NCERT Solutions for Class 12 Accountancy Chapter 2 Accounting for Partnership: Basic Concepts
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Short Answer Type Questions
1. Define Partnership Deed.
Ans. A partnership deed is an agreement among the partners which contains all the terms of the Partnership.
It generally contains the details about all the aspects affecting the relationship between the partners including the objective of business, contribution of capital by each partner, ratio in which the profits and the losses will be shared by the partners and entitlement of partners to interest on capital, interest on loan etc.
2. Why it is considered desirable to make the partnership agreement in writing?
Ans. As per Partnership Act 1932, it is not necessary to have a partnership deed in writing, but still it is always suggested to have a deed in written form because today may be there are very good relationship among the partners, but in future if there may be any dispute regarding any issue. A written partnership agreement will help in avoiding disputes and misunderstandings among the partners.
3. List the items which may be debited or credited in capital accounts of the partners when
(i) Capitals are fixed (ii) Capitals are fluctuating
Ans. (i) When capitals are fixed, the following items will be debited or credited in partners capital account
| Partners Capital Account |
| Date | Particulars | J.F. | Amount (₹). | Date | Particulars | J.F. | Amount (₹) |
| To Bank A/c (Permanent Withdrawal) |
-- | By Balance b/d (Opening Balance) | -- | ||||
| To Balance c/d | -- | By Bank A/c (Fresh Capital Introduced) | -- |
(ii) When capitals are fluctuating the following items will be debited or credited in partners capital account.
| Dr. | Partners’ Capital Account | Cr. |
| Date | Particulars | J.F. | Amount(₹) | Date | Particulars | J.F. | Amount(₹) |
| To Bank A/c (Permanent Withdrawal) | — | By Balance b/d (Opening Balance) | — | ||||
| To Interest on Drawings | -- | By Bank A/c | -- | ||||
| To P & L Appropriation A/c (Loss on Sharing Basis) |
-- | By Salaries | -- | ||||
| To Balance c/d | -- | By Interest on Capital By P & L Appropriation A/c (Profit on Sharing Basis) |
-- |
4. Why is Profit and Loss Appropriation account prepared?
Ans. Profit and loss adjustment account is prepared in order to record those transactions or omissions and errors which were left while preparing the final accounts and they are found after the final accounts have been prepared and the profits distributed among the partners. The omission may be related to interest on capital, interest on drawings, interest on partners’ loan, partner’s salary, partner’s commission or outstanding expenses.
There may also be some changes in the provisions of partnership deed or system of accountings having an impact with retrospective effect. All these acts of omission and commission are to be adjusted for correction of their impact. These omission errors and corrections can be recorded in partners’ capital account directly, but still it seems convenient to prepare the profit and loss adjustment account.
5. Give two circumstances under which the fixed capitals of partners may change.
Ans. Under the fixed capital method the capital of partners may change in the following two circumstances
(i) First, when a partner has brought addtional capital with the consent of other partners.
(ii) Second, when a partner has withdrawn a part of capital with the consent of other partners.
6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Ans. When a fixed amount of money is withdrawn quarterly, the withdrawls could be made either at the beginning or at the end of each quarter, if the withdrawls are made at the begining of each quarter, the interest is calculated on the total money withdrawn during the period of seven and half months .
7. In the absence of partnership deed, specify the rules relating to the following
(i) Sharing of profits and losses
(ii) Interest on partner’s capital
(iii) Interest on partner’s drawings
Ans. (i) Sharing of Profit and Losses
In the absence of partnership deed profit sharing ratio among the partners has to be equal.
(ii) Interest on Partner’s Capital
In the absence of a partnership deed interest on partners capital will not be given.
(iii) Interest on Partner’s Drawings
In the absence of partnership deed no interest will be charged on partners’ drawings .
(iv) Interest on Partner’s Loan
In the absence of partnership deed, if a partner gives any loan to the firm he/she will be entitled to get fixed percentage of interest @6% per annum.
(v) Salary of Partner
In the absence of the patnership deed, a partner will not be entitled for getting any salary for his work even if the other are non working.
Long Answer Type Questions
1. What is meant by partnership? Explain its chief characteristics?
Ans. According to the Section 4 of the Partnership Act, 1932, Partnership is an agreement between persons who have agreed to share profits or losses of a business that will be carried by all or any one of them acting for all.
Persons who joined their hands to set up the business are called ‘partners individually’ and ‘firm’ collectively and the name under which they carry out their business is termed as ‘firm name’.
The following are the important characteristics of partnership:
(i) Two or More Persons In order to form a partnership, there has to be at least two individuals coming together for a common goal. In other words, the minimum required number of partners in a firm can be two. But, there is a limit on the maximum number. If a firm is engaged in the banking business, it can have a maximum of ten partners while in other cases, the maximum number of partners can be fifty.
(ii) Partnership Deed
A partnership deed is an agreement among the partners which consists of all the terms of the partnership. It generally contains the details about all the aspects affecting the relationship between the partners which includes the objective of business, contribution of capital by each partner, ratio in which the profits and the losses will be shared by the partners and entitlement of partners to interest on capital, interest on loan, etc.
(iii) Business
One of the key features of a partnership is that it is formed to carry out a legal business. Partnership, in case of an illegal business, is not valid.
(iv) Sharing of Profit
In case of a partnership, the partners are suppose to share profit or loss in an agreed ratio or as per the provisions of the Partnership Act, 1932, as per which they will share profit equally.
(v) Liability
In the case of a partnership, partners’ liability is unlimited. If there is any obligation against the third party, the partners will have to pay it out of their personal property.
2. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
Ans. It is always suggested to have a written partnership deed among the partners before getting into any partnership venture. But sometimes a partnership is started without preparing or signing any such document. In such a case the rules of partnership will be applicable as per the provisions of the Indian Partnership Act, 1932. The following are the provisions that are applicable to the partnership accounts in absence of partnership deed.
(i) Profit Sharing Ratio : When a partnership deed is not made or even if it is made but silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act 1932, profits and losses are supposed to be shared equally among all the partners of the firm.
(ii) Interest on Capital : When there is absence of partnership deed or the partnership deed is silent on the issue of interest on partner’s capital, then according to the Partnership Act 1932, no interest on partners’ capital will be provided. However, if a mutual agreement is made on this issue then they are free to give interest on capital out of the profit of the firm.
(iii) Interest on Drawings : If there is no partnership deed, then the issue related to the interest on drawing will be handled according to the provisions of Partnership Act. 1932 According to which no Interest on drawing will be charged.
(iv) Interest on Partner’s Loan : When the partnership deed is not there among the partners or the partnership deed is silent on interest on partner’s loan then according to the Partnership Act, 1932. the partners are entitled for 6% p.a. interest on the loan forwarded by them to the firm
(v) Salary to Partner : When there is no partnership deed or it is silent on the issue related to salary to a partner, then as per the rules of the partnership Act. 1932, no partner will be entitled to any salary.
3. Explain why it is considered better to make a partnership agreement in writing.
Ans. As per Partnership Act. 1932, it is not necessary to have a partnership deed in writing, but still it is always suggested that it should be in written form. Because today may be there are very good relationship among the partners but in future if there may be any dispute regarding any issue, a written partnership agreement will help in avoiding disputes and misunderstandings among the partners.
In this way a written partnership deed is more desirable than an oral agreement. A written partnership agreement ensures seamless functioning of the business of the partnership firm. It also helps in settling the disputes among the partners. Moreover, a duly signed and registered partnership deed works as an evidence in the court of law. Therefore, it is suggested to have a partnership deed in writing because of the benefits associated with written documents over its oral counterparts.
4. Illustrate how interest on drawings will be calculated under various situations.
Ans. When a partner withdraws a sum either in cash or in any other form, from the firm for his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of drawings is termed as interest on drawings. The method for calculation of interest on drawings depends on the information available for time and frequency of the drawings made by the partner. The following different situations of drawings made, illustrate the calculation of interest charged on drawings.
Situation (I) : When all the information regarding amount, date and rate of interest on drawings is given
When a partner withdrew ₹10,000 on July 01 and interest on drawings is to be charged at 12% p.a. and the firm closes its books on December 31 every year, then interest on drawings amount to ₹600.
$$Interest\space on\space drawings = Total\space Amount \space Drawn×\frac{rate\space of\space intrest}{100}×\frac{period}{12}\\Interest\space on\space drawings = 10000×\frac{12}{100}×\frac{6}{12}=₹600$$
Situation (II) : When information regarding amount, rate of interest on drawings is given
Case I : Sometimes amount and rate of interest on drawings (per annum) is given but date is not mentioned. In this case when the details regarding the amount of drawings and rate of interest on drawings (p.a.) is mentioned but the date of drawings is not given then the interest will be charged on average basis and the period of drawings will be taken as 6 months.
$$Interest\space on\space drawings =10,000×{12}{100}×\frac{6}{12}= ₹600$$
Case II : Sometimes the amount and rate of its interest on drawings is given but the date and per annum rate of interest is not mentioned.
