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8/14/2019 Study Note 4.2, Page 169-197
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169Financial Accounting
4.2. APPROPRIATION OF PROFITS
INTRODUCTION
According to section 4 of the Partnership Act, 1932 a Partnership is the relation betweenpersons w ho have agreed to share th e profits of a business carried on by all or any one of them
acting for all.
If we an alyse the definition we find th ree basic elemen t of a Partnership :
(1) It arises out of an agreement made by two or more persons;
(2) The agreement is mad e regarding sharing profits of a business;
(3) Such business is carried on by all or any one of them acting for all.
(a) Partnership is the result of an agreement. It does not arise from status.
(b) The agreement may be either verbal or in writing. There should be some terms and
conditions binding the Partnership.
(c) The existing law d oes not enforce that the terms of the Partnership m ust be in w rit-
ing. If written, the agreement is know n as Deed or Articles of Partnersh ip.
(d) For the formation of a Partnership m ore then one person is requires. For a banking
business the m aximu m number of Partners is 10, in other bu sinesses it is 20.
Partnership Deed
Mode of Approp riation : Among other details the deed contains the mode of app ropr iation of
profits (or losses) specially regarding interest on partners capitals, salary or commission, etc.payable to partners and the profit-sharing ratio.
In the absence of deed the following gu idelines shou ld be followed :
1. Every Partner should share profits equally [ Section 13 (b)].
2. No interest is to be allowed on Partners capitals [ Section 13 (c)].
3. No interest should be charged on the drawings of the Partners.
4. No salary is to be allowed to any partner.
5. Interest on advances made by partners should be provided @ 6% per annum . [Section
13(d)].
6. Every partner should be to have equal share in the property of the Partnership as per
Section 14.
Some Important Considerations
Partners Capitals
(a) Where the Partners decide and the agreement p rovides, the Capitals Accounts of the Part-
ners remain unchanged over years. In that case the Capital Accounts show the original
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171Financial Accounting
(iii) In case the guaranteed am oun t (ii) is more, the excess shou ld be dedu cted from the
share of profit of the Partner given guarantee and calculated u nd er (i) above.
The some amoun t should be added with the original share of profit of the Partner to wh om the
guarantee has been given.
Illustration 1 :
X and Y are Par tners shar ing p rofit as 5:3. Z is the clerk of their bu siness getting a salary of Rs.
500 p.m. and a comm ission of 5% of the net profit after ded ucting his salary and commission.
Now , X guarantee that Z be made a Partners with 1/ 10th share of profit and nothong clse. If the
annu al profits is Rs. 1,32,000.
Steps :
(i) General Application of Profit Zs Share as clerk : Rs.
Salary 500 * 12 6,000
Commission 5/ 105 of [1,32,000 6,000] 6,00012,000
Balance of profit 1,20,000 Shared as : X =5/ 8 x 1,20,000 = Rs. 75,000 ;
Y = 3/ 8 x 1,20,000 = Rs. 45,000
(ii) Minimum guaranteed share of Z = 1/ 10th of Rs. 1,32,000 = Rs. 13,200
(ii) Shortfall = Rs. 13,200 Rs. 12,000 = Rs. 1200 to be d edu cted from share and add ed with Zs
share.
Final app ropr iation should be
Rs.
X : Rs. 75,000 Rs. 1200 73,800
Y : 45,000
Z : Rs. 12,000 + Rs. 1200 13,200
1,32,000
Xs Capital / Curr ent A/ c Dr. 1,200
To Zs Capital / Current A/ c 1,200
(Being Guaran teed share of profits provided
Guarantee given by firm :
(i) The share of profit of the guaranteed Partner is to be calculated according to the profit sharing ratio.
(ii) His minimum guaranteed amount is ascertained.
(iii) The higher of (i) and (ii) is given or credited to him.
(iv) The remaining profits are shared among the remaining Partners in their remaining ratio.
If the minimum guaranteed am oun t is more, the shortfall may be agreed to be in a ratio spe-
cially agreed u pon .
