Class 12 Accountancy Part-1 Chapter 5 Reconstitution of Partnership : Death of a Partner

Key Concept: Meaning and Implication of Death of a Partner

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion is false because the death of a partner does not necessarily dissolve the firm; the remaining partners can choose to continue the business. However, the Reason is true as the legal heirs are indeed entitled to the deceased partner's share of profits or interest on capital until the final settlement is made.

Key Concept: On the Basis of Last Year’s Profit

b) \$2,250
[Solution Description]
Time period from 1st April to 30th June = 3 months.
X's share ratio = $\frac{3}{6}$ (since total ratio parts = 3 + 2 + 1 = 6).
X's share of profit = \$18,000 $\times \frac{3}{12} \times \frac{3}{6}$ = \$18,000 $\times \frac{1}{4} \times \frac{1}{2}$ = \$2,250.

Key Concept: Revaluation Account

c) To adjust the value of assets and liabilities upon the death of a partner
[Solution Description]
The Revaluation Account is used to adjust the value of assets and liabilities upon the death of a partner. It records the increase or decrease in asset values and distributes any profit or loss arising from revaluation to the partners' capital accounts in their profit-sharing ratio.

Key Concept: On the Basis of Average Profit, Multi-concept: Time-based profit calculation and average profit over multiple years

b) \$3,500
[Solution Description]
To calculate A’s share of profit:
1. Average profit = \frac{\$24,000 + \$30,000 - \$12,000}{3} = \$14,000 (Note: 2021-22 had a loss, so subtracted).
2. Time period from 1st April 2022 to 31st December 2022 = 9 months.
3. Estimated current year's profit = \$14,000 \times \frac{9}{12} = \$10,500.
4. A’s share = \$10,500 \times \frac{1}{3} = \$3,500.

Key Concept: Revaluation Account, Partners' Capital Accounts

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The Assertion states that \textbackslash(\textbackslash\$9,750\textbackslash) transferred from C's capital account to Cash A/c represents a surplus. From the given data, we can see that C's capital account shows a debit entry of \textbackslash(\textbackslash\$9,750\textbackslash) under "To Cash A/c (Surplus)", which confirms this assertion. The Reason states that the final capital of A and C is adjusted to \textbackslash(\textbackslash\$2,25,000\textbackslash) in the ratio 3:1, which is also correct as mentioned in the note. However, the Reason does not explain why there is a surplus of \textbackslash(\textbackslash\$9,750\textbackslash) in C's capital account; it only describes the final capital adjustment. Therefore, both statements are true, but the Reason is not the correct explanation of the Assertion.

Key Concept: Accounting Treatment of Deceased Partner’s Share of Profits

a) Profit and Loss Suspense Account
[Solution Description]
When adjusting a deceased partner's share of profit through the Profit and Loss Suspense Account, the Profit and Loss Suspense Account is debited, and the deceased partner's Capital Account is credited. This happens when the new profit sharing ratio of continuing partners does not differ from their old ratio.

Key Concept: Death of a Partner

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that the death of a partner results in the dissolution of the partnership, but the firm may continue with the remaining partners, which is correct as per the Indian Partnership Act, 1932. The reason states that the legal heirs of the deceased partner are entitled to receive the deceased partner’s share of profits and capital, which is also true as the legal heirs step into the shoes of the deceased partner for claims. However, the reason does not explain why the firm continues despite the dissolution of the partnership, making it an independent true statement rather than an explanation of the assertion.

Key Concept: Assertion-Reason

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that the deceased partner's share of goodwill is credited to their capital account and debited to the gaining partners' capital accounts in the gaining ratio, which is correct as per accounting standards for partnerships. The reason explains how the gaining ratio is determined, which is also accurate. The reason correctly justifies the assertion because without calculating the gaining ratio, we cannot determine how much each remaining partner must contribute to compensate the deceased partner’s share of goodwill. Therefore, both statements are true, and the reason is the correct explanation for the assertion.

Key Concept:

c) Either interest at 6\% p.a. or a share of profits earned using the amount due
[Solution Description]
As per Section 37 of the Indian Partnership Act, 1932, in the absence of an agreement, the executor can choose between receiving interest at 6\% p.a. or a share of the profit earned by the firm using the deceased partner’s capital.

Key Concept: Accounting Treatment of Deceased Partner’s Share of Profits, Journal Entries

c) Assertion is true, but Reason is false.
[Solution Description]
The assertion states that the deceased partner's share of profit is adjusted through Profit and Loss Suspense Account, which is true as per the syllabus. However, the reason given is incorrect because the use of Profit and Loss Suspense Account is not due to the inability to determine final profit but rather to temporarily adjust the deceased partner's share before final settlement. Thus, Assertion is true, but Reason is false.

Key Concept: Components of a Balance Sheet

d) Stock
[Solution Description]
The Liabilities side of a Balance Sheet includes Capital Accounts, Creditors, Bills Payable, Bank Overdraft, Long Term Loans, and Executor’s Account (in case of a deceased partner). Stock is an asset, not a liability.

Key Concept: Through Profit and Loss Suspense Account, Balance Sheet Treatment

b) As a liability worth \$3,600
[Solution Description]
Step 1: In case of loss, the journal entry is:
Deceased Partner’s Capital A/c Dr. \$3,600
To Profit and Loss Suspense A/c \$3,600
Step 2: The Profit and Loss Suspense A/c now has a credit balance of \$3,600, which is shown on the liabilities side of the Balance Sheet.
Step 3: Under the head "Current Liabilities," the Profit and Loss Suspense A/c balance (\$3,600) will appear as a separate line item or included within "Current Liabilities."

Key Concept: Accounting Treatment of Deceased Partner’s Share of Goodwill

d) Credited to the deceased partner's capital account and debited to the gaining partners' capital accounts in their gaining ratio.
[Solution Description]
The deceased partner's share of goodwill is calculated based on the partnership deed's provisions. It is credited to their capital account and debited to the gaining partners' capital accounts in their gaining ratio.

Key Concept: Turnover-Based Calculation, Loss Scenario

c) \$600
[Solution Description]
Compute the firm’s loss till the date of death:
$\text{Loss till date} = \frac{-15,000}{150,000} \times 30,000 = -3,000 \, (\text{i.e., a loss of \$3,000})$
Now, calculate R's share of the loss:
$\text{R's share} = 3,000 \times \frac{1}{5} = 600$
Hence, R's share of the loss is \$600.

Key Concept: On the Basis of Time

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that the deceased partner's profit is calculated based on time until their death, which is correct as per the time-based method. The reason explains that profit accrues evenly over the year, which is also true and directly supports the assertion. Therefore, both are true, and the reason correctly explains the assertion.

Key Concept: Balance Sheet Adjustments

a) \$10,000 increase
[Solution Description]
Original value of Building = \$200,000.
Appreciation = 10\% of \$200,000 = \$20,000.
New value of Building = \$200,000 + \$20,000 = \$220,000.
Original value of Furniture = \$50,000.
Depreciation = 20\% of \$50,000 = \$10,000.
New value of Furniture = \$50,000 - \$10,000 = \$40,000.
Total change = (\$220,000 + \$40,000) - (\$200,000 + \$50,000) = \$10,000 (increase).

Key Concept: Revaluation Account, Partners' Capital Accounts

c) \$9,000
[Solution Description]
First, calculate the net effect of revaluation. Building increases by \$20,000 (gain), and stock decreases by \$5,000 (loss). Net gain = \$20,000 - \$5,000 = \$15,000. Partner A's share = (\$15,000 * 3/5) = \$9,000.

Key Concept: Application of Turnover-Based Profit Calculation

c) \$2,500
[Solution Description]
Calculate R's share of profit using the formula:
$\text{R's share} = \frac{40,000}{160,000} \times 50,000 \times \frac{1}{5} = 2,500$
So, R's share of profit is \$2,500.

Key Concept: Revaluation Account, Profit Distribution

d) Assertion is false, but Reason is true.
[Solution Description]
The assertion that the Revaluation Account must always result in a profit is false because it depends on whether the increase in asset values exceeds the decrease or vice versa. The reason given is true because any net profit or loss from revaluation is indeed distributed among partners in their old profit-sharing ratio, but this does not justify the assertion as it assumes all revaluations yield profits.
Calculation:
If an asset increases by \$20,000 and another decreases by \$15,000, the net profit is \$5,000. However, if assets decrease by \$10,000 and liabilities increase by \$8,000, the net loss is \$18,000. Thus, the assertion is incorrect, while the reason is correct.

