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


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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


1. Define Partnership Deed.
 

A partnership deed also referred to as a partnership agreement, is a document of importance that contains the details of all the rights and responsibilities of the concerned parties involved in a business. It helps in preventing any kind of disputes or disagreements that can arise between partners over their role on the business and the associated benefits from the partnership in the firm.
2. Why it is considered desirable to make the partnership agreement in writing.
 

According to the Partnership Act, 1932, having a Partnership deed in writing is not mandatory. However, it is a safe option to have it in writing as it helps avoid 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.

3. List the items which may be debited or credited in the capital accounts of the partners when:
 

(i) Capitals are fixed 

(ii) Capitals are fluctuating

(i) These items get credited:

1. Opening capital balance

2. Additional capital or Fresh capital that is added to the business.

These items get debited:

1. Part of capital that is withdrawn.

2. Closing capital balance

(ii)These items get debited

1. Opening capital balance

2. Fresh capital added in the accounting period

3. Salaries paid to partners

4. Profit share

5. Interest received on capital

These items get debited:

1. Withdrawals done during the accounting year.

2. Interest accumulated on withdrawals (drawing)

3. Closing capital balance

4. Loss on shares

4. Why is Profit and Loss Adjustment Account prepared? Explain.
 

It is prepared for the following reasons: 

1. For recording transactions, errors or omissions which may be left while preparing the final accounts.

2. To act as a account for distributing profit and loss between partners

3. To accommodate for changes in partnership deed.

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.

 

ParticularsRamShyamMohan
Share of profit as per 3:2:145,00030,00015,000
Profit on revaluation of plant and machinery15,00010,0005,000
60,00040,00020,000
Share of profit as per 1:1:150,00050,0005,000
Difference (Gain or Loss)25,00025,000
(Loss)(Gain)

 

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:

Mohan’s Capital A/cDr.25,000
To Ram’s Capital A/c25,000
( Adjustment entry passed)

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:

 

Profit and Loss Appropriation Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss30,000
Tripathi’s Current Account18,000
Chauhan’s Current Account12,000
30,00030,000

 

Partners’ Capital Account
Dr.Cr.
ParticularsTripathiChauhanParticularsTripathiChauhan
Balance b/d60,00040,000
Balance c/d60,00040,000
60,00040,00060,00040,000

 

Partners’ Current Account
Dr.Cr.
ParticularsTripathiChauhanParticularsTripathiChauhan
Drawings12,0008,000Interest on Capital3,0002,000
Interest on Drawings600400Partners’ Salaries12,00012,000
Balance c/d20,40017,600Profit & Loss Appropriation18,00012,000
33,00026,00033,00026,000

 

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

Profit and Loss Appropriation Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Partners’ SalaryProfit and Loss (Profit)30,000
Tripathi 1,000 × 12 =12,000Interest on Drawings
Chauhan 1,000 × 12 =12,00024,000Tripathi600
Chauhan4001,000
Interest on Capital
Tripathi3,000
Chauhan2,0005,000
Profit Transferred to
Tripathi’s Current1,200
Chauhan’s Current8002,000
31,00031,000

 

Partners’ Capital Account
Dr.Cr.
ParticularsTripathiChauhanParticularsTripathiChauhan
Balance b/d60,00040,000
Balance c/d60,00040,000
60,00040,00060,00040,000

 

Partners’ Current Account
Dr.Cr.
ParticularsTripathiChauhanParticularsTripathiChauhan
Drawings12,0008,000Partners’ Salaries12,00012,000
Interest on Drawings600400Interest on Capital3,0002,000
Balance c/d3,6006,400Profit and Loss Appropriation1,200800
16,20014,80016,20014,800

 

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

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit Transferred to Current  A/cProfit and Loss45,000
Anubha’s Capital30,000
Kajal’s Capital15,00045,000
45,00045,000

 

Partners’ Capital Account
Dr.    Cr.
ParticularsAnubhaKajalParticularsAnubhaKajal
Drawings8,5006,500Balance b/d90,00060,000
Interest on Drawings425325Partners’ Salaries8,4006,000
Interest on Capital4,5003,000
Balance c/d1,23,97577,175Profit and Loss Appropriation30,00015,000
1,32,90084,0001,32,90084,000

 

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.

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Partners’ Salaries:Profit and Loss Account45,000
Anubha8,400Interest on Drawings
Kajal6,00014,400Anubha425
Kajal325750
Interest on Capital:
Anubha4,500
Kajal3,0007,500
Profit transferred to
Anubha’s Capital15,900
Kajal’s Capital7,95023,850
45,75045,750

 

Partners’ Capital Account
Dr.    Cr.
ParticularsAnubhaKajalParticularsAnubhaKajal
Drawings8,5006,500Balance b/d90,00060,000
Interest on Drawings425325Partners’ Salaries8,4006,000
Interest on Capital4,5003,000
Balance c/d1,09,87570,125Profit and Loss Appropriation15,9007,950
1,18,80076,9501,18,80076,950

 

 

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.