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Illustration 2 :
The profit sharing ratio among X, Y and Z three 3: 2: 1. Z is guaran teed as m inimum p rofit of
Rs. 84,000 p.a. An nu al p rofit are Rs. 4,20,000. Show the d istribution.
Steps :(i) Normal Distribution :
X : 3/ 6 of Rs. 4,20,000 2,10,000
Y : 2/ 6 of Rs. 4,20,000 1,40,000
Z : 1/ 6 of Rs. 4,20,000 70,000
(ii) Zs guaranteed share is Rs. 84,000
(iii) Zs share shou ld be Rs. 84,000 (higher than Rs. 70,000)
(iv) Xs share [4,20,000 84,000] * 3/ 5 2,01,600
Ys share [4,20,000 84,000] * 2/ 5 1,34,400
Z 84,0004,20,000
Xs Capitable / Current A/ c Dr. 8,400
Ys Capitable / A/ c Dr. 5600
To Zs Capitable / Current A/ c 14,000
Prior Period Adjustments
Errors committed in making appropriations of profit or in measuring revenues or profits in
any earlier year may be located by a p artnership firm in a subsequen t year. Such errors m ay
result from w rong valuation of inventory, incorrect d istribution of profit, errors of misposting
or p rinciples, etc. Their ad justm ents shou ld be m ade w ith retrospective effect from the d ate ofinitiation of errors. The ad justm ent is usually mad e with the help of adjustm ent entries mad e
throu gh the p artners Capital Accoun ts. A Prior Period Adjustmen t Accoun t or Profit & Loss
Adjustment Account may be used to accommodate the adjustments and the balance of this
accoun t may be tran sferred either to this Profit & Loss Accoun t of the current year or to the
par tners capital accoun ts.
Also there may be situations involving personal paym ent of salary by one partner to another,
omission to charge Interests, etc.
Illustrations 3 :
A,B and C are p artners sharing p rofits and as 2 : 2 : 1. They get interest on their Cap itals at 5%
p.a and are charged @ 6% p.a on th eir Drawings.
A and B are paid salary @ Rs 250 per m onth respectively. A w ould be paid 6% interest on his
loan. A p aid Rs. 25,000 as loan on 1st July, 2007A, B and C w ithdrew Rs. 10,000 Rs. 8,000 and Rs.
6,000 respectively dur ing 2007. C is entitled to a comm ission a t 2% on total sales which amoun ted
to Rs. 3,46,000 during the year. On 1st Janu ary, 2007 the cap ital balances of A, B and C w ere Rs
1,00,000, Rs. 80,000 and Rs. 60,000 resp ectively. The net p rofit for the year is Rs. 1,00,000. Pre-
pare the Profit & Loss Appropr iation Accoun t and the Capital Accoun ts of partners.
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173Financial Accounting
Solut ion :
Profit & Loss Appropriation Accoun t for the year end ed 31.12.2007
Dr. Cr.
Particu lars Amt Amt Particulars Amt Amt
Rs. Rs. Rs. Rs.
To Salary By Profit & Loss (Net Profit) 100,000
A [250 X 12] 3,000 Interest on Drawings :
B [150 X12] 1,800 4,800 @ 6% p.a. on an average
Commission C 6,920 of 6 months)
[2% of Rs. 3,46,000] A 300
Interest on Capital : B 240
A 5,000 C 180 720
B 4,000
C 3,000 12,000
Interest on Loan A 750
Share of pr ofits :
A [2/ 5] 30,500
B [2/ 5] 30,500
C [1/ 5] 15,250 76,250
1,00,720 1,00,720
Date Particulars A B C Date Particulars A B C
2007 Rs. Rs. Rs. 2007 Rs. Rs. Rs.
31.12 To Drawings 10,000 8,000 6,000 1.1 By balance b/ d 1,00,000 80,000 60,000
Interest on 300 240 180 31.12 Salary 3,000 1,800 -
Drawings
Balance c/ d 1,28,200 1,08,060 78,990 Commission - - 6,920
In terest on
Capital 5,000 4,000 3,000
Share of Profit 30,500 30,500 15,250
1,38,500 1,16,300 85,170 1,38,500 1,16,300 85,170
Capital Accoun ts
Dr. Cr.