Key Concept: Calculation of Deceased Partner's Share of Profit

b) \$4,500
[Solution Description]
Calculate B's share of profit using the formula:
$\text{B's share} = \frac{\text{Last year's profit}}{\text{Last year's sales}} \times \text{Sales till date of death} \times \text{B's share ratio}$
Substituting the given values:
$\text{B's share} = \frac{50,000}{200,000} \times 60,000 \times \frac{3}{10} = 4,500$
So, B's share of profit is \$4,500.

Key Concept: Format of Revaluation Account

a) Debit side
[Solution Description]
The debit side of the Revaluation Account records the increase in the value of liabilities, while the credit side records the decrease in liabilities.

Key Concept: Journal Entry for Transfer to Executor’s Loan Account

c) Deceased Partner’s Capital A/c Dr. To Deceased Partner’s Executor’s Loan A/c
[Solution Description]
The correct journal entry is debiting the Deceased Partner's Capital Account and crediting the Deceased Partner's Executor's Loan Account. This ensures the amount due is transferred from the capital account to the executor's loan account.

Key Concept: Accounting Entries

c) Debit: Profit and Loss Suspense A/c; Credit: Deceased Partner’s Capital A/c
[Solution Description]
When there is a profit, the deceased partner’s share is recorded by debiting the Profit and Loss Suspense Account and crediting the Deceased Partner’s Capital Account. The entry is:
$\text{Debit: Profit and Loss Suspense A/c} \quad \text{Credit: Deceased Partner's Capital A/c}$

Key Concept: Deceased Partner's Share of Profit

b) \$2,700
[Solution Description]
Firm's profit based on sales proportion: $\frac{45,000}{3,00,000} \times 90,000 = \$13,500$. Z's share is $\frac{2}{10}$ of the firm's profit: $13,500 \times \frac{2}{10} = \$2,700$.

Key Concept: Calculation of Deceased Partner’s Share of Profit

b) \$7,500
[Solution Description]
To calculate the deceased partner’s share of profit based on turnover:
$\text{Deceased partner’s share} = \frac{\text{Last year’s profit}}{\text{Last year’s sales}} \times \text{Sales till date of death} \times \text{Share of deceased partner}$
Substituting the given values:
$\text{Share} = \frac{120,000}{600,000} \times 150,000 \times 0.25 = 0.2 \times 150,000 \times 0.25 = 7,500$

Key Concept: Journal Entries Related to Revaluation

a) Revaluation A/c Dr. \$5,000 To Machinery A/c \$5,000
[Solution Description]
A decrease in the value of machinery is debited to the Revaluation Account (as it is a loss) and credited to the Machinery Account to reduce its book value. For example: Revaluation A/c Dr. \$5,000 To Machinery A/c \$5,000.

Key Concept: Components of Revaluation Account

b) Credit side
[Solution Description]
An increase in the value of an asset is recorded on the credit side of the Revaluation Account because it represents a gain. This is followed by transferring the net profit to partners' capital accounts in their old profit-sharing ratio.

Key Concept: Capital Accounts, Goodwill Adjustment

c) \textcurrency 10,000
[Solution Description]
When Partner B retires, the goodwill is adjusted among the remaining partners. Here, A's capital account is debited with \textcurrency 7,500 (sharing in goodwill), and C's capital account is credited with \textcurrency 2,500 (receiving goodwill).
The total goodwill adjustment is the sum of the amount debited and credited. Since A is giving up part of his share of goodwill to C, the total goodwill being adjusted is:
Goodwill adjusted = Amount debited to A + Amount credited to C
Goodwill adjusted = \textcurrency 7,500 + \textcurrency 2,500 = \textcurrency 10,000
Hence, the total value of goodwill being adjusted is \textcurrency 10,000.

Key Concept: Preparation of Deceased Partner’s Executor’s Loan Account

a) Interest on Deceased Partner’s Executor’s Loan A/c
[Solution Description]
According to the syllabus, the correct journal entry for recording interest due on the deceased partner's executor's loan account is:
$\text{Interest on Deceased Partner’s Executor’s Loan A/c} \quad \text{Dr.} \quad \text{To Deceased Partner’s Executor’s Loan A/c}$.
Thus, the "Interest on Deceased Partner’s Executor’s Loan A/c" is debited.

Key Concept: Payment of Amount due to Deceased Partner’s Executor

c) Interest @ 6\% p.a. till the amount is paid or a share of profits
[Solution Description]
According to the syllabus, in the absence of an agreement, the executor has two choices: either receive interest @ 6\% p.a. until the amount is paid or receive a share of profits earned by the firm using the deceased partner's due amount as per Section 37 of the Indian Partnership Act, 1932.

Key Concept: Deceased Partner's Share of Profit

b) \$1,500
[Solution Description]
First, calculate the firm's profit based on the proportion of sales till the date of death. Given last year's profit was \$36,000 for sales of \$2,40,000. For current year sales of \$60,000, the profit is calculated as: $\frac{36,000}{2,40,000} \times 60,000 = \$9,000$. Now, C's share is $\frac{1}{6}$ of the firm's profit: $9,000 \times \frac{1}{6} = \$1,500$.

Key Concept: Preparation of Deceased Partner’s Executor’s Loan Account

c) Debit Deceased Partner’s Capital A/c; Credit Deceased Partner’s Executor’s Loan A/c
[Solution Description]
The amount due to the deceased partner is transferred from their capital account to the Executor's Loan Account. The correct journal entry is:
$\text{Deceased Partner’s Capital A/c} \rightarrow \text{Dr.}$
$\text{To Deceased Partner’s Executor’s Loan A/c}$
This ensures that the liability to the executor is recorded properly.

Key Concept: Valuation of Goodwill for Deceased Partner

a) \Rs.30,000
[Solution Description]
Total profits over 4 years = \Rs.1,20,000 + \Rs.60,000 - \Rs.20,000 + \Rs.80,000 = \Rs.2,40,000.
Average profit = \Rs.2,40,000 / 4 = \Rs.60,000.
R's share of goodwill = 1/2 of average profit = \Rs.30,000.

Key Concept: Adjustment Entry for Goodwill

b) \$8,000
[Solution Description]
The gaining ratio is given as 2 : 1 (X : Y). Total parts = 2 + 1 = 3. Y's share of adjustment for Z's goodwill:
$\text{Y's debit} = \$24,000 \times \frac{1}{3} = \$8,000$

Key Concept: Gaining Ratio, Goodwill Valuation

c) \$40,000
[Solution Description]
First, calculate Z's share of goodwill:
$2,00,000 \times \frac{2}{10} = \$40,000$.
Next, find the gaining ratio:
For X: $\frac{3}{5} - \frac{5}{10} = \frac{1}{10}$,
For Y: $\frac{2}{5} - \frac{3}{10} = \frac{1}{10}$.
Gaining ratio is 1:1.
Therefore, Z's share of goodwill is \$40,000, debited equally to X and Y (\$20,000 each) and credited to Z's capital account.

Key Concept: Construction of Deceased Partner’s Executor’s Loan Account, Interest on Executor's Loan

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion (A) states that in the absence of an agreement, the executor of a deceased partner has the option to receive either interest at 6\% p.a. or a proportionate share of profits earned by using the executor’s capital, as per Section 37 of the Indian Partnership Act, 1932. This is correct because the Act ensures that the executor is fairly compensated for the capital retained in the business.
The Reason (R) explains that this choice is provided to ensure flexibility and fairness in compensating the executor for the capital used in the business. This is also true and directly explains why the executor has the option to choose between interest and share of profits. Thus, both Assertion and Reason are true, and Reason correctly explains Assertion.

Key Concept: Calculation of Deceased Partner’s Share of Profit on Basis of Turnover

c) \$3,600
[Solution Description]
Step 1: Profit ratio of sales = \$48,000 $\div$ \$240,000 = 0.2 (or 20\%).
Step 2: Profit till death = \$60,000 $\times 0.2 = \$12,000. \\ Step 3: Y's share = \$12,000$\times \frac{3}{10} = \$3,600.

