NCERT Solution for Class 12 Accountancy Chapter 2 – Accounting for Partnership Firms – Basic Concepts

NCERT solution for class 12 Accountancy Chapter 2 – Accounting for Partnership Firms – Basic Concepts

Short Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 2

5. Give two circumstances under which the fixed capitals of partners may change.

Following circumstances lead to change in fixed capital of partners

1. Introducing fresh capital in the firm by a partner with consent from other partners.

2. When a portion of capital is withdrawn with consent of partners.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 If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

When there is withdrawal of money on first day of each quarter. Then the corresponding interest is calculated for a period of seven and half months on the total amount that is withdrawn.

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.

(iv) Interest on Partner’s loan

(v) Salary to a partner.

1. Sharing of profits and losses: If a partnership deed is absent, then the profit sharing ratio should be equal among all partners, as per Partnership Act, 1932.

2. Interest on Partner’s capital: If partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.

3. Interest on Partner’s drawings: If partnership deed is absent, then as per Partnership Act, 1932, in event of drawing money it shall be charged to the partners

4. Interest on Partner’s loan: If partnership deed is absent then the partner is eligible for a 6% interest on loan to the firm

5. Salary to a partner: In case of absence of partnership deed, the partners are not eligible for any salary, any salary whatsoever if paid will be as appropriation of profit (in case there is profit)

Long Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 2

1. What is partnership? What are its chief characteristics? Explain.

According to Section 4 of the Partnership Act, 1932 a partnership is defined as “an agreement between two or more persons who have mutually agreed to share profits or losses that will be carried by all or any one of them acting for all”. The individuals who setup the business jointly are called as partners and all the partners collectively are known as firm.

Following are the important characteristics of a partnership firm:

1. Number of partners: The minimum number of persons to form a partnership is 2 and the maximum is 50 as per Companies Rules Act, 2014. Any more than the specified limit makes partnership illegal.

2. Partnership Deed: A partnership deed is necessary document that contains all the terms of the partnership and the details about contribution of each partner towards the firm. It should be in written format as it helps in resolving disputes between partners and acts a evidence in d

3. Business: One of the important characteristics of business is that it is formed in order to do legal business. So any kind of business that is deemed illegal makes the partnership illegal

4. Profit/Loss Sharing: Partners are supposed to take profit and loss as per the ratio that was agreed at the time of partnership.

5. Liability: Firm has unlimited liability and the partners of the firm need to pay from the personal asset if the firm is unable to pay to any concerned third party

6. Mutual Agency: The firm is an agency and all the partners are its agents. Every partner is an agent and binds other partners by his/her act while at the same time is bound by other partners actions.

2. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.

As per the Indian Partnership Act, 1932. Here are the following provisions that stays relevant when a partnership deed is not present:

1. Sharing of profits and losses: If a partnership deed is absent, then the profit sharing ratio should be equal among all partners, as per Partnership Act, 1932.

2. Interest on Partner’s capital: If partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.

3. Interest on Partner’s drawings: If partnership deed is absent, then as per Partnership Act, 1932, no interest shall be charged to the partners in event of drawing money.

4. Interest on Partner’s loan: If partnership deed is absent then the partner is eligible for a 6% interest on loan to the firm.

5. Salary to a partner: In case of absence of partnership deed, the partners are not eligible for any salary, any salary whatsoever if paid will be as appropriation of profit (in case there is profit).

3. Explain why it is considered better to make a partnership agreement in writing.

According to the Partnership Act, 1932, it is not mandatory to have Partnership deed in writing. However, it is a safe option to have it in writing as there are chances that the partners may have conflicts in the future that gives rise to dispute among the partners regarding the operations of the firm. A partnership deed that is documented helps in proper functioning of the firm and assists in avoiding any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of disputes as, a written partnership that is signed by all the partners is suitable for use as an evidence in the court of law.