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Illustration 4 :
A and B are par tners in a firm shar ing profits and losses equally. On 1st April, 2007 the balance
of their Cap ital Accounts w ere : A Rs. 50,000 and B 40,000. On th at d ate th e balances of their
Current Accoun ts w ere : A Rs. 10,000 (cred it) and B Rs. 3,000 (debit). Interest @ 5% p.a. is to be
allowed on the balance of Capital Accounts as on 1.4.2007 B is to get ann ual salary of Rs. 3,000wh ich had n ot been withd rawn. Drawings of A and B du ring the year w ere Rs. 1,000 and Rs.
2,000 respectively. The profit for the year ended 31st March, 2008 before charging interest on
capital bu t after cha rging Bs salary was Rs. 70,000. It is d ecided to tr ansfer 10 % of divisible
profit to a Reserve Account.
Prepare Profit & Loss Appropr iation Accoun t for the year end ed 31st March, 2008 and show
Capital and Cu rrent Accoun ts of the Partners for the year.
Solution :
Points to be noted :
Solution :
Dr. Profit & Loss Appropr iation Account for the year end ed 31.03.2008 Cr.
Particu lars Amount Amount Particu lars Amount Amount
To Salary - B 3,000 By Profit & Loss (Net 73,000
Interest on Capitals : Profit before Charging
A 2,500 Salary and Interest)
B 2,000 4,500
Reserve
[10% of 65,500] 6,550
Share of Profit
A [1/ 2] 29,475B [1/ 2] 29,475 58,950
73,000 73,000
(i) Profit before charging interest on Capital and Salary to B = Rs. 70,000 + Rs. 3,000= Rs. 73,000
(ii) Transfer to Reserve = 10 % of Divisible Profits.
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175Financial Accounting
Capital Accoun ts
Dr. Cr.
Date Particulars A B Date Particu lars A B
Rs. Rs. Rs. Rs.
31.3.08 To balance c/ d 50,000 40,000 1.4.07 By Balance c/ d 50,000 40,000
CurrentAccounts
Dr. Cr.
Date Particulars A B Date Particu lars A B
Rs. Rs. Rs. Rs.
1.4.07 To balance b/ d - 3,000 1.4.07 By Balance c/ f 10,000 -
31.3.08 Drawings 1,000 2,000 31.3.08 Interest on Capital 2,500 2,000
31.3.08 Balance c/ d 40,975 29,475 Salary - 3,000
x Share of Profit 29,475 29,475
41,975 34,475 41,975 34,475
Calculation of Interest on D rawings
1. If the date of draw ings is mentioned , then calculate interest accord ing to the time.
2. If the date of draw ings is not mentioned , then calculate interest on the average of the time
period.i.e. if the accoun ting p eriod is for one-year, then interest for 6 months, and so on.
3. If unequal amounts are drawn at irregular intervals :
Illustration 5 : Accoun ting Per iod : Janu ary December. Interest @ 12% p.a
Month Amount D raw n (Rs.) Period (In Months) Product (Amount Period)
February 10,000 11 1,10,000
May 5,000 8 40,000
September 15,000 4 60,000
November 10,000 2 20,000
December 20,000 1 20,000
2,50,000
Interest = Product Rate of Interest 121
= 250012
1=
100
22,50,000
4. If equal amounts are draw n at a fixed d ate every month, throughout the accounting period :
(a) Drawn at the begining of every month
(b) Draw n at the middle of every month
(c) Drawn at th e end of every month
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Interest = Amount Draw n p .m Rate of Interest Time
Again, the Accoun ing Preiod m ay be for 12 months; 6 months; 3 months or etc. How to
calculate the time?