Key Concept: Revaluation Account, Capital Accounts

a) \textcurrency 1,47,000
[Solution Description]
The total profit transferred to partners is \textcurrency 1,47,000. This profit comes from the net effect of revaluation (increase in assets minus decrease in assets). From the Revaluation Account, the credit side shows the increase in assets: Investments (\textcurrency 1,80,000), Building (\textcurrency 20,000), and Furniture (\textcurrency 7,000). The debit side shows the decrease in assets: Stock (\textcurrency 21,500), Provision for Doubtful Debts (\textcurrency 7,500), and Patents (\textcurrency 31,000). The net increase in assets is calculated as:
Total credit side = \textcurrency 1,80,000 + \textcurrency 20,000 + \textcurrency 7,000 = \textcurrency 2,07,000
Total debit side = \textcurrency 21,500 + \textcurrency 7,500 + \textcurrency 31,000 = \textcurrency 60,000
Net increase in assets = Total credit - Total debit = \textcurrency 2,07,000 - \textcurrency 60,000 = \textcurrency 1,47,000
Thus, the total increase in asset values is \textcurrency 1,47,000.

Key Concept: Partners’ Capital Accounts

a) \$27,500 (Debit)
[Solution Description]
Initial debit balance in B's capital account = \$50,000.
Goodwill to be shared in ratio 2:1:1.
B's share of goodwill = (1 / 4) * \$90,000 = \$22,500 (credit).
Final balance = \$50,000 (debit) - \$22,500 (credit) = \$27,500 (debit).

Key Concept: Payment of Amount due to Deceased Partner’s Executor

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that the amount due to the deceased partner is transferred to the executor's loan account as it represents the firm's liability to the deceased partner. This is correct because the executor steps into the shoes of the deceased partner and becomes entitled to the amount due. The reason mentions that the executor can choose between receiving interest at 6\% p.a. or a share of profit under Section 37 of the Indian Partnership Act, 1932. While this is true, it does not directly explain why the amount is transferred to the executor's loan account; rather, it explains the payment options available to the executor. Therefore, both the assertion and reason are true, but the reason is not the correct explanation of the assertion.

Key Concept: Accounting Treatment

c) Profit and Loss Suspense Account
[Solution Description]
If the new profit-sharing ratio of continuing partners remains unchanged, the deceased partner’s share of profit is adjusted by debiting the Profit and Loss Suspense Account. This ensures the profit distribution does not affect the capital accounts of other partners.

Key Concept: Deceased Partner's Share of Profit

c) \$2,250
[Solution Description]
Calculate the firm's profit based on sales proportion: $\frac{27,000}{1,80,000} \times 45,000 = \$6,750$. Since the partners share profits equally, R's share is $\frac{1}{3}$ of the firm's profit: $6,750 \times \frac{1}{3} = \$2,250$.

Key Concept: Deceased Partner's Executor, Instalment Payment, Loan Account Construction

b) \$15,000
[Solution Description]
Each instalment is \$30,000 (\$90,000 / 3). For the first year:
$\text{Interest} = 90000 \times \frac{10}{100} = 9000$
Principal repaid = \$30,000, remaining amount = \$60,000. For the second year:
$\text{Interest} = 60000 \times \frac{10}{100} = 6000$
Total interest for two years = \$9,000 + \$6,000 = \$15,000.

Key Concept: Goodwill, Profit Till Death, Journal Entries

c) \$22,000
[Solution Description]
T's share of goodwill:
\$72,000 $\times \frac{1}{6} = \$12,000$.
T's share of profit till death (from 01-04-2023 to 01-10-2023, i.e., 6 months):
\$1,20,000 $\times \frac{6}{12} \times \frac{1}{6} = \$10,000$.
Total amount to be credited to T's capital account:
\$12,000 (goodwill) + \$10,000 (profit) = \$22,000.

Key Concept: Balance Sheet, Deceased Partner's Executor Account

c) \$74,500
[Solution Description]
Add Partner X's capital (\$60,000), share of goodwill (\$30,000 * 1/3 = \$10,000), and share of profit (\$4,500). Total transfer to executor's account = \$60,000 + \$10,000 + \$4,500 = \$74,500.

Key Concept: Accounting Treatment of Deceased Partner’s Share of Profits, Gaining Ratio, Profit Distribution

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion states that when a partner dies and the new profit-sharing ratio of the continuing partners differs from the old ratio, the deceased partner's share of profit must be adjusted through the Capital Transfer method. This is true because the Capital Transfer method is specifically used in such cases to adjust the deceased partner's share based on the gaining ratio of the remaining partners.
The Reason states that the Capital Transfer method ensures that the gain or loss due to the change in profit-sharing ratio is borne by the gaining partners as per their gaining ratio. This is also true and correctly explains why the Capital Transfer method is used in such scenarios. The gaining partners' capital accounts are debited or credited based on their gaining ratio to account for the deceased partner's share of profit or loss.
Therefore, both Assertion and Reason are true, and Reason is the correct explanation of Assertion.

Key Concept: Accounting Treatment, Through Profit and Loss Suspense Account

b) \$5,000
[Solution Description]
Step 1: Calculate the time period for which C was a partner. Since C left mid-year, the time is 6 months.
Step 2: Determine C's share of profit. C's profit-sharing ratio was $\frac{1}{6}$ out of $3 + 2 + 1 = 6$ parts.
Step 3: Compute C's share for 6 months: \$60,000 (total profit) × $\frac{6}{12}$ (time period) × $\frac{1}{6}$ (share) = \$5,000.
Step 4: Journal entry would be:
Profit and Loss Suspense A/c Dr. \$5,000
To C’s Capital A/c \$5,000
The amount to be credited to C's Capital A/c is \$5,000.

Key Concept: Partners’ Capital Accounts

b) Credit deceased partner’s capital account and debit remaining partners’ capital accounts
[Solution Description]
Goodwill is credited to the deceased partner’s capital account as it represents their share in the firm’s goodwill. The remaining partners’ capital accounts are debited in their gaining ratio.

Key Concept: Payment of Amount due to Deceased Partner’s Executor, Interest Calculation

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that the executor must receive interest at 6\% p.a., but this is incorrect because Section 37 of the Indian Partnership Act, 1932, allows the executor to choose either interest at 6\% p.a. or a share of profits. Therefore, the Assertion is false. The Reason correctly explains the provision under Section 37, making it true. Hence, Assertion is false, but Reason is true.

Key Concept: Time Basis of Profit Calculation

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion (A) states that the profit share of a deceased partner can be calculated using the time basis method, which is true as per the syllabus. The reason (R) explains the logic behind this method—profit is considered to accrue evenly over the year and the deceased partner's share is calculated based on the time they were active during the financial year. Since the reason correctly explains the assertion, both are true, and the reason is the correct explanation of the assertion.

Key Concept: Revaluation of Assets and Liabilities

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that the revaluation account is prepared to record changes in the value of assets and liabilities when a partner dies or retires. This is true as revaluation accounts are indeed used for this purpose to adjust the book values of assets and liabilities to their current market values. The reason claims that revaluation ensures incoming partners are not affected by past revaluations, which is also true. However, the reason does not correctly explain the assertion because the primary purpose of revaluation is to ensure fair adjustments among existing partners, not just incoming ones. Therefore, both statements are true, but the reason is not the correct explanation of the assertion.

Key Concept: Definition and Use of Profit and Loss Suspense Account

c) To temporarily hold the share of profit or loss of a deceased partner
[Solution Description]
The Profit and Loss Suspense Account is used to temporarily hold the share of profit or loss of a deceased partner until it is adjusted in their capital account. This method is applied when the new profit-sharing ratio of continuing partners does not differ from their old profit-sharing ratio.

Key Concept: Construction of Deceased Partner’s Executor’s Loan Account, Profit Sharing Ratio Adjustment

c) \$3,000
[Solution Description]
Sohan's original profit-sharing ratio was 1/5 (2:2:1). His share of profit from the date of death (30th June 2015) to 31st March 2016 (9 months) is calculated as:
Adjusted profit for 9 months = \$20,000 x (9/12) = \$15,000.
Sohan's share = \$15,000 x (1/5) = \$3,000.

Key Concept: Executor’s Account

b) Deceased partner’s capital balance, revaluation profit/loss, reserves, and profit share
[Solution Description]
The Executor’s Account includes the deceased partner’s capital balance, share in revaluation profit/loss, share in reserves, and share of profit up to the date of death. This amount is payable to the legal representative.