In this case when the date and the rate of interest are given but per annum is not specified, then annual interest is charged.
e.g., If a partner withdrew ₹10,000 and interest rate is 12%, then the interest on drawings amounts to
₹12,000.
$$Interest\space on\space drawings = Total\space Amount\space withdrawn ×\frac{Rate}{100}$$
$$Interest\space on\space drawings = 10,000 ×\frac{12}{100}=₹1,200$$
Situation III : When a fixed amount is withdrawn at regular interval.
Case I : Sometimes a fixed amount is withdrawn by the partner at the beginning of each month and the rate of interest is given, then the interest is calculated for 6.5 months.
e.g. If a partner withdraws ₹1,000 in the beginning of every month and the rate of interest is 12% pa, then the interest on drawings amount to ₹780.
$$Interest\space on\space drawings = 12,000 ×\frac{12}{100}×\frac{6.5}{12}=₹780$$
Total amount of drawings = (1000 × 12) = ₹12,000
Case II : Sometimes a fixed amount is withdrawn at the end of each month and the rate of interest is given then the interest is calculated for 5.5 months.
e.g., if a partner withdraws ₹1,000 at the end of each month and rate of interest is 12% p.a. then the interest on drawings amount to ₹660.
$$Interest\space on\space drawings = Total\space amount\space of\space drawings × \frac{Rate}{100}×\frac{5.5}{12}\\Interest\space on\space drawings = 12,000×\frac{12}{100}×\frac{5.5}{12}=₹600$$
Case III : Sometimes a fixed amount is withdrawn at the mid of each month and the rate of interest is given then the interest is calculated for 6 months.
e.g., if a partner.withdraws ₹1,000 on 15th of every month and the rate of interest is 12% p.a. then the interest on drawings amount to ₹720.
$$Interest\space on\space drawings = Total\space amount\space of\space drawings ×\frac{Rate}{100}×\frac{6}{12}\\Interest\space on\space drawings = 12,000 ×\frac{12}{100}×{6}{12}=₹720$$
Case IV : If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated for 7.5 months.
e.g., If a partner withdraws ₹5,000 in the beginning of every quarter and the rate of interest is 12% p.a. then the interest on drawings amount to ₹1,500.
$$Interest\space on\space drawings = Total\space amount\space of\space drawings ×\frac{Rate}{100}×\frac{7.5}{12}\\Interest\space on\space drawings = 20,000×{12}{100}×{7.5}{12}=₹1,500$$
Total amount of drawings = 5,000 × 4 = ₹20,000
Case V : If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5 months.
e.g., If a partner withdraws ₹ 5,000 at the end of every quarter and the rate of interest is 12% p.a. then the interest on drawings amounts to ₹ 900.
$$Interest\space on\space drawings = Total\space amount\space of\space drawings ×\frac{Rate}{100}×\frac{4.5}{12}\\Interest\space on\space drawings = 20,000 ×\frac{12}{100}×\frac{4.5}{12}=₹900$$
Total amount of drawings = 5,000 × 4 = ₹ 20,000
Situation IV : When different amount is at different intervals
When different amount is withdrawn by a partner at different dates then the interest is calculated by product method. The period of drawings has to be calculated from the date of withdrawal to the last date of the accounting year.
e.g., A partner withdraws ₹6,000 on March 01, ₹4,000 on June 01, ₹5,000 on Aug 30 and ₹2,000 on Nov 30 and the rate of interest on drawings is 12% p.a. The firm closes its book on December 31.
| Calculation of Interest on Drawings by Product Method |
| Date | Amount(₹) | Outstanding Period | Product |
| March 01 | 6,000 | 10 | 6,000 × 10 = 60,000 |
| Jun 01 | 4,000 | 7 | 4,000 × 7 = 28,000 |
| Aug. 01 | 5,000 | 5 | 5,000 × 5 = 25,000 |
| Nov. 30 | 2,000 | 1 | 2,000 × 1 = 2,000 |
| 1,15,000 |
$$Interest\space on\space drawings = Sum\space of\space product ×\frac{Rate}{100}×\frac{1}{12}\\Interest\space on\space drawings = 1,15,000 ×\frac{12}{100}×\frac{1}{12}= ₹1,150$$
5. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
Ans. Change in the profit sharing ratio occurs mainly because of the admission, retirement or death of a partner or sometimes due to the general agreement among the partners in which they may decide to change the profit sharing ratio. There may be a number of issues that should be undertaken during the change in the profit sharing ratio, such as goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capital, etc.
As far as the issue of general reserve is concerned, it is basically the accumulated profits (if any) and profit (or loss) on revaluation of assets and liabilities and therefore should be distributed in the partner’s capital account in partners old profit sharing ratio.
If the existing partners decide to change the profit sharing ratio then some partners gain at the cost of other partners. In other words one partners gains and other one sacrifices equal to the gain. In that case the former should compensate the latter. Therefore, the gaining partner capital accounts are debited to the extent of their gain and sacrificing partner’s capital accounts are credited to the extent of their sacrifice.The following journal entry is passed.
| Journal Entries | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Gaining Partner’s Dr. Capital A/c | ||||
| To Sacrificing Partner’s Capital A/c (Being adjustment entry passed with the difference figure) |
||||
Example : Ram, Mohan and Shyam are partners in a firm sharing profit and loss in 3:2 :1 ratio. They decide to share profit and loss equally in future. On the closing date, the books of the firm shows ₹2,40,000 as general reserve, profit on revaluation of Plant and Machinery ₹60,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.
| Particulars | Ram | Mohan | Shyam |
| Share of Profit as per 3 : 2:1 | 1,20,000 | 80,000 | 40,000 |
| Profit on Revalution of Plant and Machinery | 30,000 | 20,000 | 10,000 |
| 1,50,000 | 1,00,000 | 50,000 | |
| Share of Profit as per 1 : 1 : 1 | 1,00,000 | 1,00,000 | 1,00,000 |
| Difference (Gain or Loss) | 50,000 (Loss) |
-- | 50,000 (Gain) |
Hence, in the above example. Shyam gains at the cost of Ram. so the Ram needs to be compensated by Shyam with the amount of ₹50.000. The following adjustment entry is passed.
| Journal Entries | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Shyam’s A/c Dr. |
50,000 | |||
| To Ram’s Capital A/c (Being adjustment entry passed with the difference figure) |
50,000 | |||
Numerical Type Questions
1. Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were ₹60,000 and ₹40,000 as on April 01, 2019. During the year they earned a profit of ₹30,000. According to the partnership deed both the partners are entitled to ₹1,000 per month as Salary and 5% p.a. interest on their capital. They are also to be charged an interest of 5% p.a. on their drawings, irrespective of the period, which is ₹12,000 for Tripathi, ₹8,000 for Chauhan. Prepare Partner’s Accounts when, capitals are fixed.
Ans. In case, Interest on capital ,partners salary and interest on drawings is charged against profit.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount(₹) | Particulars | Amount(₹) |
| To Interest on capital | By Profit and Loss A/c | 30,000 | |
| Tripathi’s Current A/c 3,000 | By Interest on Drawings | ||
| Chauhan’s Current A/c 2,000 | 5,000 | Tripati 300 | |
| To Salary to | Chauhan 200 | 500 | |
| Triphati 12,000 | |||
| Chauhan 12,000 | 24,000 | ||
| To Profit transfered to | |||
| Tripati 900 | |||
| Chauhan 600 | |||
| 30,500 | 30,500 | ||
| Dr. | Partners’ Capital Account | Cr. | |||
| Particulars | Tripati | Chauhan | Particulars | Tripati | Chauhan |
| To Balance c/d | 60,000 | 40,000 | By Balance b/d | 60,000 | 40,000 |
| 60,000 | 40,000 | 60,000 | 40,000 | ||
| Dr. | Partners’ Current Account | Cr. | |||
| Particulars | Tripati | Chauhan | Particulars | Tripati | Chauhan |
| To Drawings | 12,000 | 8,000 | By Interest on Capital | 3,000 | 2,000 |
| To Interest on Drawings | 300 | 200 | By Partner’s Salary | 12,000 | 12,000 |
| To Balance c/d Appropriation A/c |
3,600 | 6,400 | By Profit and Loss | 900 | 600 |
| 15,900 | 14,600 | 15,900 | 14,600 | ||
2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capitals, were, ₹90,000 and ₹60,000. The profit during the year were ₹45,000. According to partnership deed, both partners are allowed salary of ₹700 per month to Anubha and ₹500 per month to Kajal. Interest allowed on capital @5%p.a. The drawings during the year were ₹8,500 for Anubha and `6,500 for Kajal. Interest is to be charged @5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital accounts are fluctuating.
Ans. Assuming that partners salary,interest on capital and interest on drawing have already been adjusted in profit and loss account.