 

Profit and Loss Adjustment Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on Partner’s LoanProfit and Loss1,80,000
Harshad 1,00,000 × (6/100) × (6/12)3,000
Profit and Loss Appropriation1,77,000
1,80,0001,80,000

 

Profit and Loss Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss Adjustment1,77,000
Harshad’s Capital88,500
Sharma’s Capital88,500
1,77,0001,77,000

 

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:

Profit and Loss Adjustment Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on Partner’s LoanProfit and Loss43,000
Aakriti 20,000 × (6/100) × (6/12)600
Profit transferred to
Aakriti’s Capital21,200
Bindu’s Capital21,20042,400
43,00043,000

 

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:

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Partner’s SalariesProfit and Loss23,200
Shikha60,000Loss transferred to
Rakhi Capital34,720
Interest on CapitalShikha’s Capital52,08086,800
Rakhi20,000
Shikha30,00050,000
1,10,0001,10,000

  

Partners’ Capital Account
Dr.    Cr.
ParticularsRakhiShikhaParticularsRakhiShikha
Drawings7,00010,000Balance b/d2,00,0003,00,000
Profit & Loss Appropriation34,72052,080Partner’s Salaries60,000
Balance c/d1,78,2803,27,920Interest on Capital20,00030,000
2,20,0003,90,0002,20,0003,90,000

 

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

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Partner’s SalariesProfit and Loss23,200
Shikha  {23,200 × (6/11)}12,655
Interest on Capital
Rakhi {23,200 × (2/11)}4,218
Shikha {23,200 × (3/11)}6,327
23,20023,200

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

 

Partners SalariesRatio
Shikhar (₹ 60,000)623,200 × (6/11)12,655
Interest on Capital
Rakhi (₹ 20,000)223,200 × (2/11)4,218
Shikhar (₹ 30,000)323,200 × (3/11)6,327
1123,200

 

Partners’ Capital Account
Dr.    Cr.
ParticularsRakhiShikhaParticularsRakhiShikha
Drawings7,00010,000Balance b/d2,00,0003,00,000
Partner’s Salaries12,655
Balance c/d1,97,2183,08,972Interest on Capital4,2186,327
2,04,2183,18,9722,04,2183,18,972

 

 

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:

 

Profit and Loss Adjustment Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalBy Profit and Loss (12,500 + 2,500)15,000
Lokesh3,000
Azad1,8004,800
Partner’s Salaries
Azad2,500
Provision for 

Manager’s Commission 15,000 × (5/100)

750
Profit transferred to
Lokesh Capital4,170
Azad Capital2,7806,950
15,00015,000

 

Partners’ Capital Account
Dr.    Cr.
ParticularsLokeshAzadParticularsLokeshAzad
Balance b/d50,00030,000
Interest on Capital3,0001,800
Balance c/d57,17037,080Partner’s Salaries2,500
Profit and Appropriation4,1702,780
57,17037,08057,17037,080

 

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:

 

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Partner’s SalaryProfit and Loss40,000
Maneesh4,800Interest on Drawings
Maneesh800
Partner’s commissionGirish7001,500
Girish {(40,000 – 4,800) × (10/100)}3,520
Interest on Capital
Mannesh7,000
Girish5,60012,600
Profit transferred to
Maneesh’s Current10,290
Girish’s Current10,29020,580
41,50041,500

 

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:

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss40,000
Ram’s Capital (20,000 – 1,250)18,750
Raj’s Capital (12,000 – 750)11,250
George’s Capital (8,000 + 1,250 + 750)10,000
40,00040,000

 

 

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:

Profit and Loss Appropriation Account for the year ended 31st31st March 2016
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss40,000
Amann’s Capital  16,00016,000
Babita’s Capital (16,000 – 2,000)14,000
Suresh’s Capital (8,000 + 2,000)10,000
40,00040,000

 

Profit and Loss Appropriation Account for the year ended 31st March 2017
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss60,000
Amann’s Capital24,000
Babita’s Capital24,000
Suresh’s Capital12,000
60,00060,000

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:

 

 

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalProfit and Loss Account1,50,000
Simmi1,500Interest on Drawings
Sonu3,0004,500Simmi600
Sonu4501,050
Partners’ Salaries
Simmi12,000
Sonu9,00021,000
Profit transferred to
Simmi’s Current94,162
Sonu’s Current31,3881,25,550
1,51,0501,51,050

 

Partners’ Capital Account
Dr.    Cr.
ParticularsSimmiSonuParticularsSimmiSonu
Balance b/d30,00060,000
Balance c/d30,00060,000
30,00060,00030,00060,000

 

Partners’ Current Account
Dr.    Cr.
ParticularsSimmiSonuParticularsSimmiSonu
Drawings20,00015,000Balance b/d30,00015,000
Interest on Drawings600450Interest on Capital1,5003,000
Partners’ Salaries12,0009,000
Balance c/d1,17,66243,388Profit and Loss Appropriation94,16231,388
1,37,66258,3881,37,66258,388

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:

 

Profit and Loss Appropriation Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalProfit and Loss1,00,300
Ramesh9,600Interest on Drawings
Suresh7,20016,800Ramesh2,000
Suresh2,5004,500
Partners’ Salaries
Ramesh24,000
Suresh36,00060,000
Profit Transferred to
Ramesh’s Capital {28,000 × (4/7)}16,000
Suresh’s Capital {28,000 × (3/7)}12,000
1,04,8001,04,800

 

Partners’ Capital Account
Dr.Cr.
ParticularsRameshSureshParticularsRameshSuresh
Drawings40,00050,000Cash80,00060,000
Interest on Drawings2,0002,500Interest on Capital9,6007,200
Balance c/d87,60062,700Partners’ Salaries24,00036,000
Profit & Loss Appropriation16,00012,000
1,29,6001,15,2001,29,6001,15,200

 

 

Capital Ratio=Ramesh:Suresh
80,000:60,000
4:3

 

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.