Key Concept: Revaluation Account, Profit Transfer, Journal Entries

a) \$2,55,000 profit transferred to partners
[Solution Description]
First, calculate the total increase in assets: \$80,000 (Building) + \$1,80,000 (Investments) = \$2,60,000. Then, subtract the decrease in Machinery: \$5,000. Net effect: \$2,60,000 - \$5,000 = \$2,55,000. Next, distribute this profit in the old ratio (3:2:1): A (\$2,55,000 x 3/6 = \$1,27,500), B (\$2,55,000 x 2/6 = \$85,000), C (\$2,55,000 x 1/6 = \$42,500).

Key Concept: Capital Transfer Method

c) \$10,500
[Solution Description]
B’s share of profit:
$45,000 \times \frac{2}{6} = 15,000$
Gaining ratio calculation:
A’s new share = $\frac{3}{5}$, Old share = $\frac{3}{6}$
C’s new share = $\frac{2}{5}$, Old share = $\frac{1}{6}$
$\text{A’s gain} = \frac{3}{5} - \frac{3}{6} = \frac{18-15}{30} = \frac{3}{30}$
$\text{C’s gain} = \frac{2}{5} - \frac{1}{6} = \frac{12-5}{30} = \frac{7}{30}$
Gaining ratio = 3:7
C’s share of profit from B:
$15,000 \times \frac{7}{10} = 10,500$
Hence, C’s gain from B’s share is \$10,500.

Key Concept: Calculation of Deceased Partner’s Share of Profit till Date of Death

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that the deceased partner’s profit share is always calculated based on last year’s profit, which is incorrect because partnerships can use other methods such as average profits or sales-based calculations as mentioned in the Reason. The Reason correctly highlights that the partnership deed may allow alternative methods, making it true and the correct explanation for why the Assertion is false.
Therefore:
1. Both Assertion and Reason are not both true; Assertion is false.
2. The Reason provides a correct explanation for why the Assertion is false (as more methods exist).
3. The correct option is "Assertion is false, but Reason is true."

Key Concept: Construction of Deceased Partner’s Executor’s Loan Account, Interest Calculation

b) \$1,852.50
[Solution Description]
First, calculate the remaining loan amount after the initial payment: \$10,000 (capital) + \$150 (interest) + \$5,000 (goodwill) + \$750 (profit) - \$1,775 (first instalment) = \$14,125 - \$1,775 = \$12,350.
The yearly instalment is \$12,350 / 4 = \$3,087.50.
Interest for each year:
Year 1: \$12,350 x 6\% = \$741.
Year 2: (\$12,350 - \$3,087.50) = \$9,262.50 x 6\% = \$555.75.
Year 3: (\$9,262.50 - \$3,087.50) = \$6,175 x 6\% = \$370.50.
Year 4: (\$6,175 - \$3,087.50) = \$3,087.50 x 6\% = \$185.25.
Total interest = \$741 + \$555.75 + \$370.50 + \$185.25 = \$1,852.50.

Key Concept: Components of Revaluation Account, Balance Sheet Preparation

a) \$8,38,000
[Solution Description]
Sum all asset values: \$2,20,000 (Building) + \$60,000 (Machinery) + \$77,000 (Furniture) + \$3,60,000 (Investment) + \$53,500 (Stock) + \$67,500 (Debtors) = \$2,20,000 + \$60,000 = \$2,80,000; \$2,80,000 + \$77,000 = \$3,57,000; \$3,57,000 + \$3,60,000 = \$7,17,000; \$7,17,000 + \$53,500 = \$7,70,500; \$7,70,500 + \$67,500 = \$8,38,000.

Key Concept: Basis of Turnover

d) \$2,500
[Solution Description]
Using the formula:
$\text{Deceased partner’s share of profit} = \frac{\text{Last year’s profit}}{\text{Last year’s sales}} \times \text{Sales till date of death} \times \text{Share of deceased partner}$
Substituting the values:
$\frac{50,000}{200,000} \times 40,000 \times \frac{1}{4} = 2,500$

Key Concept: Legal Heirs Entitlement, Journal Entry

c) Debit Capital \$60,000; Credit Executor's Loan \$60,000
[Solution Description]
Two entries are required:
1. For profit share:
P\&L Suspense A/c Dr \$10,000
To Deceased Partner's Capital A/c \$10,000
2. For capital transfer:
Deceased Partner's Capital A/c Dr \$60,000 (50,000 + 10,000)
To Executor's Loan A/c \$60,000

Key Concept: Definition and Purpose

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that the Profit and Loss Suspense Account adjusts the deceased partner's share in profits when the profit-sharing ratio remains unchanged among continuing partners. The reason explains that this method ensures accuracy in distributing profits or losses to the deceased partner’s capital account. Both statements are true, and the reason correctly explains the assertion as the purpose of the account is indeed to maintain accurate financial adjustments.

Key Concept: Accounting Treatment of Deceased Partner’s Share of Profits

c) When the new profit sharing ratio differs from the old ratio
[Solution Description]
The Capital Transfer method is used when the new profit sharing ratio of the continuing partners differs from their old profit sharing ratio. In this case, the deceased partner's share of profit is adjusted by debiting the gaining partners' capital accounts in the gaining ratio and crediting the deceased partner's capital account.

Key Concept: Goodwill Calculation, Share of Reserve

a) \$40,000 and \$12,000
[Solution Description]
Step 1: Calculate average profit.
$\text{Average Profit} = \frac{40,000 + 50,000 + 60,000}{3} = 50,000$
Step 2: Calculate goodwill.
$\text{Goodwill} = 50,000 \times 2 = 1,00,000$
Step 3: Calculate A's share of goodwill.
$\text{Share of Goodwill} = 1,00,000 \times \frac{4}{10} = 40,000$
Step 4: Calculate A's share of reserve.
$\text{Share of Reserve} = 30,000 \times \frac{4}{10} = 12,000$

Key Concept: Calculation of Deceased Partner’s Share of Profit till Date of Death

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that the deceased partner's share of profit can be calculated using last year's profit if the books aren't closed, which aligns with the syllabus. The reason explains that this method ensures fair distribution based on time. However, the reason does not correctly explain why last year's profit is used—it's due to practical inconvenience of closing books early, not merely for equitable distribution. Thus, both statements are true but the reason doesn't correctly justify the assertion.

Key Concept: Calculation and Accounting Treatment of Amount due to Deceased Partner, Interest on Capital, Share of Profit

d) Assertion is false, but Reason is true.
[Solution Description]
The assertion (A) states that if a partner dies on 30th June, the interest on capital should be calculated for 6 months from the last balance sheet date. This is generally true because most firms follow the financial year ending on 31st March. Therefore, from 1st April to 30th June is indeed 3 months (not 6 months as stated in the assertion), making the assertion false.
The reason (R) states that the time period for calculating interest on capital is always from the last balance sheet date to the date of death. This is correct because interest on capital is calculated for the duration the capital was utilized by the firm until the partner's death. However, it does not justify the incorrect assertion about the 6-month calculation period.
Thus, the assertion is false, but the reason is true.

Key Concept: Revaluation Account

b) Profit of \$3,000
[Solution Description]
To calculate the profit/loss on revaluation:
Increase in machinery value = \$55,000 - \$50,000 = \$5,000 (gain).
Decrease in furniture value = \$18,000 - \$20,000 = -\$2,000 (loss).
Net profit on revaluation = \$5,000 - \$2,000 = \$3,000.

Key Concept: Profit Calculation Based on Turnover, Executor's Option

b) Profit based on turnover (\$9,600)
[Solution Description]
Step 1: Calculate share of profit based on turnover.
$\text{Share of Profit} = \frac{80,000}{4,00,000} \times 1,20,000 \times \frac{2}{5} = 9,600$
Step 2: Assume P's capital balance is \$1,00,000 (since not provided, we assume a reasonable value for calculation). Calculate interest for 6 months.
$\text{Interest} = 1,00,000 \times \frac{6}{100} \times \frac{6}{12} = 3,000$
Step 3: Compare both options. Share of profit (\$9,600) is better than interest (\$3,000).

Key Concept: On the Basis of Last Year's Profit, Multi-concept: Time-based profit calculation and loss adjustment

b) \$6,750
[Solution Description]
To calculate Q’s share of loss:
1. Time period from 1st April 2022 to 15th August 2022 = 4.5 months.
2. Estimated current year's loss = \$60,000 \times \frac{4.5}{12} = \$22,500.
3. Q’s share = \$22,500 \times \frac{3}{10} = \$6,750.