Profit and Loss Appropriation Account | |||
| Particulars | Amount(₹) | Particulars | Amount(₹) |
| To Interest on Capital | By Profit & Loss A/c | 45,000 | |
| Anubha’s Current A/c 4,500 | By Interest on Drawing | ||
| Kajal’s Current A/c 3,000 | 7,500 | Anubha 213 | |
| To Salary to | Kajal 162 | 375 | |
| Anubha 8,400 | |||
| Kajal 6,000 | 14,400 | ||
| To Profit Transferred to | |||
| Anubha 15,650 | |||
| Kajal 7,825 | 23,475 | ||
| 45,375 | 45,375 |
| Dr. | Partners’ Current A/c | Cr. | |||
| Particulars | Anubha | Kajal | Particulars | Anubha | Kajal |
| To Drawings | 8,500 | 6,500 | By Balance b/d | 90,000 | 60,000 |
| To Interest on Drawings | 213 | 162 | By Interest on Capital | 4,500 | 3,000 |
| To Balance c/d | 1,09,837 | 70,163 | By Salary | 8,400 | 6,000 |
| By Profit and Loss Appropriation A/c |
15,650 | 7,825 | |||
| 1,18,550 | 76,825 | 1,18,550 | 76,825 | ||
3. Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed ₹4,00,000 and ₹1,00,000 respectively as capital. In addition, Harshad advanced an amount of ₹1,00,000 to the firm, on October 01, 2019. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2020 amounted to ₹1,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i) He should be given interest @10% per annum on capital and loan;
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed ₹ 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;
(iii) Interest on Capital and loan should be allowed @ 6% p.a. You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.
Ans. As per the provisions of partnership Act,1932, if there is no agreement. Decision on Harshads Claim:
(i) Interest on partners capital will not be allowed to partners
(ii) Profits shall be distributed equally among all the partners
Decision on Dhiman’s Claim
(i) Profits should be distributed equally among all the partners,
(ii) No salary shall be allowed to any partner as there is no agreement regarding remuneration.
(iii) Interest shall be allowed on partner’s Loan @ 6% pa whereas no interest is allowed on capital.
| Profit and Loss Appropriation Account | |||
| Particulars | Amount(₹) | Particulars | Amount(₹) |
| To Interest on Partner’s Loan | By Profit and Loss | 1,80,000 | |
| $$harshad \begin{pmatrix}1,00,000×\frac {6}{100}×\frac{6}{12} \end{pmatrix}$$ | 3,000 | ||
| To Profit Transferred to | |||
| Harshad’s Capital A/c 88,500 | |||
| Dhiman’s Capital A/c 88,500 | 1,77,000 | ||
| 1,80,000 | 1,80,000 |
4. Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of ₹5,00,000 and ₹3,00,000 respectively on October 01, 2019. Aakriti Advanced. ₹20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31, 2020 showed profit of ₹43,000. Partners could not agree upon the question of interest and the basis of division of profit.
You are required to divide the profits between them by preparing profit and lose appropriation account. Also give reasons for your solution.
Ans. In the absence of any partnership deed between partners
(i) Interest on partners loan is allowed @6% pa.
(ii) Interest on capital shall not be allowed.
(iii) Profits are to be distributed equally.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Interest on Partner’s Loan | By Profit and Loss | 43,000 | |
| $$Aakriti\begin{pmatrix}20,000×\frac{6}{100}×\frac{6}{12} \end{pmatrix}$$ | 600 | ||
| To Profit Transferred to | |||
| Aakriti’s Capital A/c 21,200 | |||
| Bindu’s Capital A/c 21,200 | 42,400 | ||
| 43,000 | 43,000 | ||
5. Rakhi and Shikha are partners in a firm, with capitals of ₹2,00,000 and ₹3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is ₹23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of ₹5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew ₹7,000 and Shikha ₹10,000 for their personal use. As per partnership deed, salary and interest on capital appropriation treated as change on profit. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Shika’s Salary | 60,000 | By Profit and Loss | 23,200 |
| To Interest on Capital | By Loss Transferred to | ||
| Rakhi 20,000 | Rakhi’s Capital A/c 34,720 | ||
| Shikha 30,000 | 50,000 | Shikha’s Capital A/c 52,080 | 86,800 |
| 1,10,000 | 1,10,000 | ||
| Dr. | Partners’ Capital A/c | Cr. | |||
| Particulars | Rakhi | Shikha | Particulars | Rakhi | Shikha |
| To Drawings | 7,000 | 10,000 | By Balance b/d | 2,00,000 | 3,00,000 |
| To Profit and Loss Appropriation A/c |
34,720 | 52,080 | By Partner’s Salary | -- | 60,000 |
| To Balance c/d | 1,78,280 | 3,27,920 | By Interest on Capital | 20,000 | 30,000 |
| 2,20,000 | 3,90,000 | 2,20,000 | 3,90,000 | ||
6. Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of ₹50,000 and ₹30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of ₹2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to ₹12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare partner’s capital accounts and profit and loss Appropriation Accounts.
Ans.
| Dr. | Partners’ Capital A/c | Cr. | |||
| Particulars | Lokesh | Azad | Particulars | Lokesh | Azad |
| By Balance b/d | 50,000 | 30,000 | |||
| By Interest on Capital | 3,000 | 1,800 | |||
| By Salary | 2,500 | ||||
| To Balance c/d | 57,170 | 37,080 | By Profit and Loss Appropriation | 4,170 | 2,780 |
| 57,170 | 37,080 | 57,170 | 37,080 | ||
| Profit and Loss Appropriation Account | |||
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Interest on Capital | By Profit and Loss 1,2500 | ||
| Lokesh 3,000 | (+) Azad’s Salary 2,500 | ||
| Azad 1,800 | 4,800 | 15,000 | |
| To Salary to Azad | (15,000 × 5/100) | ||
| Lokesh 4,170 | |||
| Azad 2,780 | 6,950 | ||
| 14,250 | 14,250 | ||
7. The partnership agreement between Maneesh and Girish provides that:
(i) Profits will be shared equally;
(ii) Maneesh will be allowed a salary of ₹400 p.m;
(iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary;
(iv) 7% p.a. interest will be allowed on partner’s fixed capital;
(v) 5% p.a. interest will be charged on partner’s annual drawings;
(vi) The fixed capitals of Maneesh and Girish are ₹1,00,000 and ₹80,000, respectively. Their annual drawings were ₹16,000 and ₹14,000, respectively. The net profit for the year ending March 31, 2019 amounted to ₹40,000; Prepare firm’s Profit and Loss Appropriation Account.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Maneesh Salary | 4,800 | By Profit and Loss | 40,000 |
| To Girish’s Commission | By Interest on Drawings | ||
| $$(40,000-4,800)×\begin{pmatrix} \frac{10}{100}\end{pmatrix}$$ | 3,520 | Maneesh 400 | |
| Girish 350 | 750 | ||
| To Interest on Capital | |||
| Maneesh 7,000 | |||
| Girish 5,600 | 12,600 | ||
| To Profit Transferred to | |||
| Maneesh’s Current A/c 9,915 | |||
| Girish’s Current A/c 9,915 | 19,830 | ||
| 40,750 | 40,750 | ||
Note: As period of drawings are not given, 900 will be calculated for the period of 6 months.
8. Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of ₹10,000 as his share of profits every year. The net profit for the year 2016 amounted to ₹40,000. Prepare the Profit and Loss Appropriation Account.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit Transferred to | By Profit and Loss | 40,000 | |
| Ram’s Capitals A/c (20,000 – 1,250) | 18,750 | ||
| Raj’s Capitals A/c (12,000 – 750) | 11,250 | ||
| George’s Capitals A/c (8,000 + 1,250 + 750) | 10,000 | ||
| 40,000 | 40,000 | ||
Note: If the partner guaranteed, does not get assured amount as profit then the deficit is to be given by the remaining partners as questions says. If no information is given, the contribution will be in Profit sharing ratio.
Working Note:
$$George’s\space share = 40,000 ×\frac{2}{10}=8,000\\guaranteed profit = 10,000\\Deficiency = 2,000\\Ram’s\space Contribution \frac{5}{8}×2,000=1,250\\Raj’s\space Contribution\frac{3}{8}×2,000=750$$
9. Aman, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed an amount of ₹10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2019 and March 31, 2020 were ₹40,000 and
₹60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.
Ans.
| Dr. | Profit and Loss Appropriation Accountfor the year 2019 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit Transferred to | By Profit and Loss | 40,000 | |
| Aman’s Capital’s A/c (16,000) | 16,000 | ||
| Babita’s Capital A/c (16,000 – 2,000) | 14,000 | ||
| Suresh’s Capital A/c (8,000 + 2,000) | 10,000 | ||
| 40,000 | 40,000 | ||
| Dr. | Profit and Loss Appropriation Accountfor the year 2020 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit Transferred to | By Profit and Loss | 60,000 | |
| Aman’s Capital’s A/c | 24,000 | ||
| Babita’s Capital A/c | 24,000 | ||
| Suresh’s Capital A/c | 12,000 | ||
| 60,000 | 60,000 | ||
Note: In the year of 2019. Suresh’s deficit 2,000 was contributed by Babita. In the year of 2020. Suresh’s profit was already above guarantee so no adjustment was required.
10. Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2020 shows a net profit of ₹ 1,50,000. Prepare the Profit and Loss Appropriation Account by taking into consideration the following information:
(i) Partners capital on April 1, 2019; Simmi, ₹30,000; Sonu, ₹60,000;
(ii) Current accounts balances on April 1, 2019; Simmi, ₹30,000 (cr.); Sonu, ₹15,000 (cr.);
(iii) Partners drawings during the year amounted to Simmi, ₹20,000; Sonu, ₹15,000;
(iv) Interest on capital was allowed @5% p.a.;
(v) Interest on drawing was to be charged @ 6% p.a. at an average of six months;
(vi) Partners’ salaries : Simmi ₹12,000 and Sonu ₹9,000. Also show the partners’ current accounts.
Ans.
| Dr. | Profit and Loss Appropriation Accountfor the year 2020 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Interest on Capital | By Profit and Loss | 1,50,000 | |
| Simmi’s Capital’s A/c 1,500 | By Interest on Drawings | ||
| Sonu’s Capital A/c 3,000 | 4,500 | Simmi’s Current A/c 600 | |
| To Partner’s Salary | Sonu’s Current A/c 450 (Charged for 6 Months) |
1,050 | |
| Simmi’s Current A/c 12,000 | |||
| Sonu’s Current A/c 9,000 | 21,000 | ||
| To Profit Transferred to | |||
| Simmi’s Current A/c 94,162 | |||
| Sonu’s Current A/c 31,388 | 1,25,550 | ||
| 1,51,050 | 1,51,050 | ||
| Dr. | Partners’ Capital A/c (Fixed) | Cr. | |||
| Particulars | Simmi | Sonu | Particulars | Simmi | Sonu |
| To Balance c/d | 30,000 | 60,000 | By Balance b/d | 30,000 | 60,000 |
| 30,000 | 60,000 | 30,000 | 60,000 | ||
| Dr. | Partners’ Current A/c (Fixed) | Cr. | |||
| Particulars | Simmi | Sonu | Particulars | Simmi | Sonu |
| To Drawings | 20,000 | 15,000 | By Balance b/d | 30,000 | 15,000 |
| To Interest on Drawings | 600 | 450 | By Interest on Capital | 1,500 | 3,000 |
| By Partner’s Salary | 12,000 | 9,000 | |||
| By Profit and Loss Appropriation A/c |
94,162 | 31,388 | |||
| To Balance c/d | 1,17,062 | 42,938 | |||
| 1,37,662 | 58,388 | 1,37,662 | 58,388 | ||
11. Arving and Anand are partners sharing profits and losses in the ratio 3:1. Balances in their capital accounts on April 01, 2019 were, Arvind ₹4,40,000 and Anand ₹2,60,000. As per their agreement, partners were entitled to interest on capital @5% p.a. and interest on drawings was to be charged @6% p.a. Arvind was allowed an annual salary of ₹35,000 for the additional responsibilities taken up by him. Partners drawings for the year were Arvind ₹40,000 and Anand ₹28,000. Profit and loss account of the firm for the year ending March 31, 2020 showed a Net Loss of ₹32,400. Prepare Profit and Loss Appropriation Account.
Ans. Calculation of interest on drawings:
When the date of withdrawal is not given, interest on total drawings during the year is charged for 6 months on an average basis.
$$Interest\space on\space drawings =\frac{Total\space drawings×Rate\space of\space interest}{100}×\frac{6}{12}\\Arvind’s\space interest\space in\space drawings =\frac{₹40,000×6}{100}×\frac{6}{12}\\=\frac{₹2,40,000}{100}×\frac{6}{12}=₹1,200\\Anand’s\space interest\space in\space drawings =\frac{₹28,000×6}{100}×\frac{6}{12}\\=\frac{₹1,68,000}{100}×\frac{6}{12}= ₹840$$
| Dr. | Profit and Loss Appropriation Accountfor the year ending 31st March, 2020 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Net Loss | 32,400 | By Interest on Drawings | |
| Arvind 1,200 | |||
| Anand 840 | 2,040 | ||
| By Loss Transferred to | |||
| $$Arvind\space 30,360 ×\frac{3}{4}$$ | 22,770 | ||
| $$Anand\space 30,360 ×\frac{1}{4}$$ | 7,590 | ||
| 32,400 | 32,400 | ||
Note: 1. Interest on capital and salary to a partner is provided only when there is any profit.
2. Interest on Drawings is always credited for the profit and loss appropriation A/c.
12. Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were ₹80,000 and ₹60,000 respectively. The firm started business on April 1, 2016. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of ₹2,000 and ₹3,000, respectively.
The profits for year ended March 31, 2017 before making above appropriations was ₹1,00,300. The drawings of Ramesh and Suresh were ₹40,000 and ₹50,000, respectively. Interest on drawings amounted to ₹2,000 for Ramesh and ₹2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.
Ans.
| Dr. | Profit and Loss Appropriation Accountfor the year 2016 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Interest on Capital | By Profit and Loss | 1,00,300 | |
| Ramesh’s Capital’s A/c 9,600 | By Interest on Drawings | ||
| Suresh’s Capital A/c 7,200 | 16,800 | Ramesh’s Capital A/c 2,000 | |
| To Partner’s Salary | Suresh’s Capital A/c 2,500 | 4,500 | |
| Ramesh’s Capital A/c 24,000 | |||
| Suresh’s Capital A/c 36,000 | 60,000 | ||
| To Profit Transferred to | |||
| Ramesh’s Capital A/c 16,000 | |||
| Suresh’s Capital A/c 12,000 | 28,000 | ||
| 1,04,800 | 1,04,800 | ||
| Dr. | Partners’ Capital A/c | Cr. | |||
| Particulars | Ramesh | Suresh | Particulars | Ramesh | Suresh |
| To Drawings | 40,000 | 50,000 | By Cash | 80,000 | 60,000 |
| To Interest on Drawings | 2,000 | 2,500 | By Interest on Capital | 9,600 | 7,200 |
| By Partner’s Salary | 24,000 | 36,000 | |||
| By Profit and Loss Appropriation A/c |
16,000 | 12,000 | |||
| To Balance c/d | 87,600 | 62,700 | |||
| 1,29,600 | 1,15,200 | 1,29,600 | 1,15,200 | ||
Note: Word Cash is used in capital A/c instead of Balance b/d as the business started this year.
$$Profit\space of\space Ramesh = 28,000 ×\frac{4}{7} = ₹ 16,000 and\\Suresh = 28,000 ×\frac{3}{7} ₹12,000$$
13. Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:
(i) Profits would be shared by Sukesh and Vanita in the ratio of 3 : 2;
(ii) 5% interest is to be allowed on capital;
(iii) Vanita should be paid a monthly salary of ₹600.
The following balances are extracted from the books of the firm, on March 31, 2017.
| Items | Sukesh (₹) | Vanita(₹) |
| Capital Accounts | 40,000 | 40,000 |
| Current Accounts | (Cr.) 7,200 | (Cr.) 2,800 |
| Drawings | 10,580 | 8,150 |
Net profit for the year, before charging interest on capital and after charging Sukesh’s salary was ₹ 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Interest on Capital | By Profit and Loss | 9,500 | |
| Sukesh’s Capital’s A/c 2,000 | |||
| Vanita’s Capital A/c 2,000 | 4,000 | ||
| To Profit Transferred to | |||
| Sukesh’s Current A/c 3,300 | |||
| Vanita’s Current A/c 2,200 | 5,500 | ||
| 9,500 | 9,500 | ||
Sol.
| Dr. | Partners’ Current A/c | Cr. | |||
| Particulars | Sukesh | Vanita | Particulars | Sukesh | Vanita |
| To Drawings | 10,850 | 8,150 | By Balance b/d | 7,200 | 2,800 |
| By Salary | 7,200 | ||||
| By Interest on Capital | 2,000 | 2,000 | |||
| By Profit and Loss Appropriation |
3,300 | 2,200 | |||
| To Balance c/d | 1,650 | 6,050 | |||
| 12,500 | 14,200 | 12,500 | 14,200 | ||
$$Note: Sukesh’s\space Profit = 5,500 ×\frac{3}{5}=3,300\\Vanita’s\space Profit = 5,500×\frac{2}{5}=2,200$$
Sukesh’s Salary will not be taken in profit and loss appropriation account as it is already charged.
14. Rahul, Rohit and Karan started partnership business on April 1, 2019 with capitals of ₹20,00,000,
₹18,00,000 and ₹16,00,000, respectively.
