Repayment of the Amount due to Deceased Partner

Repayment of the Amount due to Deceased Partner

On death of a partner, the amount due to his legal representatives will have to be paid. It may not be possible to pay the whole amount in a lump sum. As a rule, the payment is made according to the terms of partnership agreement. The various courses available are –

(a) Repayment in installments over a period of time and interest being paid on outstanding balances.

(b) The amount due may be treated as a loan to the firm. The firm may pay interest at an agreed rate or a share of profit of the firm.

Illustration :

A, B and C are partners in a firm sharing profits and losses in the ratio of 5:4:3 respectively. The firm had insured the partners’ lives severally, A’s life for ` 20,000, B’s life for Rs.16,000 and C’s life for Rs.14,000. The premiums were charged to the firm’s profit and loss account. B died on 1.4.2013. The surrender values of these policies were 20% of the policy amount. Calculate B’s share in policies.

Solution:

Illustration :

A, B and C are partners sharing profits in the ratio of 2:1:1 respectively. On 30th June, 2012 their balance sheet was as follows:

Liabilities	Rs.	Assets	Rs.
Creditors	40,000	Goodwill	30,000
Bills Payable	20,000	Freehold Property	1,00,000
Capitals:		Joint Life Policy	20,000
A	1,00,000	Stock	55,000
B	60,000	Debtors	45,000
C	40,000	Cash	10,000
	2,60,000		2,60,000

A died on July 1, 2012. The firm had taken a joint life policy for Rs.1,50,000, the payment for which was received on July 31, 2012. According to the partnership agreement, on retirement or death of a partner, the goodwill was to be valued at 1-1/2 times the average profit of the last four years. The profits for the last four years were Rs. 6,000, Rs. 75,000,Rs. 90,000 and Rs. 95,000 respectively. For paying the amount due to A’s legal representative, B and C brought as much cash as would bring their capitals in profit-sharing ratio and the firm would have cash in hand Rs. 3,000. Calculate goodwill, prepare partners’ capital accounts and the balance sheet.

Solution:

Calculation of goodwill

Average profit for four years =

Dr. Partners’ Capital Accounts Cr.

Particulars	A (Rs.)	B (Rs.)	C (Rs.)	Particulars	A (Rs.)	B (Rs.)	C (Rs.)
To Cash A/c	2,10,000	–	–	By Balance b/fd	1,00,000	60,000	40,000
To A’s Capital A/c	–	22,500	22,500	By B’s Capital	22,500	–	–
To Balance c/d	–	1,00,000	1,00,000	By C’s Capital	22,500	–	–
				By Joint Life Policy A/c	65,000	32,500	32,500
				By Cash	–	30,000	50,000
	2,10,000	1,22,500	1,22,500		2,10,000	1,22,500	1,22,500

Calculation of cash brought in by B and C:

	Rs.	Rs.
Amount payable to A’s legal representatives		2.10,000
Add: Desired cash in hand		__30,000
Amount required		2,40,000
Less: Amount received from Insurance company	1,50,000
Existing balance of cash in hand	___10,000	1,60,000
Shortage of cash to be brought in By B and C		__80,000
B’s capital after adjustment of Goodwill and Life Policy		70,000
C’s capital after adjustment of Goodwill and Life Policy		50,000
Shortage of cash to be brought in		80,000
Total capital of B and C after A’s death		2,00,000
Share of B being 1/2th of Rs.20,000	1,00,000
Less: Already in the business	70,000
Cash to be introduced by B	30,000
Share of C being 1/2 of Rs.20,000	1,00,000
Less: Already in the business	50,000
Cash to be introduced by C	50,000

Balance Sheet of B and C

Liabilities	Rs.	Assets	Rs.
Creditors	40,000	Goodwill	30,000
Bills Payable	20,000	Freehold Property	1,00,000
Capitals:		Stock	55,000
B 1,00,000		Debtors	45,000
C 1,00,000	2,00,000	Cash	30,000
	2,60,000		2,60,000