If the Accounting Period is for 12 months : (Janu ary December)
Begining of the month Middle of the month End of the month
One-Year 6-months 3-months One-year 6-months 3-months One-Year 6-months 3-months
January 12 6 3 11.5 5.5 2.5 11 5 2
February 11 5 2 10.5 4.5 1.5 10 4 1
March 10 4 1 9.5 3.5 0.5 9 3 0
April 9 3 6 8.5 2.5 4.5 8 2 3
May 8 2 7.5 1.5 7 1
June 7 1 6.5 0.5 6 0
July 6 21 5.5 18 5 15
August 5 4.5 4
September 4 3.5 3
October 3 2.5 2
November 2 1.5 1
December 1 0.5 0
78 72 66
Time Period :
Accounting Period At the Begining At the Middle At the End
12 months 78/ 12 72/ 12 66/ 12
6 months 21/ 12 18/ 12 15/ 12
3 months 6/ 12 4.5/ 12 3/ 12
N ote : It is a general tendency to learn the time period of 6.5, 6 & 5.5, irrespective ofund erstanding th e rationale behind on such.
Refer to he 1st Row (where the amount is drawn at the begining of every month and
throu ghou t the year), we find 78/ 12 = 6.5, 72/ 12 = 6 & 66/ 12 = 5.5.
The rationale is Rate of interest being mentioned as per ann um . But, if the rate of interest is
ment ioned p er mon th basis, then interest shall be calculated by considering the time p eriod for
78 mon ths, 72 month s & so on.
Illustration 6 :
Amount Draw n p.m. Rs. 1000. Rate of Interest @ 12% p.a.
If drawn at the begining of every mon th.
A/c Period Interest
12 m on ths = 78012
78=
100
121000
6 months = 72012
72=
100
121000
3 months = 66012
66=
100
121000
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177Financial Accounting
Illustration 7 :
Rani, Rini and Rina are three partners in a firm. According to partnership d eed, the partn ers
are entitled to draw Rs. 800 per mon th. On 1st
day of every mon th Rani, Rini and Rina d rew Rs.700 Rs. 600 and Rs. 500 resp ectively. Profit during the year 2008 was Rs. 85,500 out of wh ich Rs
30,000 was tran sferred to Genera l Reserve. Rini and Rina are entitled to received salary of Rs.
3,000 and Rs. 4,500 p.a. respectively and Rani is entilled to received commission at 10 % of net
distributable p rofit after charging such commission. On 1st Janu ary, 2008 the balan ce of their
Capital Accounts were Rs. 50,000 Rs. 40,000 and Rs. 35,000 respectively. Interest on Capital
provided at 8 % p.a.
You are requ ired to show Profit & Loss Appr opriation Accoun t for the year ended 31st Decem-
ber, 2008 and Cap ital Accoun ts of Partners in the book of the firm.
Points to be noted :
1. A partner was allowed to d raw Rs. 800 per deed in this case, none of the Partners draw
more than that.
2. Interest on Drawings should be calculated as 1st months drawings for 12 months, for
second m onths drawings for 11 mon ths and so on.
Alternatively, 6.5 month interest is to be calculated on total drawings of each partners. (See
If draw n at th e midd le of every month.
A/c Period Interest
12 m onth s = 21012
21=
100
121000
6 m onths = 18012
18=
100
121000
3 m onths = 15012
15=
100
121000
If draw n at the end of every month.
A/c Period Interest
12 m onth s = 6012
6=
100
121000
6 m onths = 4512
5.4=
100
121000
3 m onths = 3012
3=
100
121000
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theoretical discussion regard ing interest on d rawings.)
Ripas tota l d raw ings = 700 x 12 = Rs. 8,400; Int. on Draw ings = 8,400 x 10/ 100 x 13/ 24 = Rs. 455
Rinis tota l draw ings = 600 x 12 = Rs. 7,200; Int. on Drawings = 7,200 x 10/ 100 x 13/ 24 = Rs. 390
Rimas tota l draw ings = 500 x 12 = Rs. 6,000; Int. on Draw ings = 6,000 x 10/ 100 x 13/ 24 = Rs. 325
Solution :
Dr. Profit & Loss Appropriation Account for the year ended 31.12.2008 Cr.