The profit for the year ended March 2020 amounted to ₹1,35,000 and the partner’s drawings had been; Rahul, ₹50,000, Rohit, ₹50,000 and Karan ₹40,000. The profits are distributed among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a
Ans. Interest on Capital
$$\text{Rahul}\Rarr20,00,000×\frac{5}{100}=₹1,00,000\\\text{Rohit}\Rarr18,00,000×\frac{5}{100}=₹90,000\\\text{Karan}\Rarr16,00,000×\frac{5}{100}=₹80,000$$
Total interest on capital = ₹1,00,000 + 90,000 + 80,000 = ₹2,70,000
Since, The total interest on capital of three partners is more them the profit for the year.
The Profit will be distributed in the ratio of IOC as interest on capital.
Therefore, Interest on capital will be.
$$Rahul ⇒ ₹1,35,000 ×\frac{1,00,000}{2,70,000}= ₹50,000\\Rohit ⇒ ₹1,35,000 ×\frac{90,000}{2,70,000}= ₹45,000\\Karan ⇒ ₹1,35,000 ×\frac{80,000}{2,70,000}= ₹40,000$$
15. Sunflower and Pink Rose started partnership business on April 01, 2019 with capitals of ₹2,50,000 and ₹1,50,000, respectively. On October 01, 2019, they decided that their capitals should be ₹2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @10% p.a. Calculate interest on capital as on March 31, 2020.
Ans. Calculation of Interest on capital
$$Sunflower, Interest\space on\space capital = 2,50,000 ×\frac{10}{100}×\frac{6}{12}+2,00,000×\frac{10}{100}×\frac{6}{12}$$
=₹12,500 + 10,000
=₹22,500
$$Pink\space rose, Interest\space on\space capital = 1,50,000 ×\frac{10}{100}×\frac{6}{12}+2,00,000×\frac{10}{100}×\frac{6}{12}$$
= ₹7,500 + 10,000
= ₹17,500
16. On March 31, 2017 after the closure of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at ₹4,00,000, ₹3,00,000 and ₹2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to ₹1,50,000 and the partner’s drawings had been Mountain: ₹20,000, Hill ₹15,000 and Rock ₹10,000. Calculate interest on capital.
Ans.
| Calculation of Opening Capital | |||
| Particulars | Mountain | Hill | Rock |
| Closing Capital | 4,00,000 | 3,00,000 | 2,00,000 |
| (+) Drawings | 20,000 | 15,000 | 10,000 |
| (–) Profits | (50,000) | (50,000) | (50,000) |
| Opening Capital | 3,70,000 | 2,65,000 | 1,60,000 |
Interest on Capital
$$Mountain ⇒ 3,70,000 ×\frac{10}{100}= 37,000\\Hill ⇒ 2,65,000 ×\frac{10}{100}= 26,500\\Rock ⇒1,60,000 ×\frac{10}{100}= 16,000$$
17. Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2020:
| Balance Sheet as on March 31, 2020 |
|||
| Liabilities | Amount(₹) | Assets | Amount(₹) |
| Neelkan’t Capital | 10,00,000 | Sundry Assets Appropriation (March 2007) |
30,00,000 |
| Mahadev’s Capital | 10,00,000 | ||
| Neelkant’s Current Account | 1,00,000 | ||
| Mahadev’s Current Account | 1,00,000 | ||
| Profit and Loss Appropriation (March, 2020) |
|||
| 30,00,000 | 30,00,000 | ||
During the year Mahadev’s drawings were ₹30,000. Profits during 2016-17 is ₹10,00,000. Calculate interest on capital @ 5% p.a. for the year ending March 31, 2020.
Ans. Interest on Capital
$$Neelkant ⇒ 10,00,000 ×\frac{5}{100}= ₹50,000\\Mahadev ⇒ 10,00,000 ×\frac{5}{100}= ₹50,000$$
18. Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2020
May 01, 2019 ₹12,000
July 31, 2019 ₹6,000
September 30, 2019 ₹9,000
November 30, 2019 ₹12,000
January 01, 2020 ₹8,000
March 31, 2020 ₹7,000
Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.
Ans.
| Product Method |
|||
| Date | Amount (₹) | Period | Product |
| May 01, 2019 | 12,000 | 11 Month | 1,32,000 |
| July 31, 2019 | 6,000 | 8 Month | 48,000 |
| September 30, 2019 | 9,000 | 6 Month | 54,000 |
| November 30, 2019 | 12,000 | 4 Month | 48,000 |
| January 01, 2020 | 8,000 | 3 Month | 24,000 |
| March 31st, 2020 | 7,000 | 0 Month | |
| 3,06,000 | |||
Interest on Rishi’s Drawings
$$⇒ Sum\space of\space product × Rate ×\frac{1}{2} ⇒ 3,06,000 ×\frac{9}{100}×\frac{1}{12}=₹ 2,295$$
19. The capital accounts of Moli and Golu showed balances of ₹40,000 and ₹20,000 as on April 01, 2019. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @12 p.a. Golu advanced a loan of ₹10,000 to the firm on August 01, 2019.
During the year, Moli withdrew ₹1,000 per month at the beginning of every month, whereas Golu withdrew ₹1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was ₹20,950. Calculate interest on drawings and show the distribution of profits and prepare partner’s capital accounts.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Interest on Capital | By Profit and Loss | 20,950 | |
| Moli’s Capital’s A/c 4,000 | By Interest on Drawings | ||
| Golu’s Capital A/c 2,000 | 6,000 | Moli’s Capital’s A/c 780 | |
| To Interest on Golu’s Loan | Golu’s Capital A/c 660 | 1440 | |
| $$10,000×\frac{6}{100}×\frac{8}{12}$$ | 400 | ||
| To Profit Transferred to | |||
| Moli’s Capital A/c 9,594 | |||
| Golu’s Capital A/c 6,396 | 15,990 | ||
| 22,390 | 22,390 | ||
| Dr. | Partners’ Current A/c | Cr. | |||
| Particulars | Moli | Golu | Particulars | Moli | Glolu |
| To Drawings | 12,000 | 12,000 | By Balance b/d | 40,000 | 20,000 |
| To Interest on Drawings | 780 | 660 | By Interest on Capital | 4,000 | 2,000 |
| To Balance c/d | 40,814 | 15,736 | By Profit and Loss Appropriation A/c |
9,594 | 6,396 |
| 53,594 | 28,396 | 53,594 | 28,396 | ||
Working Note:
Calculation of interest on Drawings
$$⇒ Total\space Drawings × Rate ×\frac{Average\space Period}{12}\\Moli ⇒ 12,000 ×\frac{12}{100}×\frac{6.5}{12}= ₹780\\Golu ⇒ 12,000 ×\frac{12}{100}×\frac{5.5}{12}= ₹660$$
Note: If drawings are made at the beginning of every month, then interest on drawings is calculated of
$$6\frac{1}{2}months.$$
If drawings are made at the ending of every month, then interest on drawings is calculated of
$$5\frac{1}{2} months$$
If rate of interest on loan is not given, then it will be charged always 6%. p.a.
20. Rakesh and Roshan are partners, sharing profits in the ratio of 3 : 2 with capitals of ₹40,000 and ₹ 30,000, respectively. They withdrew from the firm the following amounts, for their personal use:
| Rakesh | Month | Amount (₹) |
| May 01, 2019 | 600 | |
| June 30, 2019 | 500 | |
| August 31, 2019 | 1,000 | |
| November 1, 2019 | 400 | |
| December 31, 2019 | 1,500 | |
| January 31, 2020 | 300 | |
| March 01, 2020 | 700 | |
| Roshan | At the beginning of each month | 400 |
Interest is to be charged @ 6% p.a. Calculate interest on drawings, assuming that books of accounts are closed on March 31, 2020, every year.
Ans.
| Rakesh’s Interest on Drawings | |||
| Date | Amount (₹) | Period | Product |
| May 31, 2019 | 600 | 10 Month | 6,000 |
| July 30, 2019 | 500 | 9 Month | 4,500 |
| August 31, 2019 | 1,000 | 7 Month | 7,000 |
| November 1, 2019 | 400 | 5 Month | 2,000 |
| December 31, 2019 | 1,500 | 3 Month | 4,500 |
| January 31, 2020 | 300 | 2 Month | 600 |
| March 01, 2020 | 700 | 1 Month | 700 |
| Total | 25,300 | ||
Interest on Drawings of Rakesh
$$⇒ Sum\space of\space product × Rate ×\frac{1}{12}=25,300×\frac{6}{100}×\frac{1}{12}=₹ 126.50$$
Interest on Rohan’s Drawings (By Average Method)
$$⇒ Total\space Drawings × Rate ×\frac{6.5}{12}=4,800×\frac{6}{100}×\frac{13}{2×12}=₹ 156$$
21. Himanshu withdrews ₹2,500 at the end of each month. The Partnership deed provides for charging the interest on drawings @ 12% p.a. Calculate interest on Himanshu’s drawings for the year ending March 31st 2017.