 

 SukeshVerma*
 
Capital Accounts40,00040,000
Current Accounts(Cr.)   7,200(Cr.)   2,800
Drawings10,8508,150

 

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:

 

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalProfit and Loss9,500
Sukesh2,000
Vanita2,0004,000
Profit transferred to
Sukesh’s Current {5,500 × (3/5)}3,300
Vanita’s Current {28,000 × (2/5)}2,200
9,5009,500

 

Partner’s Capital Account
Dr.    Cr.
ParticularsSukeshVanitaParticularsSukeshVanita
Balance b/d40,00040,000
Balance c/d40,00040,000
40,00040,00040,00040,000

 

Partner’s Current Account
Dr.    Cr.
ParticularsSukeshVanitaParticularsSukeshVanita
Drawings10,8508,150Balance b/d7,2002,800
Partner’s Salaries7,200
Profit and Loss Appropriation3,3002,200
Balance c/d1,6506,050Interest on capital2,0002,000
12,50014,20012,50014,200

 

 

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

 

01 April 2016 to 30 September 20162,50,000 × 6 =15,00,000
01 October 2016 to 31 March 20172,00,000 × 6 =12,00,000
Sum of Product27,00,000

 

Pink Rose

 

01 April 2016 to 30 September 20161,50,000 × 6 =9,00,000
01 October 2016 to 31 March 20172,00,000 × 6 =12,00,000
Sum of Product21,00,000

 

Alternative Method:

 

Simple Interest Method

 

Sunflower

April 01, 2016 to September 30, 20162,50,000 ×10×6= 

₹ 12,500

 

10012
 

October 01,  2016 to March 31, 2017

2,00,000 ×10×6= 

₹ 10,000

 

10012
Interest on Sunflower’s Capital₹ 22,500

 

Pink Rose

April 01, 2016 to September 30, 20161,50,000 ×10×6= 

₹   7,500

 

10012
 

October 01,  2016 to March 31, 2017

2,00,000 ×10×6= 

₹ 10,000

 

10012
Interest on Pink Rose’s Capital₹ 17,500

 

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.

MountainHillRock
Closing Capital4,00,0003,00,0002,00,000
Add: Drawings20,00015,00010,000
Less: Profit (1:1:1)(50,000)(50,000)(50,000)
Opening Capital3,70,0002,65,0001,60,000

 

 

Interest on Capital

Mountain3,70,000 ×10 / 100= ₹ 37,000
Hill2,65,000 × 10 / 100= ₹ 26,500
Rock1,60,000 × 10 / 100= ₹ 16,000

 

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

 

Balance Sheet as at March 31, 2017 

 

 Amount Amount
LiabilitiesAssets
Neelkant’s Capital10,00,000Sundry Assets30,00,000
Mahadev’s Capital10,00,000  
Neelkant’s Current Account1,00,000  
Mahadev’s Current Account1,00,000  
Profit and Loss Apprpriation   
(March 2017)8,00,000  
 30,00,000 30,00,000
    

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

Neelkant’s10,00,000 × 5 / 100= ₹ 50,000
Mahadev’s10,00,000 × 5 / 100= ₹ 50,000

 

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

 

May 01, 2017₹ 12,000
July 31, 2017₹   6,000
September 30, 2017₹   9,000
November 30, 2017 ₹ 12,000
January 01, 2018₹   8,000
March 31, 2018₹   7,000

 

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

Interest is calculated as follows:

Product Method

 Drawings × PeriodProduct
01 May, 2017 to 31 March 201812,000 × 11 =1,32,000
31 July, 2017 to 31 March 20186,000 × 8 =48,000
30 September, 2017 to 31 March 20189,000 × 6 =54,000
30 Nov. 2017 to 31 March 201812,000 × 4 =48,000
01 Jan. 2018 to 31 March 20188,000 × 3 =24,000
31 March 2018 to 31 March 20187,000 × 0 =0
Sum of Product3,06,000

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:

Profit and Loss Adjustment Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalProfit and Loss Account20,950
Moli4,000Interest on Drawings
Golu2,0006,000Moli780
Golu6601,440
Interest on Partner’s Loan
Golu’s {10,000 × (6/100) × (8/12)}400
Profit transferred to
Moli’s Capital {15,990 × (3/5)}9,594
Golu’s Capital {15,990 × (2/5)}6,39615,990
22,39022,390

 