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
To General Reserve 30,000 By Profit & Loss 85,500
(Net Profit )
Salary - Rini 3,000 on Drawings :
Rina 4,500 7,500 Rani 455
Interest on Capital (at 8%) Rini 390
Rani 4,000 Rina 325 1,170
Rini 3,200
Rina 2,800 10,000
Commission-Rani-(Note) 3561
Share of Profit
Rani [1/ 3] 11,870
Rini [1/ 3] 11,870
Rina [1/ 3] 11,869 35,609
86,670 86,670
Capital Accoun ts
Dr. Cr.
Date Particulars Rani Rini Rina Date Particulars Rani Rini Rina
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.
To Drawings 8,400 7,200 6,000 By Balance b/ d 50,000 40,000 35,000
31.12 Interest on 455 390 325 31.12 Interest on 4,000 3,200 2800
Drawings Capital
Balance c/ d 60,576 50,480 47,844 Salary - 3,000 4,500
Commission 3,561 - -
Sh ar e of Profit 11,870 11,870 11,869
69,431 58,070 54,169 69,431 58,070 54,169
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179Financial Accounting
Illustration 8 :
Calculation of Interest on Draw ings mad e uniformly at the end of each quarter.
On January 1, 2008, Amethyst and Emerald comm enced business as partn ers introdu cing capi-
tals of Rs. 20,000 and Rs. 30,000 to their respective accounts. The partnership deed, provided
inter alia that:
(i) Profit/ Losses shall be shared in the ratio of 2 : 3 as between Amethyst and Enerald.
(ii) Partners shall be entitled to interest on Capital at the commencement of each year at 6 %
p.a.; and
(iii) Interest on Drawings shall be charged at 8 % p.a.
During the year ended 31.12.2008 the firm made a profit of Rs. 19,280 before adjustment of
interest on Capital and drawings. The Partners w ithdrew d uring the year Rs. 3,000 each at the
end of every quarter comm encing from 31.3.2008.
You are required to prepare a Profit Loss Approp riation A/ c and show the entries therein for
distribution of Profit.
Show also the Capital A/ cs of the par tners for the year.
Points to be noted :
Each Partn er d rew Rs. 3,000 at the end of each quarter or Rs. 12,000 during th e year. But inter-
est on draw ings for each of them shou ld be :
(a) On 3,000 draw at the end of 1st Quarter Interest for 9 months = 3,000 x 8/ 100 x 9/ 12 = Rs.
180
(b) On 3,000 draw at the end of 2nd Quarter Interest for 6 months = 3,000 x 8/ 100 x 6/ 12 = Rs.
120
(c) On 3,000 draw at the end of 3rd Quarter Interest for 3 months = 3,000 x 8/ 100 x 3/ 12 =
Rs. 60
(d) On 3,000 draw at the end of 4th Quarter No interest
* Total Interest on Draw ings for each partner = Rs. 180 + Rs. 120 + Rs. 60 = Rs. 360
Working Notes :
Rs.
N et Profit before Commission [86,670 30,000 -7,500 10,000] 39,170
Less : Rinas Commission = 10/ 100 of 39,170 (approx) 3,561Share of Profit 35,609
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llustration 9 :
Azu and Biju a re partn ers firm contribu ting Rs. 25,000 and Rs. 20,000 respectively as capitals
and sharing p rofit as Azu 3/ 5 th and Biju 2/ 5 th. Interest on Capitals is to be allowed at 10 %
per annu m. The net profit for year end ed 31st March, 1996 amou nts to Rs. 3,600 before making
any allowan ce for interest. Show the ap propriation of profit.
Solution :
Azu (Rs.) Biju (Rs.) Total (Rs.)
Interest on Capital @ 10 % p.a. 2,500 2,000 4,500
The p rofit are Rs. 3,500.
Unless specifically agreed up on, interest on capitals should be allowed only u p to Rs. 3,600
should be shared in Capital Ratio [25,000 : 20,000 or 5 : 4]
Solution :
Dr. Profit & Loss Appropria tion Account for the year ended 31.12.1995 Cr.