Ans. Interest on Himanshu’s Drawings
$$⇒ Total\space Drawings × Rate ×\frac{Average\space Period}{12}\\⇒ (2,500 × 12) ×\frac{12}{100}×\frac{5.5}{12} ⇒ 30,000 ×\frac{12}{100}×\frac{11}{2×12}=₹ 1,650$$
22. Bharam is a partner in a firm. He withdraws `3,000 at the starting of each month for 12 months. The books of the firm closes on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.
Ans. Interest on Bharam’s Drawings (By Average Method)
$$⇒ (3,000 × 12)×\frac{10}{100}×\frac{60}{12}⇒ 36,000 ×\frac{10}{100}×\frac{13}{2×12}=₹1,950$$
23. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2019 were ₹2,50,000 and ₹ 1,50,000, respectively. They share profits equally. On July, 01, 2019, they decided that their capitals should be
₹ 1,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2020.
Ans. Interest on capital can be calculated by Product method as well as simple method.
Raj’s Interest on Capital (By Product Method)
1 April 2019 to 30 June, 2019 2,50,000 × 3 7,50,000
1 July 2019 to 31 March, 2020 1,00,000 × 9 9,00,000
16,50,000
$$Interest = Sum\space of\space Product × Rate ×\frac{1}{12}= 16,50,000 ×\frac{8}{100}×\frac{1}{12}$$
= ₹ 11,000
Neeraj’s Interest on Capital (By Simple Method)
$$=\begin{pmatrix}1,50,000\frac{8}{100}\frac{3}{12} \end{pmatrix}+\begin{pmatrix}1,00,000\frac{8}{100}\frac{9}{12} \end{pmatrix}$$
⇒ = 3,000 + 6,000
⇒ = ₹ 9,000
24. Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings during 2019 were ₹24,000 and ₹16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.
Ans. Interest on Drawings
$$Amit = 24,000 ×\frac{10}{100}×\frac{6}{12}=₹ 1,200\\Bhola = 16,000 ×\frac{10}{100}×\frac{6}{12}=₹ 800$$
Note: If amounts (drawings) were withdrawn evenly, thoughout the year, then interest on drawings is calculated for 6 months
25. Harish is a partner in a firm. He withdrew the following amounts during the year 2019:
₹
February 01 4,000
May 01 10,000
June 30 4,000
October 31 12,000
December 31 4,000
Interest on drawings is to be charged @ 7.5% p.a.
Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2006.
Ans.
| Calculation of Interest on Harish’s Drawings | |||
| Date | Amount (₹) | Period | Product |
| Feb 1, 2006 | 4,000 | 11 months | 44,000 |
| May 1, 2006 | 10,000 | 8 months | 80,000 |
| June 30, 2006 | 4,000 | 6 months | 24,000 |
| Oct 31, 2006 | 12,000 | 2 months | 24,000 |
| Dec 31, 2006 | 4,000 | 0 months | -- |
| Total | 1,72,000 | ||
$$Interest = 1,72,000 ×\frac{7\frac{1}{2}}{100}×\frac{1}{12}=₹1,075$$
26. Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are
₹2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming that money is withdrawn: (i) in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of every month.
Ans.
| Interest on Drawings | |||
| Menon | $$24,000×\frac{10}{100}×\frac{6\frac{1}{2}}{12}$$ = ₹1,300 |
$$24,000×\frac{10}{100}×\frac{6}{12}$$ = ₹1,200 |
$$24,000×\frac{10}{100}×\frac{5\frac{1}{2}}{12}$$ = ₹1,100 |
| Thomas | $$24,000×\frac{10}{100}×\frac{6\frac{1}{2}}{12}$$ = ₹1,300 |
$$24,000×\frac{10}{100}×\frac{6}{12}$$ = ₹1,200 |
$$24,000×\frac{10}{100}×\frac{5\frac{1}{2}}{12}$$ = ₹1,100 |
Note: If drawings is done at the middle of every month, then interest on drawings is calculated for 6 months.
27. On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of ₹24,000 ₹18,000 and ₹12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to ₹36,000 and the partner’s drawings had been Ram, ₹3,600; Shyam, ₹4,500 and Mohan, ₹2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.
Ans.
| Interest on Drawings | |||
| Particulars | Ram | Shyam | Mohan |
| Closing Capital | 24,000 | 18,000 | 12,000 |
| (+) Drawings | 3,600 | 4,500 | 2,700 |
| (–) Profit (3 : 2 : 1) | (18,000) | (12,000) | (6,000) |
| Total | 9,600 | 10,500 | 8,700 |
Interest on Capital
$$Ram ⇒ 9,600 ×\frac{5}{100}=₹480\\Shyam ⇒ 10,500 ×\frac{5}{100}=₹525\\Mohan ⇒ 8,700 ×\frac{5}{100}=₹435$$
28. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to be a minimum sum of ₹8,000. Profits for the year ended March 31, 2017 was ₹36,000. Divide profit among the partners by preparing profit and loss appropriation account.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit Transferred to | |||
| Amit’s Capital’s A/c 18,000 | |||
| (–) Golu’s Capital A/c (1,200) | 16,800 | By Profit and Loss 36,000 | |
| Sumit’s Capital A/c 12,000 | Add: Guarantee 300 | 36,300 | |
| (800) | 11,200 | ||
| Samiksha’s Capital A/c 6,000 | |||
| Amit’s Guarantee (+) 1,200 | |||
| Sumit’s (+) 800 | 8,000 | ||
| 36,000 | 36,000 | ||
$$Note : Amit’s\space guarantee = 2,000 ×\frac{3}{5}=₹ 1,200\\Sumit’s\space guarantee = 2,000 ×\frac{2}{5}=₹ 800$$
29. Pinki, Deepti and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than ₹5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to ₹40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.
Ans.
| Journal | ||
| Particulars | Dr.(₹) | Cr. (₹) |
| Profit Transferred to | 40,000 | |
| To Pinki’s Capital A./c | 20,000 | |
| To Deepti Capital A/c | 16,000 | |
| To Kaku’s Capital A/c | 4,000 | |
| Pinki’s Capital A/c Dr. | 500 | |
| Deepti’s Capital a/c Dr. | 500 | |
| To Kaku’s Capital A/c | 1,000 | |
| 40,000 | 40,000 |
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit Transferred to | By Profit and Loss | 40,000 | |
| Pinki’s Capital 20,000 | |||
| (–)½ of Kaku’s Deficiency (500) | 19,500 | ||
| Deepti’s Capital 16,000 | |||
| (–)½ of Kaku’s Deficiency (500) | 15,500 | ||
| Kaku’s Capital’s A/c 4,000 | |||
| (+) Guarantee by 1,000 | 5,000 | ||
| Pinki and Deepti | |||
| 40,000 | 40,000 | ||
30. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed ₹10,000 as per share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are ₹40,000 and ₹60,000 respectively. Prepare Profit and Loss Appropriation Account.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit Transferred to | By Profit and Loss | 40,000 | |
| Pinki’s Capital 20,000 | |||
| (–)½ of Kaku’s Deficiency (500) | 19,500 | ||
| Deepti’s Capital 16,000 | |||
| (–)½ of Kaku’s Deficiency (500) | 15,500 | ||
| Kaku’s Capital’s A/c 4,000 | |||
| (+) Guarantee by 1,000 | 5,000 | ||
| Pinki and Deepti | |||
| 40,000 | 40,000 | ||
| Dr. | Profit and Loss Appropriation Accountfor the year ending 31 March, 2016 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit transferred to | By Profit and Loss | 40,000 | |
| Abhay’s Capital’s A/c | 20,000 | ||
| Siddharth’s Capital A/c 12,000 | |||
| (–) Deficiency of Kusum (2,000) | 10,000 | ||
| Kusum’s Capital A/c 8,000 (+) Siddharth’s |
|||
| Guarantee 2,000 | 10,000 | ||
| 40,000 | 40,000 | ||
| Dr. | Profit and Loss Appropriation Accountfor the year ending 31 March, 2017 | Cr. | |
| Particulars | Amount (₹) | Particulars | CAmount (₹) |
| To Profit transferred to | By Profit and Loss | 60,000 | |
| Abhay’s Capital’s A/c | 30,000 | ||
| Siddharth’s Capital A/c | 18,000 | ||
| Kusum’s Capital A/c | 12,000 | ||
| 60,000 | 60,000 | ||
Note: In year 2017 the profit share of partner Kusum is already above guaranteed amount, thus there is no need to adjustment.
31. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than ₹5,000. The profits for the year ending March 31, 2020 amounts to ₹35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3 : 2. Record necessary journal entry to show distributioin of profit among the partners.
