = New Ratio – Old Ration

Digvijay’s Share = 2/4 – 2/5

= 10 – 6 /15

= 4/15

Parakaram’s Share = 1/3 – 1/5

= 3/15

= 2/15

Gaining ratio between Digvijay and Parakaram = 4:2

= 2:1

6. Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the firm. On that date, their Balance Sheet was as follows:

The terms were:

Goodwill of the firm was valued at Rs.13,500.
Expenses owing to be brought down to Rs.3,750.
Machinery and loss tools are to be valued at 10% less than their book value.
Factory premises are to be revalued at Rs.24,300.

Prepare:

Revaluation account
Partners’ Capital accounts and
Balance sheet of the firm after retirement of Sheela.

Solution:-

Books of Radha and Meena

Dr. Revaluation A/c Cr.

Sheela’s share of goodwill

Total goodwill of the firm * Retiring Partner’s Share = 13,500 * 2/6

= 4,500

Gaining Ratio = New Ratio – Old Ratio

Radha’s share = 3/4 – 3/6

= 18 – 12/24

= 6/24

Meena’s Shares = 1/4 – 1/6

= 6 – 4/24

= 2/6

Gaining Ratio between Radha and Meena = 6 : 2

= 3:1

7. Pankaj, Narsh and Saurabh are partners sharing profits in the ratio of 3:2:1. Narsh retired from the firm due to his illness on September 30, 2017. On that date the Balance Sheet of the firm was as follows:

Book of Pankaj, Naresh and Sauabh

Balance Sheet as on September 30, 2017

Additional Information

Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for Rs.1,200 and furniture to be brought up to Rs.45,000.
Goodwill of the firm be valued at Rs.42,000.
Rs.26,000 from Naresh’s Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained form Bank.
Naresh share of profit till the date of retirement is to be calculated on the basis of last year’s profit, i.e., Rs.60,000.
New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1.

Give the necessary ledger accounts and balance sheet of the firm after Naresh’s retirement.

Solution:-

Dr. Revaluation Account Cr.

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, 2019 was as follows:

Books of Puneet, Pankaj and Pammy

Balance sheet as on March 31, 2019

Mr. Pammy died on September 30, 2019. The partnership deed provided the following:

The deceased partner will be entitled to his share of profits up to the date of death calculated on the basis of previous year’s profit.
He will be entitled to his share of goodwill of the firm calculated on the basis of 3 years’ purchases of average of last 4 years’ profit. The profits for the last four financial years are given below:

For 2015-16; Rs.80,000; for 2016-17, Rs.50,000; for 2017-18, Rs.40,000; for 2018-19, 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.

Pammy’s Capital Account

Dr. Pammy’s Executor Account Cr.

Working Notes:

Pammy’s Share of Profit

Previous Year’s Profit * Proportionate Period * Share of Deceased partner

=30,000 * 6 / 12 * 1/5

= Rs.3,000

Pammy’s Share of Goodwill

Goodwill of the firm = Average Profit * Number of year’s Purchases

Average Profit = 80,000 + 50,000 + 40,000 + 30,000/4

= 2,00,000 / 4

= Rs.50,000

Goodwill of the firm = 50,000 * 3

= Rs.1,50,000

Pammy’s Share = 1,50,000 * 1/5

= Rs.30,000

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

= 1:1

Interest on Capital for 6 months, i.e. from April 1, 2007 to September 30, 2007

= 40,000 * 12 / 100 * 6/12

= Rs.2,400

Interest Amount

The firm closes its books every year on March 31, while instalments to Pammy’s Executor are paid on September 30 every year.

Amount outstanding on 30 September = 75,400 – 15,400

= Rs.60,000Calculation of Interest

9. Following is the Balance Sheet of Prateek, Rockey and Kushal as March 31, 2020.

Books of Prateek, Rockey and Kushal

Balance Sheet as on March 31, 2020

Rockey died on June 30, 2020. Under the terms of the partnership deed, the executors of a deceased partner were entitled to:

Amount standing to the credit of the Partner’s Capital account.
Interest on capital at 5% per annum.
Share of goodwill on the basis of twice the average of the past three years’ profit and
Share of profit from the closing date of the last financial year to the date of death on the basis of last year’s profit.