Illustration :
On 31st March, 2012 the balance sheet of Sen, Sil and Som who shared profits and losses in the ratio of 4 : 3 : 2 respectively stood as follows:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	20,600	Furniture and Fittings	12,000
Joint Life Policy Reserve	6,000	Joint Life Policy (Policy for ` 18,500)	10,000
Capital Accounts:		Sundry Debtors	17,500
Sen	10,000	Stock	30,500
Sil	30,000	Cash at Bank	7,100
Som	10,500		______
	77,100		77,100

On 30th June, 2012 Sen died. According to partnership deed, at the time of death, goodwill of the firm was to be valued at 2 years’ purchase of average profits of the last three years and deceased partner’s capital account was to be credited with the share of profits for the period he lived in the year of death on the basis of profit of immediately previous year.

Find out the amount due to Sen’s executors on 30th June, 2012. Profits for the past three years have been as follows:

For the year ended 31st March, 2012	Rs.36,000
For the year ended 31st March, 2011	Rs. 30,000
For the year ended 31st March, 2010	Rs. 25,800

Solution:

Illustration :
Following is the balance sheet of A, B and C as at 1st April, 2012:

Liabilities	Rs.	Assets	Rs.
Sundry Creditors	20,000	Goodwill	40,000
Reserve fund	32,000	Plant and Machinery	60,000
Capital Accounts:		Stock	40,000
A	1,00,000	Sundry Debtors	60,000
B	50,000	Cash at Bank	50,000
C	50,000	Cash in Hand	2,000
	2,52,000		2,52,000

C died on 30th June, 2012. Under the terms of partnership deed, the executors of a deceased partner were entitled to –

(a) Amount standing to the credit of partner’s capital account;

(b) Interest on capital balance at 15% per annum;

(d) Share of profit from the closing of the last financial year to the date of death on the basis of the average of three completed year profits before the death.

Profits for the years ended 31st March, 2010, 2011 and 2012 were Rs.60,000, Rs.70,000 and Rs.80,000 respectively.

Profits were shared in the ratio of capitals.

Pass the necessary journal entries and draw up C’s Capital Account to be rendered to his executors.

Solution:

Journal Entries

Particulars	Dr.(Rs.)	Cr.(Rs.)
Reserve Fund Dr.	8,000
To C’s Capital A/c		8,000
(Reserve fund transferred to capital account)
Interest on Capital A/c Dr.	1,875
To C’s Capital A/c		1,875
(Interest @ 15% credited to C’s Capital Account)
A’s Capital A/c Dr.	16,667
B’s Capital A/c Dr.	8,333
To C’s Capital A/c		25,000
(Share of goodwill due to C, debited to the capital accounts of existing partners)
Profit and Loss A/c Dr.	4,375
To C’s Capital A/c		4,375
(Share of profit till 30th June, 2012 based on the average profit of the preceding three years credited to C’s Capital Account)

Dr. C’s Capital Account Cr.

Particulars	Rs.	Particulars	Rs.
To C’s Executors	89,250	By Balance b/fd	50,000
		By Reserve fund	8,000
		By Interest on Capital	1,875
		By A’s Capital A/c	16,667
		By B’s Capital A/c	8,333
	_______	By Profit and Loss A/c	4,375
	89,250		89,250

Working Notes
(i) Calculation of Goodwill

Total profit of three years =Rs.2,10,000

Average Profit = Rs.2,10,000 ÷ 3 = Rs.70,000

Goodwill = Rs.70,000 x 2 = Rs.1,40,000

Existing Goodwill = Rs.40,000

Goodwill to be increased by Rs.1,00,000

C’s Share = Rs.1,00,000 ÷ 4 = Rs.25,000

(ii) Calculation of C’s Share of Profit

Average Profit = Rs.70,000

C’s Share for 3 months = Rs.70000 x

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