Partners’ Capital Account
Dr.    Cr.
ParticularsMoliGoluParticularsMoliGolu
Drawings12,00012,000Balance b/d40,00020,000
Interest on Drawing780660Interest on Capital4,0002,000
Balance c/d40,81415,736Profit and Loss Adjustment9,5446,396
53,59428,39653,59428,396

 

 

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:

 

RakeshMonth
 May 31, 2016600
 June 30, 2016 500
 August 31, 20161,000
 November 1, 2016400
 December 31, 20161,500
 January 31, 2017 300
 March 01, 2017 700
RohanAt the beginning of each month 400

 

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

 Drawings × PeriodProduct
31 May 2016 to 31 March 2017600 × 10 =6,000
30 June 2016 to 31 March 2017500 ×   9 =4,500
31 August 2016 to 31 March 20171,000 ×   7 =7,000
1 November 2016 to 31 March 2017400 ×   5 =2,000
31 December 2016 to 31 March 20171,500 ×   3 =4,500
31 January 2017 to 31 March 2017300 ×   2 =6,00
01 March 2017 to 31 March 2017700 ×   1 =700
Sum of Product25,300

 

 

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

 Capital × PeriodProduct
1 April 2017 to 30 June 20172,50,000 × 3 =7,50,000
1 July 2017 to 31 March 20181,00,000 × 9 =9,00,000
Sum of Product16,50,000

 

 

Neeraj

 

 Capital × PeriodProduct
1 April 2017 to 30 June 20171,50,000 × 3 =4,50,000
1 July 2017 to 31 March 20181,00,000 × 9 =9,00,000
Sum of Product13,50,000

 

 

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:

 

 
February 014,000
May 0110,000
June 304,000
October 3112,000
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, 2017.

The solution for this question is as follows:

 

Calculation of interest on Harish’s drawings

 Drawings × PeriodProduct
01 Feb. 17 to 31 Dec. 174,000 × 11 =44,000
01 May 17 to 31 Dec. 1710,000 ×   8 =80,000
30 June 17 to 31 Dec. 174,000 ×   6 =24,000
31 Oct. 17 to 31 Dec. 1712,000×   2 =24,000
31 Dec. 17 to 31 Dec. 174,000 ×   0 =0
Sum of Product1,72,000

 

 

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:

RamShyamMohan
Capital on March 3124,00018,00012,000
Add: Drawings3,6004,5002,700
Less: Profit (3:2:1)(18,000)(12,000)(6,000)
Capital April 01, 20129,60010,5008,700

 

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

 

Profit and Loss Appropriation Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss36,000
Amit’s Capital18,000
Less: Gurantee to Samiksha 

{2,000 × (3/5)}

(1,200)16,800
Sumit’s Capital12,000
Less: Gurantee to Samiksha 

{2,000 × (2/5)}

(800)11,200
Samiksha Capital6,000
Add: Amit’s Guarantee1,200
Add: Sumit’s Guarantee8008,000
36,00036,000

 

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:

Profit and Loss Appropriation Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit & Loss40,000
Pinki’s Capital20,000
Less: Gurantee to Kaku 

{1,000 × (1/2)}

(500)19,500
Deepti’s Capital16,000
Less: Guarantee to Kaku 

{1,000 × (1/2)}

(500)15,500
Kaku’s Capital4,000
Add: Deficiency received from
Pinki500
Deepti5005,000
40,00040,000

 

 

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:

 

Profit and Loss Appropriation Account as on March 31, 2016
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss40,000
Abhay’s Capital20,000
Siddharth’s Capital12,000
Less: Guarantee to Kusum’s(2,000)10,000
Kusum’s Capital8,000
Add: Deficiency received from Siddharth2,00010,000
40,00040,000

 

Profit and Loss Appropriation Account as on March 31, 2017
Dr.   Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss60,000
Abhay’s Capital30,000
Siddharth’s Capital18,000
Kusum’s Capital12,000
60,00060,000

 

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:

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss35,000
Radha’s Capital17,500
Less: Fatima’s Deficiency {1,500 × (3/5)}(900)16,600
Mary’s Capital14,000
Less: Fatima’s Deficiency {1,500 × (2/5)}(600)13,400
Fatima’s Capital3,500
Add: Deficiency born by
Radha900
Mary6005,000
35,00035,000

 

Journal 

 

DateParticularsL.F.Debit 

Amount

Credit 

Amount

Profit and Loss Appropriation A/cDr.35,000
To Radha’s Capital A/c16,600
To Mary’s Capital A/c13,400
To Fatima’s Capital A/c5,000
(Profit distributed among Partners)

 

Alternative Method

Journal 

 

DateParticularsL.F.Debit 

Amount

Credit 

Amount

Profit and Loss Appropriation A/cDr.35,000
To Radha’s Capital A/c17,500
To Mary’s Capital A/c14,000
To Fatima’s Capital A/c3,500
(Profit distributed among Partners)
Radha’s Capital A/cDr.900
Mary’s Capital A/cDr.600
To Fatima’s Capital A/c1,500
(Deficiency of Fatima’s Share taken from Radha and 

Mary)

 

 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:

Profit and Loss Appropriation Account as on March 31, 2017
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss30,000
X’s Capital15,000
Less: Z’s Deficiency {3,000 × (3/5)}(1,800)13,200
Y’s Capital10,000
Less: Z’s Deficiency {3,000 × (2/5)}(1,200)8,800
Z’s Capital5,000
Add: Share of Deficiency born by
Radha1,800
Mary1,2008,000
30,00030,000

 

 

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)

 

Profit and Loss Appropriation Account as on March 31, 2015
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss2,50,000
Arun’s Capital1,00,000
Less: Chintu’s share of deficiency(10,000)90,000
Bobby’s Capital1,00,000
Chintu’s Capital50,000
Add: Deficiency received from Arun10,00060,000
2,50,0002,50,000

 

(ii)

 

Profit and Loss Appropriation Account as on March 31, 2015
Dr. Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss3,60,000
Arun’s Capital {3,60,000 × (2/5)}1,44,000
Bobby’s Capital {3,60,000 × (2/5)}1,44,000
Chintu’s Capital {3,60,000 × (1/5)}72,000
3,60,0003,60,000

 

 

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:

 

Profit and Loss Appropriation Account as on March 31, 2017
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Profit transferred toProfit and Loss70,000
Ashok’s Capital28,000
Less: Cheena’s share of deficiency {6,000 × (1/2)}(3,000)25,000
Brijesh’s Capital28,000
Less: Cheena’s share of deficiency {6,000 × (1/2)}(3,000)25,000
Cheena’s Capital14,000
Add: Deficiency received from
Ashok3,000
Brijesh3,00020,000
70,00070,000

 

 

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:

 

Profit and Loss Appropriation A/c as on 31 March 2017
Dr.   Cr.
Particulars Amount 

ParticularsAmount 

Interest on CapitalProfit and Loss2,00,000
Ram50,000
Mohan25,000
Sohan20,00095,000
Profit Transferred to
Ram’s Capital52,500
Less: Share of deficiency {7,500 × (3/5)}(4,500)48,000
Mohan’s Capital35,000
Less: Share of deficiency {7,500 × (2/5)}(3,000)32,000
Sohan’s Capital17,500
Add: Deficiency received from
Ram4,500
Mohan3,00025,000
2,00,0002,00,000

 

 

35. 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).

The solution for this question is as follows:

 

 

Profit and Loss Appropriation Account as on March 31, 2017
Dr.   Cr.
ParticularsAmount 

ParticularsAmount 

Profit Transferred toProfit and Loss75,000
Amit’s Capital {84,000 × (3/6)}42,000Babita’s Capital9,000
Less: Sona’s share of deficiency {1,000 × (3/5)}(600)41,400(Deficiency  of Fees 25,000 – 16,000)
Babita’s Capital {84,000 × (2/6)}28,000
Less: Sona’s share of deficiency {1,000 × (2/5)}(400)27,600
Sona’s Capital {84,000 × (1/6)}14,000
Add: Deficiency received from
Amit600
Babita40015,000
84,00084,000

 

 

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:

(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.

The solution for this question is as follows:

Past Adjustment

XYZ Total
Interest on Capital5,0004,0003,000=12,000
Less: Interest on Drawings(700)(500)(300)=(1,500)
Add: Partner’s Salaries1,0001,500NIL=2,500
Right distribution of ₹ 13,0005,3005,0002,700=13,000
Less: Wrong distribution of ₹ 13,000 (3:1:1)(7,800)(2,600)(2,600)=(13,000)
(2,500) Dr.2,400 Cr100 Cr=NIL

 

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.

 

DateParticulars L.FDebit Amount ₹Credit Amount ₹
X’s Capital A/cDr.2,500
To Y’s Capital A/c2,400
To Z’s Capital A/c100
(Profit adjusted among partners)

 

 

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:

 

 
2014-1522,000
2015-1624,000
2016-1729,000

 

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

The solution for this question is as follows:

 

Distribution of Profit

 

Old Ratio (2:2:1)HarryPorterAliTotal
Year     
2014 – 15(8,800)(8,800)(4,400)=(22,000)
2015 – 16(9,600)(9,600)(4,800)=(24,000)
2016 – 17(11,600)(11,600)(5,800)=(29,000)
=
Total Profit of 3 years in old ratio(30,000)(30,000)(15,000)=(75,000)
Distribution of 3 years profit in new Ratio (1:1:1)25,00025,00025,000=75,000
Adjusted Profit(5,000)(5,000)10,000NIL

 

Journal (Adjusting entry)

 

Date 

Particulars

 

L.FDebit Amount ₹Credit Amount ₹
     
Harry’s Capital A/cDr.5,000 
Porter’s Capital A/cDr.5,000
To Ali’s Capital A/c10,000
(Profit adjusted due to change in profit sharing ratio)

 

 

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.

  Amount  Amount
LiabilitiesAssets
Mannu’s Capital30,000 Drawings :  
Shristhi’s Capital10,00040,000Mannu4,000 
   Shristhi2,0006,000
   Other Assets34,000
  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.