Profit for the year ending on March 31, 2018 March 31, 2019 and March 31, 2020 were Rs.12,000, Rs.16,000 and Rs.14,000 respectively. Profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up Rockey’s capital account to be rendered to his executor.

Solution:-

Books of Prateek and Kushal

Journal

Working Notes:-

Rockey’s Share of Profit = Previous year’s profit * proportionate Period * Share of Deceased Partner

= 14,000 * 3/12 * 2/7

= Rs.1,000

Rockey’s Share of Goodwill

Average Profit = 12,000 + 16,000 + 14,000/3

= Rs.14,000

Goodwill of a firm = Average profit *Number of year’s Purchase Goodwill of a firm = 14,000 *2

= Rs.28,000

Rockey’s Share = 3/5 – 3/7

= 21 – 15/35

= 9/35

Kushal’s Share = 2/5 – 2/7

= 14 – 10/35

= 4/35

Gaining Ratio between Prateek & Kushal = 9:4

= 3:2

Interest on Capital for 3 months i.e. from April 1, 2020 to June 30, 2020

= 20,000 * 5/100 * 3/12

= Rs.250

10. Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on April 1, 2020 was as follows:

Books of Suri and Baja

Balance Sheet as on April 1, 2020

Bajaj retires from the business and the partners agree to the following:

Freehold premises and stock are to be appreciated by 20% and 15% respectively.
Machinery and furniture are to be reduced by 10% and 7% respectively.
Bad debts reserve is to be increased to Rs.1,500.
Goodwill is valued at Rs.21,000 on Bajaj’s retirement.
The continuing partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Bajaj. Surplus/deficit, if any, in their capital accounts will be adjusted through current accounts.

Prepare necessary ledger accounts and draw the Balance Sheet of the reconstituted firm.

Solution:-

Dr. Revaluation Account Cr.

Working Notes:

Bajaj Share in Goodwill = total goodwill of the firm * Retiring Partner’s Share

= 21,000 * 1/3

= Rs.7,000

Gaining Ratio = New Ratio – Old Ratio

Narang’s Gaining Share = 3/4 – 3/6

= 9-6/12

= 3/12

Suri’s Gaining Share = 1/4 – 1/6

= 3-2/12

= 1/12

Gaining Ratio between Narang and Suri = 3:1

Calculation of New Capitals of the existing partners

Balance in Narang’s Capital = Rs.34,230

Balance in Suri’s Capital = Rs.31,410

Total Capital of the New firm after revaluation of assets & liabilities & adjustment of Goodwill & Reserve = Rs.65,640

Based on new profit – sharing ratio of 3:1

Narang’s Capital = 65,640 * 3/4

= Rs.49,230

Suri’s Capital = 65,640 * 1/4

= Rs.16,410

NOTE: Due to insufficient balance in Bajaj’s Capital Account, the amount due to Bajaj is transferred to his Loan Account.

11. The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015:

Books of Rajesh, Pramod and Nishant

Balance Sheet as on March 31, 2015

Pramod retired on the date of Balance Sheet and the following adjustments were made:

Stock is to be reduced by 10% .
Factory buildings were appreciated by 12%.
Provision for doubtful debts be created up to 5%.
Provision for legal charges to be made at Rs.265.
The goodwill of the firm be fixed at Rs.30,000. The continuing partners decide to keep their capitals in the new profit sharing ratio of 3:2.

Record journal entries and prepare the balance sheet of the reconstituted firm after transferring the balance in Pramod’s Capital account to his loan account.

Solution:-

Journal

Working Notes:

Pramod’s Share of goodwill = total goodwill of the firm*Retiring Partner’s Share

= 10,000 * 3/12

= Rs.3,000

Gaining Ratio = New Ratio – Old Ratio

Rajesh’s Gaining share = 3/5 – 4/10

= 6 – 4/10

= 2/10

Nishant’s Gaining share = 2/5 – 3/10

= 4 – 3/10

= 1/10

Gaining Ratio between Rajesh and Nishant = 2:1

If Existing partners withdraw their excess capital

Journal Entry

Rajesh’s Capital A/c 940

Nishant’s Capital A/c 2,705

To Bank A/c 3,645

(Being Surplus Capital withdraw)

20. Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2020.