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
To Interest on Capital : By Profit & Loss (Net Profit) 19,280
(at 6% p.a) Interest on Drawings :
Amethyst 1,200
Enerald 1,800 Amethyst 360
Share of Profit 3,000 Emerald 360 720
Amethyst [2/ 5] 6,800
Emerald [3/ 5] 10,200 17,000
20,000 20,000
Capital Accoun ts
Dr. Cr.
Date Particulars Amrthyst Emerald Date Particulars Amrthyst Emerald
Rs. Rs. Rs. Rs.
31.12.08 To Drawings 12,000 12,000 1.1.08 By Bank 20,000 30,000
31.12.08 Drawings 360 360 (Capital Introduced)
Balance c/ d 15,640 29,640 31.12.08 Interest on Capital 1,200 1,800
Share of Profit 6,800 10,20028,000 42,000 28,000 42,000
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181Financial Accounting
Illustration 10 :
Sharing of p rofit on Effective Capital Ratio.
Sachin, Sanat an d Sohali Started a partn ership firm on 1.1.2008. Sachin introd uced Rs. 10,000
on 1.1.2008 and furth er int rod uced Rs. 5,000 on 1.7.08 Sanat int rod uced Rs. 20,000 at first on
1.1.08 but w ithd rew Rs. 8,000 from the business on 31.7.08. Sohali int rod uced Rs. 12,000 at th e
beginning on 1.1.08, increased it by Rs. 4,000 on 1.6.08 and red uced it to Rs. 10,000 0n 1.11.08.
During the year 2008 they made a net profit of Rs. 56,100. The partners decided to provie
interest on their capitals at 12 % p.a. and to d ivide the balance of profit in their effective capital
contribution ratio.
Prep are the Profit & Loss App rop riation Account for the year end ed 31.12.08.
Solution
(a) Calculation of effective capital contribution :
Product(R)
Sachin : Rs. 10,000 for 6 months (1.1.to 1.7) 60,000
Rs. 15,000 for 6 months (1.7.to 31.12) 90,000
1,50,000
Sanat : Rs. 20,000 for 7 months (1.1.to 31.7) 1,40,000
Rs. (20,000 8,000) for 5 months (1.8.to 31.12) 60,000
2,00,000
Sohali : Rs. 12,000 for 5 months (1.1.to 1.6) 60,000
Rs. (12,000 + 4,000) for 5 months (1.6.to 1.11) 80,000
Rs. 10,000 for 2 months (1.11.to 31.12) 20,000
1,60,000
Azu s share = 5/ 9 x Rs. 3,600 = Rs. 20,000 ; Bijus share = 4/ 9 x Rs. 3,600 = Rs. 1,600
If the partners have agreed upon provision for interest on capital irrespective of profits, the
distribution should be
Dr. Profit & Loss Appr opr iation Account for the year end ed 31.12.2008 Cr.
Particulars Amt Amt Particu lars Amt AmtRs. Rs. Rs. Rs.
To Interest on Capital : By profit & Loss (Net Profit) 3,600
Azu 2,500 Share of Loss :
Biju 2,000 4,500 Azu [3/ 5] 540
Biju [2/ 5] 360 900
4,500 4,500
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Profit Sharing Ratio = Effective Capital Ratio = 15 : 20 : 16
(b) Interest on Capitals = Produ ct x Interest on Capital x 1/ 12
Sachin =1,50,000 x 12/ 100 x 1/ 12 = 1,500; Sanat = 2,00,000 x 12/ 100 x 1/ 12 = 2,000; Sohali =
1,60,000 x 12/ 100 x 1/ 12 = 1,600Dr. Profit & Loss Appr opr iation Account for the year end ed 31.12.1996 Cr.
Interest on Capitals omitted to be charged.
Illustration 11 :
A, B, C and D are p artn ers shar ing p rofit and losses in the rato of 4 : 3 : 3 : 2 Theirrespective capitals on 31st March, 2008 were Rs.3,000 Rs. 4,500 Rs. 6,000 and Rs. 4,500. After
closing and finalizing the accoun ts it was found that interest on capital @ 6 % per annu m was
omitted. Interest to altering the signed accounts it was d ecided to pass a single adjusting entry
on 1st April, 2008 crediting or debiting the respective partners accounts. Show the Journal
Entry.