The solution for this question is as follows:

 

Adjustment of Profit

 

Mannu’sShrishtiTotal
Interest on Capital1,500500=2,000
Less: Interest on Drawings(120)(60)=(180)
Right distribution of ₹ 1,8201,380440=1,820
Less: Wrong distribution of ₹ 1,820 (3 : 2)(1,092)(728)=(1,820)
Adjusted Profit288(288)=NIL

 

Adjusting Journal Entry

 

Date 

Particulars

 

L.FDebit Amount  

Credit Amount  

Shrishti’s Capital A/cDr.288
To Mannu’s Capital A/c288
(Adjustment of profit made)

 

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

 

EluinMonuAhmed
Capital  on 31 Mar. 2017 (Closing Capital)80,00060,00040,000
Add: Drawings20,00015,0009,000
Less: Profit ₹ 120,000 (3:2:1)(60,000)(40,000)(20,000)
Capital on April 01, 2016 (Opening Capital)40,00035,00029,000

 

Adjustment of Profit

 

EluinMonuAhmed Total
Interest on Capital (on Opening Capital)2,0001,7501,450=5,200
Less: Interest on Drawings(500)(360)(200)=(1,060)
Right distribution of ₹ 4,1401,5001,3901,250=4,140
Less: Wrong distribution of ₹ 4,140 (in the ratio 3:2:1)(2,070)(1,380)(690)=(4,140)
(570)10560=NIL

 

Adjusting Journal Entry

 

Date 

Particulars

 

L.F.Debit Amount 

Credit Amount ₹
     
Eluin’s Capital A/cDr.570 
To Monu’s Capital A/c10
To Ahmed’s Capital A/c560
(Adjustment of Profit made)

 

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

AzadBennyTotal
Interest on Capital2,0004,000=6,000
Less: Wrong distribution of Profit ₹ 6,000 (1: 1)(3,000)(3,000)=(6,000)
Adjusted Profit(1,000)(1,000)=NIL

  

Adjusting Journal Entry

 

Date 

Particulars

 

L.FDebit Amount 

Credit Amount 

     
Azad’s Current  A/cDr.1,000 
To Benny’s Current A/c1,000
(Adjustment of profit made)

 

 

 

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:

 

  
2014Profit59,000
2015Profit62,000
2016Loss(4,000)
2017Profit78,000

 

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

The solution for this question is as follows:

 

Interest on 

Loan

+Salary=Total
201459,000+1,800+9,000=69,800
201562,000+1,800+9,000=72,800
2016(4,000)+1,800+9,000=6,800
201778,000+1,800+9,000=88,800
1,95,000+7,200+36,000=2,38,200

 

 

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

Kavita {1,95,000 × (3/5)}=1,17,000
Pradeep {1,95,000 × (2/5)}=78,000
Chandan received as manager = Interest on Loan + Salary
= 7,200 + 36,000=43,200
2,38,200

 

Right Distribution – Division of Profit when Chandan as Partner

 

Chandan Share of Profit {2,33,400 × (1/6)}38,900
Interest on Capital4,800
43,700

 

Kavita’s Share of Profit {(2,33,400 – 38,900) ×(3/5)} =1,16,700
Pradeep’s share of Profit {(2,33,400 – 38,900) × (2/5)} =77,800

 

 

Adjustment of Profit

Kavita Pradeep Chandan=Total
Distribution of profit when Chandan as partner1,16,70077,80043,700=2,38,200
Less: Distribution of profit when Chandan as manager(1,17,000)(78,000)(43,200)=(2,38,200)
Right distribution of ₹ 4,140(300)(200)(500)=NIL

 

 

Date 

Particulars

 

L.F.Debit Amount ₹Credit Amount ₹
 Kavita’s Capital A/cDr. 300 
Pradeep’s Capital A/cDr.200 
To Chandan’s Capital A/c500
(Adjustment of profit made)

 

 

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:

(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.

 

Interest on Capital shall be calculated on opening capital.

The solution for this question is as follows:

 

MohanVijayAnil
Closing Capital30,00025,00020,000
Add: Drawings5,0004,0003,000
Less: Profit (1:1:1)(8,000)(8,000)(8,000)
Opening Capital27,00021,00015,000

 

Interest on Capital

 

Mohan = 27,000 ×10 = ₹ 2,700
100

 

Vijay = 21,000 ×10 = ₹ 2,100
100

 

Anil = 15,000 ×10 = ₹ 1,500
100

 

Adjustment of Profit

 

MohanVijayAnil Total
Interest on Capital (on Opening Capital)2,7002,1001,5006,300
Interest on Drawings(250)(200)(150)(600)
2,4501,9001,3505,700
Wrong distribution(1,900)(1,900)(1,900)=(5,700)
550NIL(550)

 

Adjusting Journal Entry

 

Date 

Particulars

 

L.FDebit Amount 

Credit Amount 

     
Anil’s Capital A/cDr.550 
To Vijay’s Capital A/c550
(Adjustment of profit made)

 

 

 

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:

 

YearAnjuManjuMamta
2014435
2015321
2016111

 

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

    Anuj = 10,000 ×5 = ₹ 500
100

 

Manju = 8,000 ×5 = ₹ 400
100

 