Key Concept: Capital Account Balance, Interest on Capital, Share of Profit

a) \$66,250
[Solution Description]
Step 1: Calculate interest on capital from 1st April 2023 to 30th June 2023 (3 months).
$\text{Interest} = 50,000 \times \frac{10}{100} \times \frac{3}{12} = 1,250$
Step 2: Calculate share of profit based on last year's profit. The time period is 3 months (April to June).
$\text{Share of Profit} = 1,20,000 \times \frac{5}{10} \times \frac{3}{12} = 15,000$
Step 3: Add capital balance, interest, and share of profit.
$\text{Total Amount Due} = 50,000 + 1,250 + 15,000 = 66,250$

Key Concept: Legal Provision - Interest Calculation

b) 6\% p.a.
[Solution Description]
According to the Indian Partnership Act, 1932, if the partnership agreement does not specify the interest rate, the executor can choose between:
1. 6\% p.a. interest or
2. Proportionate share of profit earned by using the executor’s capital.
Therefore, 6\% p.a. is the default legal rate of interest.

Key Concept: Accounting Treatment of Deceased Partner’s Share of Loss

c) \$8,000
[Solution Description]
To calculate Y's share of loss:
1. Total loss for the year = \$48,000.
2. Time period after last balance sheet = 6 months.
3. Prorated loss for 6 months = \$48,000 $\times$ $\frac{6}{12}$ = \$24,000.
4. Y's share in loss = \$24,000 $\times$ $\frac{4}{12}$ = \$8,000.

Key Concept: Average Profit Basis

c) \$8,750
[Solution Description]
Steps to calculate Y's share:
1. Total profits = \$90,000 + \$100,000 + \$110,000 = \$300,000.
2. Average profit = $\frac{\$300,000}{3} = \$100,000$.
3. Time period: 1st April 2023 to 15th July 2023 = 3.5 months.
4. Profit for 3.5 months = \$100,000 $\times \frac{3.5}{12} = \$29,166.67$.
5. Y's share = \$29,166.67 $\times \frac{3}{10} = \$8,750$.

Key Concept: Calculation of Deceased Partner’s Share of Profit till Date of Death

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The assertion states that the deceased partner's share of profit is calculated using last year's profit and the time elapsed. This is correct as per the syllabus, where the formula $\text{Deceased Partner’s Share of Profit} = \text{Last Year’s Profit} \times \frac{\text{Time till Date of Death}}{12} \times \text{Share of Deceased Partner}$ is used when calculating on the basis of last year's profit.
The reason states that the profit-sharing ratio remains unchanged unless specified otherwise in the partnership deed. This is also correct because the default rule is that the profit-sharing ratio remains the same unless altered by agreement. However, the reason does not directly explain why the calculation method mentioned in the assertion is used; it only explains a general principle about profit-sharing ratios.
Therefore, both the assertion and the reason are true, but the reason is not the correct explanation of the assertion.

Key Concept: Deceased Partner’s Goodwill Calculation

c) \$30,000
[Solution Description]
The total profit-sharing ratio is 4 + 5 + 6 = 15 parts. B's share in profits was 5/15 = 1/3.
$\text{B's share of goodwill} = \$90,000 \times \frac{1}{3} = \$30,000$

Key Concept: Adjustments

c) It is distributed among partners in their profit-sharing ratio
[Solution Description]
The profit or loss arising from the revaluation of assets and liabilities is recorded in the Revaluation Account and then distributed among the partners in their profit-sharing ratio.

Key Concept: Format of Balance Sheet

c) Liabilities Side
[Solution Description]
In case of a partner’s death, the amount due to the deceased partner is transferred to the Executor’s Account and shown under the Liabilities side of the Balance Sheet.

Key Concept: Journal Entries for Revaluation Account

b) Revaluation A/c Dr. 5,000 To Machinery A/c 5,000
[Solution Description]
When the value of machinery decreases, the Revaluation Account is debited, and the Machinery Account is credited. The journal entry is:
$\text{Revaluation A/c} \quad \text{Dr.} \quad 5,000 \quad \text{To Machinery A/c} \quad 5,000$

Key Concept: Preparation of Balance Sheet, Revaluation Account, Partners' Capital Accounts

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion (A) states that the revaluation account records profit or loss from revaluation during changes like a partner's death, which is correct as per standard accounting practices. The reason (R) correctly explains why this is done by stating that revaluation profits or losses are shared in the old profit-sharing ratio before any adjustments. Hence, both (A) and (R) are true, and (R) is the correct explanation of (A).

Key Concept:

a) \$34,500
[Solution Description]
Current year's profit = \$1,80,000 × 1.15 = \$2,07,000.
P's share for 4 months = (4/12) × \$2,07,000 × (5/10) = \$34,500.

Key Concept: Purpose of Revaluation Account

c) To adjust the book values of assets and liabilities to their current market values and distribute any resulting profit or loss among the partners
[Solution Description]
The primary purpose of preparing a Revaluation Account is to adjust the book values of assets and liabilities to their current market values and distribute any resulting profit or loss among the partners in their old profit-sharing ratio.

Key Concept: Share of Profit

c) \$7,500
[Solution Description]
1. Calculate profit ratio per sale: $\frac{\text{Last Year’s Profit}}{\text{Last Year’s Sales}} = \frac{120000}{600000} = 0.2$.
2. Profit till death: $0.2 \times 150000 = 30000$.
3. Deceased partner’s share: $30000 \times \frac{1}{4} = 7500$.
So, the deceased partner’s share of profit is \$7,500.

Key Concept: Valuation of Goodwill, Calculation of Gaining Ratio, Journal Entry for Goodwill Adjustment

d) Assertion is false, but Reason is true.
[Solution Description]
The Assertion states that the deceased partner's share of goodwill is distributed among the remaining partners in their old profit-sharing ratio, which is incorrect. According to partnership accounting principles, the deceased partner's share of goodwill is distributed among the remaining partners in their gaining ratio, not the old ratio. The Reason correctly states that the gaining ratio is calculated as the difference between the new profit-sharing ratio and the old profit-sharing ratio of the remaining partners. Therefore, while the Reason is true, the Assertion is false.

Key Concept: On the Basis of Turnover (or Sales

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that the deceased partner's share of profit is calculated based on the last year’s profit and sales ratio, which is true as per the given formula:
$\text{Deceased partner’s share of profit} = \frac{\text{Last year’s profit}}{\text{Last year’s sales}} \times \text{Sales till date of death} \times \text{Share of deceased partner}$.
The reason is also true because the sales up to the date of death are indeed used to calculate the proportionate profit for the current year, as illustrated in the syllabus example. Moreover, the reason correctly explains the assertion since the calculation method relies on both the previous year’s data and current year’s sales.

Key Concept: Partners’ Capital Accounts

c) \$3,000 each
[Solution Description]
Goodwill adjustment for retiring partner C’s share:
Total goodwill = \$30,000.
C’s share = $\frac{1}{5} \times \$30,000 = \$6,000$.
Remaining partners A and B will bear this amount in their profit-sharing ratio (2:2 or 1:1).
Thus, A and B will be debited with \$3,000 each.

Key Concept: Balance Sheet, Capital Adjustment

a) \textcurrency 50,750
[Solution Description]
The new capital of A is \textcurrency 1,68,750, and the initial adjusted capital after revaluation was \textcurrency 1,18,000. To find the additional capital brought in by A:
Additional capital = New capital - Initial adjusted capital
Additional capital = \textcurrency 1,68,750 - \textcurrency 1,18,000 = \textcurrency 50,750
Therefore, A brought in an additional capital of \textcurrency 50,750.

Key Concept: Time-Based Calculation, Last Year's Profit

b) \$6,000
[Solution Description]
To calculate C's share of profit:
1. Time period from 1st April 2023 to 30th September 2023 is 6 months.
2. C's profit share = $\text{Last Year's Profit} \times \frac{\text{Time Period}}{12} \times \text{C's Ratio}$
3. Substitute values: \$72,000 $\times \frac{6}{12} \times \frac{1}{6} = \$6,000$.

Key Concept:

d) Deceased Partner’s Capital A/c Dr. To Deceased Partner’s Executor’s Loan A/c
[Solution Description]
The amount due to the deceased partner’s executor is transferred from their capital account to the executor’s loan account. The correct journal entry is:
$\text{Deceased Partner’s Capital A/c} \quad \text{Dr.} \quad \text{To Deceased Partner’s Executor’s Loan A/c}$

Key Concept: Revaluation Account

b) \$22,500
[Solution Description]
Total revaluation profit = \$45,000.
Profit-sharing ratio for A:B:C = 3:2:1.
Sum of ratios = 3 + 2 + 1 = 6.
Partner A's share = (3 / 6) * \$45,000 = \$22,500.