Statement showing Rectification of Profits
Particu lars Amount Amount Particu lars Amount Amount
Rs. Rs. Rs. Rs.
To To Interest on Capital : By Profit & Loss 56,100
(Net Profit)
Sachin 1,500
Sanat 2,000
Sohali 1,600 5,100
Share of Profit :
Sachin [15/ 51] 15,000
Sanat [20/ 51] 20,000
Sohali [16/ 51] 16,000
51,000
56,100 56,100
Partner Interest on Capital Amount Wrougly (Excess)/ Deficit Adjust
@ 6%p.a. not provided distributed in PSR
Rs. Rs. Rs. Rs.
A 180 360 (180) Debit
B 270 270 - -
C 360 270 90 Credit
D 270 180 90 Credit
1,080 1,080 -
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183Financial Accounting
The Cap ital Accoun ts of Adhar and Bhu dhar Stood at Rs. 40,000 and Rs. 30,000 Respectively
after the necessary adjustm ent in respect of the drawings and th e net profit for the year ended
31st December, 1995. It was subsequen tly ascertained that 5% p.a. interest on Cap itals and d raw -
ings was not taken into accoun t in arriving at the net profit. The draw ings of the par tners hadbeen : Adhar Rs. 1,200 at the end of each qu arter and Bhu dhar Rs. 1,800 at the end of each half
year.
The profit for the year as adjusted amounted to Rs. 20,000. The partners share profit in the
proportion of Adhar 3/ 5 and Bhudhar 2/ 5
You are requ ired to pass journ al entries and show the ad justed capital accounts of the partners.
Working Notes :
(i) In terest Drawings
Dr. Cr.
Date Particu lars L.F Amount Amount
Rs. Rs.
1.4.08 As Current A/ c ..Dr. 180
To Cs Current Account 90
To Ds Current Account 90
[Interest on Cap ital not provided
@ 6% p.a. now rectified]
Adhar Bhudhar
Rs. Rs.
On 1,200 drawn at the end of 1st quarter [1,200 x 5/ 100 x 9/ 12] 45
On 1,200 drawn at the end of 2nd quarter [1,200 x 5/ 100 x 6/ 12] 30
On 1,200 drawn at the end of 3rd quarter [1,200 x 5/ 100 x 3/ 12] 15
On 1,200 drawn at the end of last quarter Nil
90
On 1,800 drawn at th e end of 1st half year [1,200 x 5/ 100 x 6/ 12] 45
On 1,800 drawn at the end of 2nd half year Nil
45
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Solution :
Adjustment Entry :
Journal Dr. Cr.
Date Particulars L.F. Amount Amount
Rs. Rs.
1.1.2009 Adhars Capital Account .Dr. 121To Bhudhars Capitals Account
[Adjustment made for Interests on Capital 121
and on Drawings
not provided and th e net amoun t wrongly
shared as Profits]
(ii) Statem ent sh owing Rectification of Profits
Adhar Bhudhar
Rs. Rs.
(A) Capital as on 31.12.08 40,000 30,000Add : Drawings 4,800 3,600
Less : Share of Profits already Credited 12,000 8,000
Capital as on 1.1.08 32,800 25,600
Add : Interest on Capital @ 5% 1,640 1,280
Less : Interest on Drawings 90 45
Add : Share of Profits = 17,215
[20,000 - 1,640 - 1,280 + 90 + 45] 10,329 6,886
Less : Drawings 4,800 3,600
(B) Adjusted Capital as on 31.12.08 39,879 30,121
Difference of Capital [A-B} 121 121
(Excess) (Deficit)
Capital Accoun ts
Dr. Cr.
Date Particulars Adhar Bhudhar Date Particu lars Adhar Bhudhar
Rs. Rs. Rs. Rs.
1.1.09 To Bhudhars 121 1.1.09 By balance b/ f 40,000 30,000
Capitals
Balance c/ f 39,879 30,121 Ashars Capital 121
40,000 30,121 40,000 30,121
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185Financial Accounting
The entries were d uly passed in the books but the following d iscrepancies were subsequen tly
discovered :
(i) Interest on capital should have been allowed at 6% p.a. and that on drawings should have
been charged at 8% p.a.