Mamta = 6,000 ×5 = ₹ 30
100

Adjustment of profit

Year 2014

AnujManjuMamta=Total
Interest on Capital5004003001,200
Wrong distribution of ₹ 1,200 (4:3:5)(400)(300)(500)=(1,200)
100100(200)NIL

 

Year 2015

AnujManjuMamta=Total
Interest on Capital5004003001,200
Wrong distribution of ₹ 1,200 (3:2:1)(600)(400)(200)=(1,200)
(100)NIL100NIL

Year 2016

AnujManjuMamta=Total
Interest on Capital5004003001,200
Wrong distribution of ₹ 1,200 (1:1:1)(400)(400)(400)=(1,200)
100NIL(100)NIL

Final Adjustment

AnujManjuMamta
2014100100(200)
2015(100)NIL100
2016100NIL(100)
100100(200)

Adjusting Journal Entry

Date 

Particulars

 

L.FDebit Amount 

Credit Amount 

Jan. 2017
Mamta’s Capital A/cDr.200
To Anuj’s Capital A/c100
To Manju Capital A/c100
(Adjustment of profit made)

 

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.

 

Account NameDebit 

Amount

Credit 

Amount

Capital
Dinker2,35,000
Ravinder1,63,000
Drawings
Dinker 6,000
Ravinder 5,000
Opening Stock35,100
Purchases and Sales2,85,0003,75,800
Carriage inward2,200
Returns3,0002,200
Stationery1,200
Wages12,500
Bills receivables and Bills payables45,00032,000
Discount900400
Salaries12,000
Rent and Taxes18,000
Insurance premium2,400
Postage300
Sundry expenses1,100
Commission3,200
Debtors and creditors95,00040,000
Building1,20,000
Plant and machinery80,000
Investments1,00,000
Furniture and Fixture26,000
Bad Debts 2,000
Bad debts provision 4,600
Loan35,000
Legal Expenses200
Audit fee1,800
Cash in Hand13,500
Cash at Bank23,000
 8,91,2008,91,200
   

 

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.

 

 

The solution for this question is as follows: 

Financial Statement as on December 31, 2017

Trading Account

Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Opening Stock35,100Sales3,75,800
Purchases2,85,000Less: Sales Return(3,000)3,72,800
Less: Purchases Return(2,200)2,82,800
Closing Stock42,500
Carriage Inwards2,200
Wages12,500
Add: Outstanding1,20013,700
Gross Profit81,500
4,15,3004,15,300

 

Profit and Loss Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Stationery1,200Gross Profit81,500
Discount Allowed900Discount Received400
Salaries12,000Commission3,200
Rent & Taxes18,000
Add: Outstanding1,60019,600
Insurance Premium2,400
Postage300
Sundry Expenses1,100
Depreciation on
Building4,800
Plant and Machinery4,800
Fixtures and Fittings1,300
Provision for Bad Debts4750
Add: Bad Debt2,000
6,750
Less: (Old) Provision for Bad Debt(4,600)2,150
Legal Expenses200
Audit Fee1,800
Outstanding Interest on Loan350
Profit and Loss Appropriation32,200
85,10085,100

 

Profit and Loss Appropriation Account
Dr.Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalNet Profit32,200
Dinker9,400Interest on Drawings
Ravinder6,52015,920Dinker180
Ravinder150330
Partner’s Salaries
Dinker2,000
Ravinder2,0004,000
Commission (Ravinder)1,500
Profit transferred to
Dinker’s Capital7,407
Ravinder’s Capital3,70311,110
32,53032,530

 

Partners’ Capital Account
Dr.Cr.
ParticularsDinkerRavinderParticularsDinkerRavinder
Drawings6,0005,000Balance b/d2,35,0001,63,000
Interest on Drawings180150Interest on Capital9,4006,520
Balance c/d2,47,6271,71,573Partner’s Salaries2,0002,000
Profit & Loss Appropriation7,4073,703
Commission1,500
2,53,8071,75,2232,53,8071,75,223

 

Balance Sheet
LiabilitiesAmount  

AssetsAmount  

Bills Payable32,000Bills Receivables45,000
Creditors40,000Debtors95,000
Loan35,000Less: 5% Provision for Bad Debts(4,750)90,250
Add: Outstanding Interest35035,350
Building1,20,000
Rent Outstanding1,600Less: 4% Depreciation(4,800)1,15,200
Wages outstanding1,200
Capital:Plant and Machinery80,000
Dinker2,47,627Less: 6% Depreciation(4,800)75,200
Ravinder1,71,5734,19,200
Investments1,00,000
Furniture and Fixtures26,000
Less: 5% Depreciation(1,300)24,700
Cash in Hand13,500
Cash at Bank23,000
Closing Stock42,500
5,29,3505,29,350

 

45. Kajol and Sunny were partners sharing profits and losses in the ratio of 3:2. The following Balances were extracted from the books of account for the year ended March 31, 2015.