Key Concept: Definition and Use of Profit and Loss Suspense Account

d) When the new profit-sharing ratio remains the same as the old ratio
[Solution Description]
The Profit and Loss Suspense Account is used when the new profit-sharing ratio of continuing partners does not differ from their old profit-sharing ratio. This ensures that the deceased partner's share of profit or loss is adjusted without altering the existing ratio among the remaining partners.

Key Concept: Profit Calculation on Time Basis, Deceased Partner's Share

c) \$30,000
[Solution Description]
First calculate time period from last balance sheet (31st March) to death date (30th September): 6 months.
Then apply the formula:
$\text{Share} = \text{Last Year's Profit} \times \frac{\text{Time}}{12} \times \text{Profit Ratio} = 240,000 \times \frac{6}{12} \times \frac{1}{4} = 30,000$

Key Concept: Multi-concept: Turnover-Based Profit, Accounting Treatment

b) X and Z's Capital A/c Dr. \$2,025 To Y's Capital A/c \$2,025
[Solution Description]
First, compute the firm’s profit till date:
$\text{Profit till date} = \frac{27,000}{180,000} \times 45,000 = 6,750$
Next, determine Y's share:
$\text{Y's share} = 6,750 \times \frac{3}{10} = 2,025$
Since the adjustment is done through Capital Transfer, the correct entry is:
$\text{X and Z's Capital A/c Dr. (in gaining ratio)} \quad \text{To Y's Capital A/c}$

Key Concept: Calculation of Deceased Partner’s Share of Profit

c) \$3,000
[Solution Description]
Using the formula:
$\text{Deceased partner’s share of profit} = \text{Last year’s profit} \times \frac{\text{Sales till date of death}}{\text{Last year’s sales}} \times \text{Share of deceased partner}$
Substituting the given values:
$45,000 \times \frac{15,000}{90,000} \times \frac{2}{5} = 3,000$
Hence, the deceased partner’s share of profit is \$3,000.

Key Concept: Accounting Treatment

c) Debit Deceased Partner’s Capital A/c and Credit Deceased Partner’s Executor’s Loan A/c
[Solution Description]
As per the syllabus, the amount due to the deceased partner is transferred to their Executor’s Loan Account with the following journal entry:
$\text{Deceased Partner’s Capital A/c} \quad \text{Dr.} \quad \text{To Deceased Partner’s Executor’s Loan A/c}$.
Therefore, the correct option is "Debit Deceased Partner’s Capital A/c and Credit Deceased Partner’s Executor’s Loan A/c."

Key Concept: Profit and Loss Suspense Account

b) \$50,000
[Solution Description]
Current year’s profit = Previous year’s profit + 20\% of previous year’s profit.
$2,00,000 + (20\% \times 2,00,000) = 2,40,000$
Profit for 5 months (April to August) = $\frac{5}{12} \times 2,40,000 = 1,00,000$
Harish’s share = $1,00,000 \times \frac{2}{4} = 50,000$
Journal Entry:
$\text{Profit and Loss Suspense A/c Dr. } 50,000 \quad \text{To Harish’s Capital A/c } 50,000$
Therefore, the amount credited to Harish’s Capital Account is \$50,000.

Key Concept: Calculation of Gaining Ratio

c) 1:3
[Solution Description]
The gaining ratio is calculated as the difference between the new ratio and old ratio:
$Ram = \frac{1}{2} - \frac{2}{5} = \frac{1}{10}$
$Sohan = \frac{1}{2} - \frac{1}{5} = \frac{3}{10}$
Hence, the gaining ratio is 1:3.

Key Concept: Deceased Partner's Executor, Interest Calculation, Section 37 of Indian Partnership Act

a) \$24,000
[Solution Description]
Calculate the deceased partner's share of profits using their profit-sharing ratio:
$\text{Share of Profit} = \text{Total Profit} \times \frac{\text{Deceased Partner's Ratio}}{\text{Total Ratio}} \times \frac{\text{Time}}{12}$
Here, Total Profit = \$1,20,000, and the time period is 12 months. C's ratio = 2, Total ratio = 10.
$\text{Share of Profit} = 120000 \times \frac{2}{10} = 24000$
Since the executor chose profit share over 6\% interest, \$24,000 is payable.

Key Concept: Share of Goodwill Calculation

c) \$60,000
[Solution Description]
First, calculate the total goodwill as: $\text{Goodwill} = \text{Average Profit} \times \text{Number of Years' Purchase} = 30,000 \times 4 = \$120,000$. The deceased partner’s share of goodwill is: $120,000 \times \frac{3}{6} = \$60,000$.

Key Concept: Interest on Executor’s Loan

c) 6\% p.a.
[Solution Description]
The syllabus states that in the absence of an agreement, interest is payable at 6\% p.a. or proportionate share of profit earned by using executor’s capital, as per Section 37 of the Indian Partnership Act, 1932.
Hence, the correct answer is "6\% p.a."

Key Concept: On the Basis of Average Profit

b) \$3,000
[Solution Description]
To calculate A's share of profit:
1. Average profit = $\frac{\$9,000 + \$12,000 + \$15,000}{3}$ = \$12,000.
2. Time period from 1st April 2021 to 31st December 2021 = 9 months.
3. Prorated profit for 9 months = \$12,000 $\times$ $\frac{9}{12}$ = \$9,000.
4. A's share in profit = \$9,000 $\times$ $\frac{1}{3}$ = \$3,000.

Key Concept: Average Profit Method

c) \$10,000
[Solution Description]
First, find the average profit:
$\text{Average profit} = \frac{60,000 + 72,000 + 84,000}{3} = 72,000$
Next, calculate the profit till the date of death:
$72,000 \times \frac{5}{12} = 30,000$
Finally, compute the deceased partner’s share:
$30,000 \times \frac{1}{3} = 10,000$
Thus, the deceased partner’s share of profit till the date of death is \$10,000.

Key Concept:

a) A: \$17,813; C: \$48,986
[Solution Description]
Last year's profit = \$96,000
2nd last year = \$96,000/1.08 ≈ \$88,889
3rd last year = \$88,889/1.08 ≈ \$82,305
Average profit = (\$96,000 + \$88,889 + \$82,305)/3 ≈ \$89,065
Goodwill = 2 × \$89,065 = \$178,130
B's share = \$178,130 × (3/8) = \$66,798.75
Gaining ratio: A gains 3/5 - 4/8 = 1/10, C gains 2/5 - 1/8 = 11/40
Total gain = 15/40 = 3/8
A's share = \$66,798.75 × (1/10)/(3/8) ≈ \$17,813
C's share = \$66,798.75 - \$17,813 ≈ \$48,985.75
Journal Entry:
A's Capital Dr. \$17,813
C's Capital Dr. \$48,985.75
To B's Capital \$66,798.75

Key Concept: Assertion-Reason

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion is true because the fundamental principle of a Balance Sheet is that total assets must equal total liabilities plus capital. The Reason is also true as the Balance Sheet is prepared after incorporating all adjustments and revaluations to show the accurate financial position. Moreover, the Reason correctly explains why the Balance Sheet must balance, as it accounts for all adjustments to ensure accuracy.

Key Concept: Calculation of Deceased Partner's Share - Time Basis

a) \$6,667
[Solution Description]
Using the time basis formula:
$\text{Share of Profit} = \text{Last Year's Profit} \times \frac{\text{Time Till Death}}{12} \times \text{Partner's Share} = 80,000 \times \frac{4}{12} \times \frac{1}{4} = 6,666.67$
The deceased partner's share of profit is approximately \$6,667.

Key Concept: Accounting Treatment - Legal Heirs

c) The deceased partner's legal heirs
[Solution Description]
According to partnership law, in the absence of an agreement, the deceased partner's share is paid to their legal heirs or executors.

Key Concept: Calculation of Deceased Partner’s Share of Profit on Basis of Average Profit

c) \$6,500
[Solution Description]
Step 1: Total profit for 3 years = \$50,000 + \$60,000 + \$70,000 = \$180,000.
Step 2: Average profit = \$180,000 $\div$ 3 = \$60,000.
Step 3: Period from April 1, 2023, to October 15, 2023 = 6.5 months.
Step 4: Firm's profit for 6.5 months = \$60,000 $\times \frac{6.5}{12} = \$32,500. \\ Step 5: R's share of profit = \$32,500$\times \frac{1}{5} = \$6,500.