4. Illustrate how interest on drawings will be calculated under various situations.

A partner whenever withdraws from the firm, any amount which can be in the form of cash or other forms solely for personal use is called drawings. Interest on drawings is referred to the amount that is charged by firm as interest on the total amount taken as drawings. Interest calculation is dependent on the time and the frequency in which drawing is made. Here are some situations that can be shown where calculation is done for interest charged on drawings.

5. How will you deal with a change in the profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer?

There is change in profit sharing only when there is addition of a new partner, retirement or death of partner or due to mutually agreed decision among the partners. Some of the factors that need to be taken into account while changing the profit sharing ratio are: goodwill, accumulated profits and reserves, liabilities and adjustment of capitals and profit or loss on the revaluation of the assets, etc.

General reserve is essentially the accumulated profits and profit or loss that is obtained on the revaluation of assets and liabilities, adjustments in capital etc.

If one or more partners decide that it is the right time for changing profit sharing ratio, then the gaining partner shall gain and the other will lose, therefore the gainer should compensate the latter. This results in debiting gaining partner capital account and crediting the sacrificing partners’ capital account.

Gaining Partner’s Capital A/c Dr.

To Sacrificing Partner’s Capital A/c

(Adjustment entry passed)

Example:

Ram, Shyam, and Mohan 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 that date, the books of the firm shows ₹ 90,000 as general reserve, profit due to revaluation of plant and machinery ₹ 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

Here Mohan gains while Ram loses, so Ram needs to be compensated by Mohan with an amount of ₹ 25,000. The following adjustment entry is passed.

Adjustment entry:

Numerical Questions for NCERT Accountancy Solutions Class 12 Part 1 Chapter 2

1. Tripathi 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 January 01, 2015. 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% interest on their capital. They are also to be charged an interest of 5% 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.

a) If interest on Capital and Partners’ salaries and interest on drawings is charged against profit, the solution will be as:

b) ) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of  profit, the solution will be as:

2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were ₹ 90,000 and ₹ 60,000. The profit during the year were ₹ 45,000. According to partnership deed, both partners are allowed salary, ₹ 700 per month to Anubha and ₹ 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings at the end of the period 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 account are fluctuating.

a) Note: If Partners’ Salaries, Interest on capital and Interest on Drawing are treated as these have already adjusted in Profit and Loss Account. The Solution will be as

b) Alternative Note: If Partners’ salaries, interest on capital and interest on drawings adjusted in Profit and Loss Appropriation Account. The solution will be as.

3. Harshad and Dhiman are in partnership since April 01, 2016. 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, 2016. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2017. The profits for the year ended March 31, 2017 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.

The solution for this question is as follows:

DISTRIBUTION OF PROFITS

Harshad Claims:

Decisions

(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.

(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims:

Decisions

(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.

(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration.

(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a.

4. Aakriti and Bindu entered into partnership for making garment on April 01, 2016 without any Partnership agreement. They introduced Capitals of ₹ 5, 00,000 and ₹ 3, 00,000 respectively on October 01, 2016. 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 2017 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 giving reason for your solution.

The solution for this question is as follows:

Reason

a) Interest on partner’s loan shall be allowed at 6% p.a. because there is no partnership agreement.

b) Interest on capital shall not be allowed because there is no agreement on interest on capital.

c) Profit shall be distributed equally because profit sharing ratio has not been given.

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. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

If interest on capital and Partners’ salaries will be provided even if firm involves in loss.

The solution for this question is as follows:

If interest on capital and salaries will be provided out of profit

 If profit is less than the sum of distributable items, distribution shall be in proportion of items for distribution.

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 accounts showing the allocation of profits and partner’s capital accounts.

The solution for this question is as follows:

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/month;

(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% interest will be allowed on partner’s fixed capital;

(v)   5% 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, 2015 amounted to ₹ 40,000;

 Prepare firm’s Profit and Loss Appropriation Account.

The solution for this question is as follows:

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 2013 amounted to ₹ 40,000. Prepare the Profit and Loss Appropriation Account.