 

Account NameDebit Amount ₹Credit Amount ₹
Capital
Kajol1,15,000
Sunny91,000
Current accounts [on 1-04-2005*]
Kajol4,500
Sunny3,200
Drawings
Kajol6,000
Sunny3,000
Opening stock22,700
Purchases and Sales1,65,0002,35,800
Freight inward1,200
Returns 2,0003,200
Printing and Stationery 900
Wages 5,500
Bills receivables and Bills payables25,00021,000
Discount 400 800
Salaries6,000
Rent7,200
Insurance premium2,000
Traveling expenses700
Sundry expenses 1,100
Commission1,600
Debtors and Creditors74,00078,000
Building85,000
Plant and Machinery70,000
Motor car60,000
Furniture and Fixtures15,000
Bad debts1,500
Provision for doubtful debts2,200
Loan25,000
Legal expenses300
Audit fee900
Cash in hand7,500
Cash at bank 12,000
 5,78,1005,78,100
 

 

Prepare final accounts for the year ended March 31, 2015, with following adjustments:

(a)   Stock on March 31, 2015 was ₹37, 500.

(b)   Bad debts ₹3, 000; Provision for bad debts is to be made at 5% on debtors

(c)   Rent Prepaid were ₹1, 200.

(d)   Wages outstanding were ₹ 2,200.

(e)   Interest on capital to be allowed on capital at 6% per annum and interest on drawings to be charged @ 5% per annum.

(f)    Kajol is entitled to a Salary of ₹ 1,500 per annum.

(g)   Prepaid insurance was ₹ 500.

(h)   Depreciation was charged on Building, @ 4%; Plant and Machinery, @ 5%; Motor car, @ 10% and furniture and fixture, @ 5%.

(i)    Goods worth ₹ 7,000 were destroyed by fire on January 20, 2015. The Insurance company agreed to pay ₹ 5,000 in full settlement of the claim.


*As per the question, this year should be 01-04-2014

The solution for this question is as follows:

 

 

Financial Statement as on March 31, 2015 

Trading Account

Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Opening Stock22,700Sales2,35,800
Purchases1,65,000Less: Sales Return(2,000)2,33,800
Less: Purchases Return(3,200)
Less: Goods Lost by Fire(7,000)1,54,800Closing Stock37,500
Freight Inward1,200
Wages5,500
Add: Outstanding2,2007,700
Gross Profit84,900
2,71,3002,71,300

 

 

Profit and Loss Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Printing and Stationery900Gross Profit84,900
Discount Allowed400Discount Received800
Salaries6,000Commission1,600
Rent7,200Insurance Co. (Claim)5,000
Less: Prepaid(1,200)6,000
Insurance Premium2,000
Less: Prepaid(500)1,500
Travelling Expenses700
Sundry Expenses1,100
Bad Debt1,500
Add: Further Bad debt3,000
Add: Provision for Bad Debts3,550
8,050
Less: Provision for Bad Debt (Old)(2,200)5,850
Legal Expenses300
Audit Fee900
Goods Lost by Fire7,000
Depreciation on
Building3,400
Plant and Machinery3,500
Motor Car6,000
Furniture and Fixture750
Net Profit48,000
92,30092,300

 

Profit and Loss Appropriation Account
Dr.    Cr.
ParticularsAmount 

ParticularsAmount 

Interest on CapitalNet profit48,000
Kajol6,900
Sunny5,46012,360Interest on Drawings
Kajol300
Partner’s SalariesSunny150450
Kajol1,500
Profit & Loss – Gross Profit
Kajol’s Current20,754
Sunny’s Current13,83634,590
48,45048,450

 

Partners’ Capital Account
Dr.    Cr.
ParticularsKajolSunnyParticularsKajolSunny
Balance b/d1,15,00091,000
Balance c/d1,15,00091,000
1,15,00091,0001,15,00090,000

 

Partners’ Current Account
Dr.    Cr.
ParticularsKajolSunnyParticularsKajolSunny
Balance b/d3,200Balance b/d4,500
Drawings6,0003,000Interest on Capital6,9005,460
Interest on Drawings300150Partner’s Salaries1,500
Balance c/d27,35412,946Profit and Loss Appropriation20,75413,836
33,65419,29633,65419,296

 

Balance Sheet as on March 31, 2015 

 

LiabilitiesAmount 

AssetsAmount 

Bills Payable21,000Bills Receivable25,000
Creditors78,000Debtors74,000
Loan25,000Less: Further Bad debt(3,000)
Wages Outstanding2,20071,000
Capital:Less: 5% Provision for Bad Debt(3,550)67,450
Kajol1,15,000
Sunny91,0002,06,000Building85,000
Less: 5% Depreciation(3,400)81,600
Current:
Kajol27,354Plant and Machinery70,000
Sunn12,94640,300 Less: 5% Depreciation(3,500)66,500
Motor Car60,000
Less: 10% Depreciation(6,000)54,000
Furniture & Fixture15,000
Less: 5% Depreciation(750)14,250
Cash in Hand7,500
Cash at Bank12,000
Closing Stock37,500
Prepaid Rent1,200
Prepaid Insurance500
Insurance Co. (Claim)5,000
3,72,5003,72,500


 

Concepts covered in this chapter –

 

  • Nature of partnership
  • Partnership Deed
  • Special aspects of partnership accounts
  • Maintenance of capital accounts of partners
  • Past Adjustments
  • Final Accounts