Books of Jain, Gupta and Malik

Balance Sheet as on March 31, 2020

The partners have been sharing profits in the ratio of 5:3:2. Malik decides to retire from business on April 1, 2020 and his the business is to be calculated as per the following terms of revaluation of assets and liabilities:

Stock, Rs.20,000; Office furniture, Rs.14,250; Plant and Machinery Rs.23,530; Land and Building Rs.20,000

A provision of Rs.1,700 to be created for doubtful debts. The goodwill of the firm is valued at Rs.9,000.

The continuing partners agreed to pay Rs.16,500 as cash on retirement of Malik, to be contributed by continuing partners in the ratio of 3:2. The Balance in the capital account of Malik will be treated as loan.

Prepare Revaluation account, capital accounts, and Balance Sheet of the reconstituted firm.

Solution:-

In the books of Jain and Gupta

Dr. Revaluation Account Cr.

Working Note:

Malik’s share of goodwill = total goodwill * Retiring Partners Share

= 9,000 * 2/10

= Rs.1,800

Gaining Ratio = New Ratio – Old Ratio

Jain’s Gaining share = 5/8 – 5/10

= 50 – 40/80

= 10/80

Gupta’s Gaining share = 3/8 – 3/10

= 30 – 24/80

= 6/80

Gaining Ratio between Jain and Gupta = 10:6

= 5:3

13. Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2020 stood as follows:

Books of Arti, Bharti and Seema

Balance Sheet as on March 31, 2020

Bharti died on June 12, 2020 and according to the deed of the said partnership, her executors are entitled to be paid as under:

The capital to her credit at the time of her death and interest thereon @ 10% per annum.
Her proportionate share of reserve fund.
Her share of profits for the intervening period will be based on the sales during that period, which were calculated as Rs.1,00,000. The rate of profit during past three years had been 10% on sales.
Goodwill according to her share of profit to be calculated by taking twice the amount of the average profit of the last three years less 20%. The profits of the previous year were:

2017 – Rs.8,200

2018 – Rs.9,000

2019 – Rs.9,800

The investments were sold for Rs.16,200 and her executors were paid out. Pass the necessary journal entries and write the account of the executors of Bharti.

Solution:-

Journal

Working Note:

Bharti’s share of profit = Profit is 10% of sales

Sales during the last year for that period were Rs.1,00,000

If sales are Rs.1,00,000 then the profit is Rs.10,000

Bharti’s Share = 10,000 * 2/6

Bharti’s Share of Goodwill

Goodwill of the firm = Average profit * Number of Years Purchase

Average Profit = 8,200 + 9,000 + 9,800/3

= Rs.9,000

9,000 – 20% of 9,000 = 9,000 – 1,800

= Rs.7,200

Goodwill of the firm = 7,200 x 2

= 14,400

Bharti’s Share = 14,400 * 2/6

= Rs.4,800

Gaining Ratio = New Ratio – Old Ratio

Arti’s Gaining Share = 3/4 – 3/6

= 9 – 6/12

= 3/12

Seema’s Gaining Share = 1/4 – 1/6

= 3 – 2/12

= 1/12

Gaining ratio between Arti and Seema = 3:1

Interest on Capital for 73 days, i.e. from April 1. 2020 to June 12, 2020

Interest on capital = Amount of Capital * Ratio of Interest * Period

= 21,000* 10/100 * 73/365

= Rs.240

14. Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2020 was as follows:

Books of Nithya, Sathya and Mithya

Balance Sheet at March 31, 2020

Mithya dies on August 1, 2020. The agreement between the executors of Mithya and the partners stated that:

Goodwill of the firm be valued at 2 ½ times average profit of last four years. The profits of four years were : in 2016-17, Rs.13,000; in 2017-18, Rs.12,000; in 2018-19, Rs.16,000; and in 2014-15, Rs.15,000.
The patents are to be valued at Rs.8,000, Machinery at Rs.25,000 and Premises at Rs.25,000.
The share of profit of Mithya should be calculated on the basis of the profit of 2019-20.
Rs.4,200 should be paid immediately and the balance should be paid in 4 equal half-yearly instalments carrying interest @ 10%.

Record the necessary journal entries to give effect to the above and write the executor’s account till the amount is fully paid. Also prepare the Balance Sheet of Nithya and Sathya as it would appear on August 1, 2020 after giving effect to the adjustments.

Solution:-

Journal