Ans.
| Journal Entries | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| 2020 Mar 31 | Profit and Loss Appropriation A/c Dr. | 35,000 | ||
| To Radha’s Capital A/c | 17,500 | |||
| To Mary’s Capital A/c | 14,000 | |||
| To Fatima’s Capital
A/c (Being profit distributed among all partners in 5 : 4 : 1 ratio) |
3,500 | |||
| Radha’s Capital A/c Dr. | 900 | |||
| Mary’s Capital A/c Dr. | 600 | |||
| To Fatima’s Capital
A/c (Being deficiency of Fatima contributed by Radha and Mary in 3 : 2 ratio) |
1,500 | |||
Note : Alternatively single compound entry can also be passed.
32. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of ₹8,000. The net profit for the year ended March 31, 2020 was ₹30,000. Prepare Profit and Loss Appropriation Account, indicating the amount finally due to each partner.
Ans.
| Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Profit Transferred to | By Profit and Loss | 30,000 | |
| X’s Capital’s A/c 15,000 | |||
| (–) Z’s Deficiency (1,800) | 13,200 | ||
| Y’s Capital A/c 10,000 | |||
| (–) Z’s Deficiency (1,200) | 8,800 | ||
| Z’s Capital A/c 5,000 | |||
| (+) Deficiency Born by | |||
| X 1,800 | |||
| Y 1,200 | 8,000 | ||
| 30,000 | 30,000 | ||
Note:
$$Share\space of\space X\space in\space Z’s\space deficiency = 3,000 ×\frac{3}{5}=₹1,800\\Share\space of\space Y\space in\space Z’s\space deficiency = 3,000 ×\frac{2}{5}=₹1,200$$
Z’s deficiency = Guranteed profit – Actual share
= 8,000 – 5,000
= 3,000
33. Arun, Boby and Chintu are partners in a firm sharing profits in the ratio of 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of ₹60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the profit and loss appropriation account showing distribution of profits among partners in case the profits for year 2015 are: (i) ₹2,50,000; (ii) ₹3,60,000.
Ans.
| (i) Dr. | Profit and Loss Appropriation Account | Cr. | |
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Profit Transferred to | By Profit and Loss | 2,50,000 | |
| Arun’s Capital’s A/c 1,00,000 | |||
| (–) Chintu’s Deficiency (10,000) | 90,000 | ||
| To Boby’s Capital A/c | 1,00,000 | ||
| To Chintu’s Capital A/c 50,000 | |||
| (+) Deficiency Borne by | |||
| Arun 10,000 | 60,000 | ||
| 2,50,000 | 2,50,000 | ||
Working Note:
(i)
$$Arun\space 2,50,000 ×\frac{2}{5}=₹1,00,000\\Body\space 2,50,000 ×\frac{2}{5}=₹1,00,000\\Chintu\space 2,50,000 ×\frac{1}{5}=₹50,000\\(ii)3,60,000×\frac{2}{5}=₹1,44,000\\3,60,000×\frac{2}{5}=₹1,44,000\\3,60,000×\frac{1}{5}=₹72,000$$
34. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena’s share in any year shall not be less than ₹20,000. The net profit for the year ended March 31, 2017 amounted to ₹70,000. Prepare Profit and Loss Appropriation Account.
Ans.
| Dr. | Profit and Loss Appropriation Accountfor the year ending March 31, 2017 | Cr. | |
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Profit Transferred to | By Profit and Loss | 70,000 | |
| Ashok’s Capital’s A/c 28,000 | |||
| (–) Cheena’s Deficiency (3,000) | 25,000 | ||
| Brijesh’s Capital A/c 28,000 | |||
| (–) Cheena’s Deficiency (3,000) | 25,000 | ||
| Cheena’s Capital A/c 14,000 | |||
| (+) Deficiency Received from | |||
| Ashok 3,000 | |||
| Brijesh 3,000 | 20,000 | ||
| 70,000 | 70,000 | ||
Working Note:
$$Profit\space of Ashok 70,000 ×\frac{2}{5}= ₹28,000\\Brijesh\space 70,000 ×\frac{2}{5}= ₹28,000\\Cheena\space 70,000 ×\frac{1}{5}=₹14,000$$
Cheena’s Deficiency = Gurantee – Actual Profit
(To be borne by Ashok and Brijesh equally) 20,000 – 14,000 = ₹ 6,000
35. Ram, Mohan and Sohan are partners with capitals of ₹5,00,000, ₹2,50,000 and ₹2,00,000 respectively. After providing interest on capital @10% p.a. the profits are divisible as follows:
$$Ram\frac{1}{2},Mohan\frac{1}{3}and\space Sohan\frac{1}{6}$$
But Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than ₹25,000, in any year.
The net profit for the year ended March 31, 2007 is ₹2,00,000, before charging interest on capital. You are required to show distribution of profit
Ans.
| Dr. | Profit and Loss Appropriation Accountfor the year ending 31 March 2007 | Cr. | |
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Interest on Capital | By Profit and Loss | 2,00,000 | |
| Mohan’s Capital A/c 25,000 | |||
| Sohan’s Capital A/c 20,000 | 95,000 | ||
| To Profits Transferred to | |||
| Ram’s Capital A/c 52,500 | |||
| $$(–) Deficiency (7,500×\frac{3}{5})(4,500)$$ | 48,000 | ||
| Mohan’s Capital A/c 35,000 | |||
| $$(–) Deficiency (7,500 ×\frac{2}{5})(3,000)$$ | 32,000 | ||
| Sohan’s Capital A/c 17,500 | |||
| (+) Deficiency Received From | |||
| Ram 4,500 | |||
| Mohan 3,000 | 25,000 | ||
| 2,00,000 | 2,00,000 | ||
Working Note:
$$Profit\space Sharing\space Ratio=\frac{1}{2}:\frac{1}{3}:\frac{1}{6}\\=\frac{3:2:1}{6}=3 : 2 : 1$$
36. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following :
(i) Sona’s share in the profits, guaranteed to be not less than ₹15,000 in any year.
(ii) Babita gives guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is ₹25,000). The net profit for the year ended March 31, 2017 is ₹75,000. The gross fee earned by Babita for the firm was ₹16,000. You are required to show Profit and Loss Appropriation Account (after giving effect to the alone).
Ans.
| Dr. | Profit and Loss Appropriation Accountfor the year ending March 31, 2017 | Cr. | |
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Profit Transferred to | By Profit and Loss | 75,000 | |
| Amit’s Capital’s A/c 42,000 | |||
| (–) Sona’s Deficiency (600) | 41,400 | By Babita’s Capital (Less Earned i.e.,25,000 – 16,000) |
9,000 |
| Babita’s Capital A/c 28,000 | |||
| (–) Sona’s Deficiency (400) | 27,600 | ||
| Sona’s Capital A/c 14,000 | |||
| (+) Deficiency Received from 10,000 | |||
| Amit 600 | |||
| Babita 400 | 15,000 | ||
| 84,000 | 84,000 | ||
Working Note : Distribution of Profit
$$Amit’s\space 84,000 ×\frac{3}{6}=₹ 42,000\\Babita’s\space 84,000 ×\frac{2}{6}=₹ 28,000\\Sona’s\space 84,000 ×\frac{1}{6}=₹ 14,000$$
Sona’s Deficiency = 15,000 – 14,000
= ₹ 1,000 (Borne by Amit and Babita in 3 : 2 ratio)
37. The net profit of X, Y and Z for the year ended March 31, 2020 was ₹60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books :
(i) Interest on Capital @ 5% p.a.
(ii) Interest on drawings amounting to X ₹700, Y ₹500 and Z ₹300.
(iii) Partner’s Salary : X ₹1000, Y ₹1500 p.a.
The capital accounts of partners were fixed as : X ₹1,00,000, Y ₹80,000 and Z ₹60,000. Record the adjustment entry.
Ans.
| Statement Showing Adjustment | |||
| Particulars | x | y | z |
| Amount Wrongly Credited | 36,000 | 12,000 | 12,000 |
| A | 36,000 | 12,000 | 12,000 |
| Amount to be Credited | |||
| Interest on Capital @ 5% | 5,000 | 4,000 | 3,000 |
| Interest on Drawings | (700) | (500) | (300) |
| Salary | 1,000 | 1,500 | |
| Profit Share [60,000 – 12,000 – 2,500 + 1,500] in 3:1:1 | 28,200 | 9,400 | 9,400 |
| B | 33,500 | 14,400 | 12,100 |
| Difference (B – A) | (2,500)Dr. | 2400 Cr. | 100 Cr. |
| 84,000 | 84,000 | ||
Note: Negative figure is debit and positive figure is credit.
| Journal Entries | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| X’s Current A/c Dr. | 2,500 | |||
| To Y’s Current A/c | 2,400 | |||
| To Z’s Current A/c (Being profit adjusted among all partners) |
100 | |||
38. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for some years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit sharing ratio should come into effect retrospectively were for the last three year. Harry and Porter have agreement on this account.
The profits for the last three years were:
₹
2014-15 22,000
2015-16 24,000
2016-17 29,000
Show adjustment of profits by means of a single adjustment journal entry.