Key Concept: On the Basis of Last Year’s Loss

c) \$6,000
[Solution Description]
Time period from 1st April to 31st December = 9 months.
R's share ratio = $\frac{2}{9}$ (since total ratio parts = 4 + 3 + 2 = 9).
R's share of loss = \$36,000 $\times \frac{9}{12} \times \frac{2}{9}$ = \$36,000 $\times \frac{3}{4} \times \frac{2}{9}$ = \$6,000.

Key Concept: Last Year's Profit Method

b) \$4,000
[Solution Description]
To calculate the deceased partner’s share of profit using the Last Year's Profit Method:
$\text{Deceased Partner’s share} = \text{Last year’s profit} \times \frac{\text{Time till death}}{12} \times \text{Share of deceased partner}$
Given:
- Last year’s profit = \$48,000
- Time till death = 4 months
- Share of deceased partner = $\frac{1}{4}$
Substituting the values:
$48,000 \times \frac{4}{12} \times \frac{1}{4} = 4,000$
Therefore, the deceased partner’s share of profit till the date of death is \$4,000.

Key Concept: Revaluation, Balance Sheet Adjustments

b) \$13,000 increase
[Solution Description]
Machinery increases by \$15,000. Debtors decrease by \$3,000, but the provision increases by \$1,000 (new provision = \$3,000 - \$2,000). Net impact = \$15,000 - \$3,000 + \$1,000 = \$13,000 increase in total assets.

Key Concept:

c) Deceased Partner’s Executor’s Loan A/c Dr. To Cash/Bank A/c
[Solution Description]
When an instalment is paid to the deceased partner’s executor, the executor’s loan account is debited, and the cash or bank account is credited. The journal entry is:
$\text{Deceased Partner’s Executor’s Loan A/c} \quad \text{Dr.} \quad \text{To Cash/Bank A/c}$

Key Concept: On the Basis of Last Year's Profit, Multi-concept: Time-based profit calculation and partnership sharing ratio

b) \$8,000
[Solution Description]
To calculate X’s share of profit:
1. Determine the time period from 1st April 2022 to 30th September 2022 = 6 months.
2. Calculate estimated current year's profit proportionally: \$36,000 \times \frac{6}{12} = \$18,000.
3. X’s share = \$18,000 \times \frac{4}{9} = \$8,000.

Key Concept: Accounting Treatment of Deceased Partner’s Share of Profits

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to the syllabus, when the new profit-sharing ratio differs, the deceased partner's share of profit must be adjusted through capital transfer. This involves debiting the gaining partners' capital accounts and crediting the deceased partner's capital account in the gaining ratio. The reason correctly explains why this adjustment is necessary - to ensure the deceased partner gets their rightful share of profits until the date of death. Thus, both Assertion and Reason are true, and Reason correctly explains Assertion.

Key Concept: Calculation of Deceased Partner’s Share of Profit on Basis of Time - Last Year's Profit

b) \$2,000
[Solution Description]
Step 1: Calculate the time period from April 1, 2023, to July 31, 2023, which is 4 months.
Step 2: Compute the firm's profit for 4 months: \$36,000 $\times \frac{4}{12} = \$12,000$.
Step 3: Calculate C's share: \$12,000 $\times \frac{1}{6} = \$2,000$.

Key Concept: Accounting Entries - In Case of Profit

c) Profit and Loss Suspense A/c Dr.; To Deceased Partner’s Capital A/c
[Solution Description]
The journal entry involves debiting the Profit and Loss Suspense Account for the deceased partner's share of profit and crediting the Deceased Partner’s Capital Account.
$\text{Profit and Loss Suspense A/c Dr. (Share of profit)}$
$\text{To Deceased Partner’s Capital A/c}$

Key Concept: Through Profit and Loss Suspense Account

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to the syllabus, the Profit and Loss Suspense Account method is used only when the new profit-sharing ratio of continuing partners does not differ from their old profit-sharing ratio. The assertion correctly states this condition. The reason explains that if the profit-sharing ratio changes, the adjustment must be made through Capital Transfer, which is also correct and logically explains why the Profit and Loss Suspense Account is not used in such cases.

Key Concept:

a) \$5,400
[Solution Description]
Y's share = \$99,000 × (3/11) = \$27,000.
Gaining ratio calculation:
X's new share = 3/5, old share = 6/11 → gain = 3/5 - 6/11 = 3/55
Z's new share = 2/5, old share = 2/11 → gain = 2/5 - 2/11 = 12/55
Total gain = 15/55 = 3/11
X's debit = \$27,000 × (3/15) = \$5,400.

Key Concept: Interest on Capital

b) \$3,000
[Solution Description]
To calculate the interest on capital:
1. Time period from 1st April to 30th September = 6 months.
2. Interest = $\text{Capital} \times \frac{\text{Rate}}{100} \times \frac{\text{Time}}{12}$
3. Plugging in the values: $50000 \times \frac{12}{100} \times \frac{6}{12} = 3000$.
So, the interest payable is \$3,000.

Key Concept: Assertion and Reason on Deceased Partner's Profit Calculation

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion states that the deceased partner's share of profit is calculated by multiplying the firm's profit up to the date of death with their profit-sharing ratio. This is correct because, as per the given formula, the profit share is derived from the firm’s interim profit and the partner’s ratio.
The Reason provides the correct method for calculating the firm’s profit up to the date of death based on turnover, which justifies the Assertion. Hence, both are true, and Reason correctly explains the Assertion.

Key Concept: Understanding the Turnover-Based Profit Calculation

d) $\frac{\text{Last year's profit}}{\text{Last year's sales}} \times \text{Sales till date of death} \times \text{Share of deceased partner}$
[Solution Description]
The formula for calculating a deceased partner's share of profit based on turnover is:
$\text{Deceased partner's share} = \frac{\text{Last year's profit}}{\text{Last year's sales}} \times \text{Sales till date of death} \times \text{Share of deceased partner}$
This matches option d).

Key Concept: Calculation and Accounting Treatment of Amount due to Deceased Partner

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion (A) states that the amount due to a deceased partner includes their share of goodwill, which is calculated based on the partnership agreement. This is true as per the syllabus, which mentions that goodwill is one of the components in calculating the amount due to a deceased partner. The reason (R) explains the nature of goodwill as an intangible asset representing the firm's reputation and earning capacity, and it justifies why the deceased partner's share of goodwill should be included. Hence, both assertion and reason are true, and the reason correctly explains the assertion.

Key Concept: Construction of Deceased Partner’s Executor’s Loan Account

b) Deceased Partner’s Executor’s Loan A/c Dr. To Cash/Bank A/c
[Solution Description]
When payment is made in instalments, the Deceased Partner's Executor's Loan Account is debited, and the Cash/Bank Account is credited. This reflects the outflow of cash to settle the loan.

Key Concept: Meaning of Death of a Partner

b) The firm continues, and the deceased partner’s share is transferred to their legal heirs while the remaining partners carry on the business.
[Solution Description]
When a partner dies, the partnership is dissolved as per law, but the firm may continue with the remaining partners. The deceased partner's share is purchased by the remaining partners, and their legal heirs receive the amount due. The accounting treatment resembles that of retirement, except payment goes to legal heirs instead of the partner themselves.

Key Concept: Interest on Executor’s Loan Account

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
According to U/S 37 of the Indian Partnership Act, 1932, in the absence of an agreement, the executor of a deceased partner has the right to either receive interest at 6\% p.a. on the loan amount or a proportionate share of the profit earned by using the executor’s capital. Thus, both Assertion and Reason are true, and the Reason correctly explains the Assertion as it provides the legal basis for the interest payment option.

Key Concept: Time Basis, Deceased Partner's Share of Profit

d) Assertion is false, but Reason is true.
[Solution Description]
The assertion states that the deceased partner's share of profit calculated on a time basis is always based on the last year's profit. This is not entirely accurate because the partnership agreement can also specify using the average profit of previous years for this calculation. The reason correctly points out that the method depends on what is specified in the partnership agreement. Therefore, while the reason is true and provides additional information, it does not support the assertion as the assertion itself is false because it generalizes the method.