The solution for this question is as follows:

9. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed a minimum 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, 2016 and March 31, 2017 were ₹ 40,000 and ₹ 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

The solution for this question is as follows:

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, 2017 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, 2016;

        Simmi, ₹ 30,000; Sonu, ₹ 60,000;

(ii)   Current accounts balances on April 1, 2016;

        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.

The solution for this question is as follows:

11. 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.

The solution for this question is as follows:

12. 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.

Net profit for the year, before charging interest on capital and after charging partner’s salary was ₹ 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

The solution for this question is as follows:

13. Rahul, Rohit and Karan started partnership business on April 1, 2016 with capitals of ₹ 20, 00,000, ₹ 18, 00,000 and ₹ 16, 00,000, respectively. The profit for the year ended March 2017 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 partners in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.

14. Sunflower and Pink Rose started partnership business on April 01, 2016 with capitals of ₹ 2, 50,000 and ₹ 1, 50,000, respectively. On October 01, 2016, 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, 2017.

The solution for this question is as follows:

Product Method

Sunflower

Pink Rose

Alternative Method:

Simple Interest Method

Sunflower

Pink Rose

15. On March 31, 2017 after the close 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.

The solution for this question is as follows:

Generally interest on Capital is calculated on opening balance of capital. If additional capital is not given.

Interest on Capital

16. Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2017:

During the year Mahadev’s drawings were ₹ 30,000. Profits during 2017 is ₹ 10, 00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2017.

Interest on Capital

17. Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2018.

Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.

Interest is calculated as follows:

Product Method

18. The capital accounts of Moli and Golu showed balances of ₹ 40,000 and ₹ 20,000 as on April 01, 2016. 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, 2016. 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 show distribution of profits and prepare partner’s capital accounts.

The solution for this question is as follows:

19. 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:

Interest is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of accounts are closed on March 31, 2017, every year.

The solution for this question is as follows:

Rakesh’s Interest on Drawings

20. Himanshu withdrew ₹ 2,500 at the end Month 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 31st December, 2017.

The solution for this question is as follows:

21. 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.

The solution for this question is as follows:

22. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2017 were ₹ 2, 50,000 and ₹ 1, 50,000, respectively. They share profits equally. On July 01, 2017, 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, 2018.

The solution for this question is as follows:

Interest on Capital

Raj

Neeraj

23. 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 2017 were ₹ 24,000 and ₹ 16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.

The solution for this question is as follows:

24. Harish is a partner in a firm. He withdrew the following amounts during the year 2017:

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, 2017.

The solution for this question is as follows:

Calculation of interest on Harish’s drawings

25. 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.

The solution for this question is as follows:

26. 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.

The solution for this question is as follows:

27. 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.

The solution for this question is as follows:

Guarantee of Profit to the partners

28. Pinki, Deepati 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.

The solution for this question is as follows:

29. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed a minimum amount of ₹ 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.

The solution for this question is as follows:

30. 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, 2017 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 distribution of profit among partner.

The solution for this question is as follows:

Alternative Method

 31. 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, 2017 was ₹ 30,000. Prepare Profit and Loss Appropriation Account, indicating the amount finally due to each partner.

The solution for this question is as follows:

32. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 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.

The solution for this question is as follows:

(i)

(ii)

33. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2: 2: 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall 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.

The solution for this question is as follows:

34. 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 1/2, Mohan 1/3 Sohan 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, 2017 is ₹ 2, 00,000, before charging interest on capital. You are required to show distribution of profit.

The solution for this question is as follows:

35. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following :

You are required to show Profit and Loss Appropriation Account (after giving effect to the alone).

The solution for this question is as follows:

36. The net profit of X, Y and Z for the year ended March 31, 2016 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:

The capital accounts of partners were fixed as: X ₹ 1, 00,000, Y ₹ 80,000 and Z ₹ 60,000. Record the adjustment entry.

The solution for this question is as follows:

Past Adjustment

Explanation:

Capital have credit balance if it deducted will be debited and if it is added it will be credited.