Ans. Total profit of last three years = 22,000 + 24000 + 29,000 = ₹ 75,000
| Statement Showing Adjustment | |||
| Total Profit Distributed among | Hayy | Porter | Ali |
| In old ratio 2 : 2 : 1 | 30,000 | 30,000 | 15,000 |
| A | 30,000 | 30,000 | 15,000 |
| Distribution according to new ratio 1 : 1 : 1 | 25,000 | 25,000 | 25,000 |
| B | 25,000 | 25,000 | 25,000 |
| Difference (B – A) | (5,000)Dr. | (5,000)Dr. | 10,000Cr. |
Note: Negative is Debit.
| Journal Entries | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Harry’s Current A/c Dr. | 5,000 | |||
| Porter’s Current A/c Dr. | 5,000 | |||
| To Ali’s Current A/c (Being profit adjusted among all partners) |
10,000 | |||
39. Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on March 31, 2017.
| Dr. | Balance Sheet as on March 31, 2017 (New Firm) |
Cr. | |
| Liabilities | Amount(₹) | Assets | Amount(₹) |
| Mannu’s Capital 30,000 | Drawings | ||
| Shristhi’s Capital 10,000 | 40,000 | Mannu 4,000 | |
| Shristhi 2,000 | 6,000 | ||
| Other Assets | 34,000 | ||
| 40,000 | 40,000 | ||
Profit for the year ended March 31, 2017 was ₹5,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and @6% p.a. on drawings was inadvertently enquired. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry
Ans.
| Calculation of Opening Capital | ||
| Particulars | Mannu | Shrishthi |
| Capital as on 31 March, 2006 | 30,000 | 10,000 |
| (–) Profit Credited | (3,000) | (2,000) |
| Capital as on 1 April, 2005 | 27,000 | 8,000 |
Note: Drawings were not taken while calculating opening capital as it is shown in balance sheet which means it was not taken in capital account.
| Adjustment of Profits | ||
| Particulars | Mannu | Shrishthi |
| Amount Already Credited | 3,000 | 2,000 |
| A | 3,000 | 2,000 |
| Amount to be Credited | 1,350 | 400 |
| (–) Interest on Drawings | (120) | (60) |
| Profit Share (5,000 + 180 – 1,750) | 2058 | 1,372 |
| B | 3,288 | 1,712 |
| Difference (B – A) | 288 Cr. | (288) Dr. |
| Journal Entries | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Shrishthi’s Capital A/c Dr. | 288 | |||
| To Mannu’s Capital A/c (Being profit adjusted among all partners) |
288 | |||
40. On March 31, 2017 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were ₹80,000, ₹60,000 and ₹40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin ₹20,000; Monu,
₹15,000 and Ahmed, ₹9,000. Interest on drawings chargeable to partners were Eluin ₹500, Monu ₹360 and Ahmed ₹200. The net profit during the year amounted to ₹1,20,00. The profit sharing ratio was 3 : 2 : 1. Record necessary adjustment entry.
Ans.
| Calculation of Opening Capital | |||
| Particulars | Eluin | Monu | Ahmed |
| Capital as on 31 March, 2006 | 80,000 | 60,000 | 40,000 |
| (+) Drawings | 20,000 | 15,000 | 9,000 |
| (–) Profits (1,20,000 in 3 : 2 : 1) | (60,000) | (40,000) | (20,000) |
| Capital as on 1 April, 2005 | 40,000 | 35,000 | 29,000 |
| Statement for Adjustment | |||
| Statement for Adjustment | Eluin | Monu | Ahmed |
| Amount Already Credited | 60,000 | 40,000 | 20,000 |
| A | 60,000 | 40,000 | 20,000 |
| Amount to be Credited | |||
| (+) Interest on Capital | 2,000 | 1,750 | 1,450 |
| (–) Interest on Drawings Share of Profit | (500) | (360) | (200) |
| (1,20,000 + 1,060 – 5,200) in 3 : 2 : 1 | 57,930 | 38,620 | 19,310 |
| B | 59,430 | 40,010 | 20,560 |
| Difference (B – A) | (570) Dr. | 10 Cr. | 560 Cr. |
Note: Negative is Debit.
| Journal Entry | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Eliuin’s Capital A/c Dr. | 570 | |||
| To Monu’s Capital A/c | 10 | |||
| To Ahmed’s Capital A/c (Being profit adjusted among all partners) |
560 | |||
41. Azad and Benny are equal partners. Their fixed capitals are ₹40,000 and ₹80,000, respectively. After the accounts for the year have been prepared it is discovered that interest @5% p.a. as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the beginning of the next year. Record the necessary journal entry.
Ans. Interest on Capital @ 5%
$$Azad ⇒ 40,000 ×\frac{5}{100}=₹2,000\\Benny ⇒ 80,000 ×\frac{5}{100}=₹4,000$$
Total Interest on Capital = ₹6,000
Profit wrongly distributed equal to amount of interest.
| Statement for Adjustment | Azad | Benny |
| Profits Already Distributed A | 3,000 | 3,000 |
| Interest on Capital B | 2,000 | 4,000 |
| Difference (B – A) | (1,000) Dr. | 1,000 Cr. |
| Journal Entry | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Azad’s Capital A/c Dr. | 1,000 | |||
| To Benny’s Capital A/c (Being profit adjusted among all partners) |
1,000 | |||
42. Mohan, Vijay and Anil are partners, the balance on their capital accounts being ₹30,000, ₹ 25,000 and
₹20,000 respectively. In arriving at these figures, the profits for the year ended March 31, 2017 amounting to ₹24,000 had been credited to partners in the proportion in which they shared profits. During the year the drawings for Mohan, Vijay and Anil were ₹5,000, ₹4,000 and ₹3,000, respectively. Subsequently, the following omissions were noticed:
(a) Interest on Capital, at the rate of 10% p.a., was not charged.
(b) Interest on Drawings: Mohan ₹ 250, Vijay ₹ 200, Anil ₹ 150 was not recorded in the books.
Record necessary corrections through journal entries.
Ans.
| Calculation of Opening Capital | |||
| Particulars | Mohan | Vijay | Anil |
| Capital as on 31 March, 2017 | 30,000 | 25,000 | 20,000 |
| (+) Drawings | 5,000 | 4,000 | 3,000 |
| (–) Profits (24,000 in 1 : 1 : 1) | (8,000) | (8,000) | (8,000) |
| Capital as on 1 April, 2016 | 27,000 | 21,000 | 15,000 |
| Statements for Adjustment | Mohan | Vijay | Anil |
| Amount Already Credited | |||
| (Profit 24,000 in 1 : 1 : 1) A | 8,000 | 8,000 | 8,000 |
| Amount to be Credited | |||
| Interest on Capital | 2,700 | 2,100 | 1,500 |
| (–) Interest on Drawings | (250) | (200) | (150) |
| Profit (24,000 + 600 – 6,300) | 6,100 | 6,100 | 6,100 |
| B | 8,550 | 8,000 | 7,450 |
| Difference (B – A) | 550 Cr. | (550) Dr. |
| Journal Entry | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Anil’s Capital A/c Dr. | 550 | |||
| To Mohan’s Capital A/c (Being profit adjusted among all partners) |
550 | |||
43. Anju, Manju and Mamta are partners whose fixed capitals were ₹10,000, ₹8,000 and ₹6,000, respectively. As per the partnership agreement, there is a provision for allowing interest on capitals @ 5% p.a. but entries for the same have not been made for the last three years. The profit sharing ratio during three years remained as follows:
Year Anju Manju Mamta
2016 4 3 5
2017 3 2 1
2018 1 1 1
Make necessary and adjustment entry at the beginning of the fourth year i.e. April 2019.
Ans. Interest on Capital
$$Anju ⇒ 10,000 ×\frac{5}{100}=₹500\\Manju ⇒ 8,000 ×\frac{5}{100}=₹400\\Mamta ⇒ 6,000 ×\frac{5}{100}=₹300$$
Total interest of partners = ₹1,200 for a year
| Particulars | Anju | Manju | Mamta |
| Amount Already Credited by Way of Profits in 2016 (1,200 in 4 : 3 : 5) |
400 | 300 | 500 |
| In 2017 (1,200 in 3 : 2 : 1) | 600 | 400 | 200 |
| In 2018 (1,200 in 1 : 1 : 1) | 400 | 400 | 400 |
| Total Amount Credited A | 1,400 | 1,100 | 1,100 |
| Amount to be Credited | |||
| Interest on Capital for 3 years | 1,500 | 1,200 | 900 |
| B | 1,500 | 1,200 | (200) |
| Difference (B – A) | 100 Cr. | 100 Cr. | (200) Dr. |
| Journal Entry | ||||
| Date | Particulars | L.F. | Amount(₹)(Dr.) | Amount(₹)(Cr.) |
| Mamta’s Capital A/c Dr. | 200 | |||
| To Anju’s Capital A/c | 100 | |||
| To Manju’s Capital A/c (Being profit adjusted among all partners) |
100 | |||