Key Concept: Goodwill Calculation, Profit Sharing

a) \$11,250
[Solution Description]
Total profits for 3 years:
\$90,000 + \$60,000 + \$30,000 = \$1,80,000.
C's share of profit:
\$1,80,000 $\times \frac{1}{8} = \$22,500$.
Goodwill amount:
50\% of \$22,500 = \$11,250.
This amount is to be credited to C's capital account.

Key Concept: Construction of Deceased Partner’s Executor’s Loan Account, Journal Entry

b) Debit Sohan’s Executor’s Loan A/c \$14,125; Credit Cash A/c \$14,125
[Solution Description]
The total amount due to Sohan's executor is \$10,000 (capital) + \$150 (interest) + \$5,000 (goodwill) + \$750 (profit) = \$15,900. After the first instalment of \$1,775, the remaining amount is \$15,900 - \$1,775 = \$14,125.
The journal entry will be:
Debit: Sohan’s Executor’s Loan A/c \$14,125
Credit: Cash/Bank A/c \$14,125.

Key Concept: Turnover Basis

a) \$2,400
[Solution Description]
Calculation steps:
1. Profit per sale unit = $\frac{\$48,000}{\$240,000} = 0.2$.
2. Profit till death = \$60,000 $\times 0.2 = \$12,000$.
3. R's share = \$12,000 $\times \frac{2}{10} = \$2,400$.

Key Concept: Calculation and Accounting Treatment of Amount due to Deceased Partner

c) Assertion is true, but Reason is false.
[Solution Description]
The Assertion is true because when the current year's profit is not available, the deceased partner's share of profit is calculated based on the last year's profit as per the partnership agreement or common accounting practice. However, the Reason is false because the Indian Partnership Act, 1932 does not mandate the use of last year's profit for calculating the deceased partner's share. Instead, it allows for interest at 6\% p.a. or a proportionate share of profit earned by using the executor’s capital, at the executor's option.

Key Concept: Interest on Capital Calculation

b) \$1,200
[Solution Description]
Interest on capital is calculated using the formula: $\text{Interest} = \text{Capital} \times \frac{\text{Rate}}{100} \times \frac{\text{Time}}{12}$. Here, Capital = \$20,000, Rate = 12\%, Time = 6 months. Substituting the values: $20,000 \times \frac{12}{100} \times \frac{6}{12} = 20,000 \times 0.06 = \$1,200$.

Key Concept: Turnover Basis Calculation, Multi-Concept

b) \$40,000
[Solution Description]
Use turnover basis formula:
$\text{Share} = \left(\frac{180,000}{900,000}\right) \times 600,000 \times \frac{1}{3} = 0.2 \times 600,000 \times \frac{1}{3} = 40,000$

Key Concept: Share of Profit Calculation

c) \$2,400
[Solution Description]
Current year's expected profit is 20\% more than last year's profit: $24,000 + (24,000 \times 0.20) = \$28,800$. The deceased partner’s share of profit for 4 months is: $28,800 \times \frac{4}{12} \times \frac{1}{4} = 28,800 \times \frac{1}{12} = \$2,400$.

Key Concept: Construction of Deceased Partner’s Executor’s Loan Account

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that in the absence of an agreement, the executor of a deceased partner has the option to receive either 6\% interest or a proportionate share of profits earned by using the executor's capital. This is accurate as per the syllabus. The reason correctly cites Section 37 of the Indian Partnership Act, 1932, which provides this provision and clarifies that it applies similarly to both deceased and retiring partners. Therefore, both the assertion and reason are true, and the reason explains the assertion correctly.

Key Concept: Revaluation Account

b) Both Assertion and Reason are true, but Reason is NOT the correct explanation of Assertion.
[Solution Description]
The Assertion states that the revaluation account is used to adjust the value of assets and liabilities upon the death of a partner, which is true as per the syllabus. The Reason states that its purpose is to distribute profit/loss among partners in their old profit-sharing ratio, which is also true. However, the Reason does not correctly explain the Assertion because while profit/loss distribution is one function, the primary purpose is adjustment of asset/liability values. Thus, both are true but Reason is not the correct explanation of Assertion.

Key Concept: Adjustment of Reserves, Goodwill, Final Transfer

a) \$1,20,000
[Solution Description]
The Reserve Fund distribution is separate from goodwill adjustment. Only the goodwill adjustment involves Sita's Capital Account. Total goodwill credited to Sita is \$1,20,000.

Key Concept: Type of Question

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion explains the correct formula for calculating a deceased partner's share of profit based on turnover, which is derived proportionally using last year's profit and sales data along with current year sales until the date of death. The Reason states that this method assumes a constant profit margin between the years. Since the formula indeed relies on this assumption for proportional calculation, the Reason correctly explains the Assertion.

Key Concept: Share of Goodwill

c) \$80,000
[Solution Description]
1. Calculate total goodwill: $\text{Goodwill} = \text{Average Profit} \times \text{Number of Years’ Purchase} = 60000 \times 4 = 240000$.
2. Deceased partner’s share of goodwill: $240000 \times \frac{1}{3} = 80000$.
So, the deceased partner’s share of goodwill is \$80,000.

Key Concept: Payment of Amount due to Deceased Partner’s Executor

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion states that the executor of a deceased partner has two options: to receive either 6\% interest per annum or a share of profits based on the deceased partner's capital. This is correct as per the syllabus content. The reason cites Section 37 of the Indian Partnership Act, 1932, which indeed provides these options when there is no prior agreement. Since the reason correctly explains the assertion, both are true and related.

Key Concept: Revaluation Account and Capital Accounts

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The assertion correctly states that the Revaluation Account records changes in asset and liability values and transfers them to the partners' capital accounts in their old profit-sharing ratio. The reason explains the broader purpose of the Revaluation Account, which includes ensuring fair distribution of profits or losses among existing partners during changes like admission or retirement. Since the reason provides the correct justification for the assertion, both are true and logically connected.

Key Concept: Purpose of Revaluation Account

a) Both Assertion and Reason are true, and Reason is the correct explanation of Assertion.
[Solution Description]
The Assertion (A) correctly states that the Revaluation Account records changes in asset and liability values during reconstitution. This aligns with the syllabus description of its purpose. The Reason (R) explains why this revaluation is necessary (to reflect the true financial position during events like admission, retirement, or death of a partner). Since both are true and the Reason directly justifies the Assertion, the correct answer is option (a).

Key Concept: Deceased Partner's Profit Share, Profit and Loss Suspense Account

c) \$1,500
[Solution Description]
First, find the firm’s profit till the date of death using the formula:
$\text{Profit till date} = \frac{\text{Last year's profit}}{\text{Last year's sales}} \times \text{Sales till date of death}$
Substitute the given values:
$\text{Profit till date} = \frac{36,000}{240,000} \times 60,000 = 9,000$
Now, calculate C's share of profit:
$\text{C's share} = 9,000 \times \frac{1}{6} = 1,500$
Thus, the correct answer is \$1,500.

Key Concept: On the Basis of Average Profit

b) \$2,000
[Solution Description]
Average profit = $\frac{\$9,000 + \$12,000 + \$15,000}{3}$ = \$12,000.
Time period from 1st April to 30th September = 6 months.
A's share ratio = $\frac{1}{3}$.
A's share of profit = \$12,000 $\times \frac{6}{12} \times \frac{1}{3}$ = \$12,000 $\times \frac{1}{2} \times \frac{1}{3}$ = \$2,000.

Key Concept: Balance Sheet of the New Firm

a) Each partner gains \$7,000
[Solution Description]
Total gain from revaluation = Increase in assets (\$10,000) + decrease in liabilities (\$4,000) = \$14,000.
Since the profit-sharing ratio is equal, each partner's capital account will increase by $\frac{\$14,000}{\text{Number of Partners}}$.
Assuming 2 partners, each gets \$7,000.

Key Concept: Accounting Treatment - Instalment Payment

c) Debit Executor’s Loan A/c \$20,000 and Interest A/c \$1,200; Credit Cash A/c \$21,200
[Solution Description]
When an instalment and interest are paid to the executor, the journal entry involves debiting the Executor’s Loan Account (for the principal) and crediting the Cash/Bank Account (total payment).
The correct entry is:
$\text{Deceased Partner’s Executor’s Loan A/c} \rightarrow \text{Dr.}\ 20,000$
$\text{Interest on Executor’s Loan A/c} \rightarrow \text{Dr.}\ 1,200$
$\text{To Cash/Bank A/c}\ 21,200$
Here, the total payment (\$21,200) includes both the instalment and interest.