Here X wrongly taken excess ₹ 2,500 hence ₹ 2,500 will be deducted from X capital Account on the other hand Y and Z taken less amount as they should have been taken, hence capital account of Y and Z will be added.

37. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2: 2: 1, have existed for same 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:

Show adjustment of profits by means of a single adjustment journal entry.

The solution for this question is as follows:

Distribution of Profit

Journal (Adjusting entry)

38. 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.

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.

The solution for this question is as follows:

Adjustment of Profit

Adjusting Journal Entry

39. 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, 20,000. The profit sharing ratio was 3: 2: 1. Pass necessary adjustment entries.

The solution for this question is as follows:

In this question interest on capital shall be calculated on opening capital

Adjustment of Profit

Adjusting Journal Entry

40. Azad and Benny are equal partners. Their capitals are ₹ 40,000 and ₹ 80,000, respectively. After the accounts for the year have been prepared it is discovered that interest at 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.

The solution for this question is as follows:

Adjustment of Profit

Adjusting Journal Entry

41. Kavita and Pradeep are partners, sharing profits in the ratio of 3: 2. They employed Chandan as their manager, to whom they paid a salary of ₹ 750 p.m. Chandan deposited ₹ 20,000 on which interest is payable @ 9% p.a. At the end of 2017 (after the division of profit), it was decided that Chandan should be treated as partner w.e.f. Jan. 1, 2014 with 1/6 th share in profits. His deposit being considered as capital carrying interest @ 6% p.a. like capital of other partners. Firm’s profits after allowing interest on capital were as follows:

Record the necessary journal entries to give effect to the above.

The solution for this question is as follows:

Chandan received as Manager = Interest on Loan + Salary = 7,200 + 36,000 = ₹ 43,200

Total Profit of 4 years before interest on Chandan’s Loan and Salary = 2, 38,200

Interest on Chandan’s Capital for 4 years = {20,000 × (6/100) = 1,200}

= 1,200 × 4 = ₹ 4,800

Profit after interest on all partners’ Capital

= Total Profit of four years before interest on Chandan’s loan and Salary – Interest on Chandan’s Capital for four years

= 2, 38,200 – 4,800

= ₹ 2, 33,400

Wrong Distribution – Distribution of 4 years

Profit when Chandan as a Manager

Right Distribution – Division of Profit when Chandan as Partner

Adjustment of Profit

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 Rupees 24,000 had been credited to partners in the proportion in which they shared profits. During the tear their drawings for Mohan, Vijay and Anil were ₹ 5,000, ₹ 4,000 and ₹ 3,000, respectively. Subsequently, the following omissions were noticed:

Record necessary corrections through journal entries.

Interest on Capital shall be calculated on opening capital.

The solution for this question is as follows:

Interest on Capital

Adjustment of Profit

Adjusting Journal Entry

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 there years remained as follows:

Make necessary and adjustment entry at the beginning of the fourth year i.e. Jan. 2017.

The solution for this question is as follows:

Interest on Capital

Adjustment of profit

Year 2014

Year 2015

Year 2016

Final Adjustment

Adjusting Journal Entry

44. Dinker and Ravinder were partners sharing profits and losses in the ratio of 2:1. The following balances were extracted from the books of account, for the year ended December 31, 2017.

Prepare final accounts for the year ended December 31, 2017, with following adjustment:

(a)  Stock on December 31, 2017, was ₹ 42,500.

(b)  A Provision is to be made for bad debts at 5% on debtors

(c)  Rent outstanding was ₹ 1,600.

(d) Wages outstanding were ₹ 1,200.

(e)  Interest on capital to be allowed on capital @ 4% per annum and interest on drawings to be charged @ 6% per annum.

(f)  Dinker and Ravinder are entitled to a Salary of ₹ 2,000 per annum

(g)  Ravinder is entitled to a commission ₹ 1,500.

(h)  Depreciation is to be charged on Building @ 4%, Plant and Machinery, 6%, and furniture and fixture, 5%.

(i)   Outstanding interest on loan amounted to ₹ 350.