(ii) Dhruva w as not entitled to get any salary but Rohini was to get a monthly salary of Rs.
250.
(iii) Profits should have been shared in opening capital ratio.
You are requ ired to redistribute the profits correctly.
Solution :
Calculation of Net Am ounts already Cred ited to each Partners Capital
Dhruva Rohini
Rs. Rs.
Amounts Credited : Interest on Capital 3,200 2,400
Salary 4,800
Share of Profit 15,010 15,010
23,010 17,410
Less : Amount debited Interest on drawings 240 180
22,770 17,230
Adjustment for wrong distribution of Profi ts.
Illustration 12 :
Profit & Loss Appropr iation Account for the year end ed 31st March 2008Dr. Cr.
Particulars Amt Rs. Particulars Amt Rs.
To Interest on Capital : By Net Profit 40,000
Dhruva 8% of Rs. 40,000 3,200 In terest on Drawings (calcu la ted
Rohini 8% of Rs. 30,000 2,400 on average of 6 m onths)
Salary Dhruva 4,800 Dhruva 6% of Rs. 8,000 240
Share of Profit : Dhruva [1/ 2] 15,010 Rohini 6% of Rs. 6,000 180
Rohini [1/ 2] 15,010
40,420 40,420
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Illustration 13 :
Cross Guarantee
Susm ita and Aishwarya were p artners of a Beauty Parlou r sharing p rofit and Losses as 3 : 2
Manp ereet who had been runn ing a similar business as a beauty consultant requested Susmita
and Aishwarya to form a new par tnership to w hich all of them agreed on the conditions that :
1. They would share the profits and losses 3 : 2 : 1.
2. Susmita and Aisharwya guranteed to the effect that Manpreets share of profit would not
be lower th an Rs. 22,500 per an nu m.
3. Manpreet guaranteed that gross fees earned by her for partnership business shall be at
least equal to her average gross fees of the preceeding three years when she was doingbusiness on her ow n. Her average gross fees were Rs. 37,500.
The profit of the new p artnership for the first accounting year end ed on 31st March, 2008 was
Rs. 1,12,500 and the gross fees earned by Manp reet for the firm were Rs. 24,000.
Show the d istribution of the above profit in a Profit & Loss Approp riation Accoun t for the year
ended 31st March, 2008.
Solution : Susm ita , Aisharwya & Manpreet
Dr. Profit & Loss Appropr iation Account for the year end ed 31.3.08 Cr.
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
To Partnerships By Profit + Less A/ c 1,12,500
Capital A/ cs : (Net Profit)
(Share of Profit) [Note 2 ] Manpreets Capital A/ c 13,500
Susmita 62,100 [Note 2]
Aisharwya 41,400
Manpreet 22,500 1,26,000
1,26,000 1,26,000
Dr. Profit & Loss Appropriation Account for the year end ed 31.12.2008 Cr.
Particu lars Amount Amoun Particu lars Amount Amount
Rs. Rs. Rs. Rs.
To Interest on Capital : By Dhruvaa Capital 22,770
Dhruva [6% of 40,000] 2,400 (Amount written back)Rohini [6% 0f 30,000] 1,800 4,200 Rohinis Cap itals
Salary Rohini 3,000 (Amount written back) 17,230
[250 x 12]
Interest on Drawings :
[@ 8% p.a. on average
6 months]
Dhruva 320
Share of Profit : Rohini 240 560
Dhruva [4/ 7] 19,063
Rohini [3/ 7] 14,297 33,360
40,560 40,560
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187Financial Accounting
Note :
1. Manp reets shortfall in gross fees earned by her for the partnersh ip = Rs. 37500 Rs.
24,000 = Rs. 13,500. This am ount is to be p aid by her out of her Cap ital Account.
Manp rcets Cap ital A/ c Dr. 13,500
To Profit Loss Approp rition A/ c 13,500
2. Manp reets share of actual profit =1/ 6 of Rs. 1,26,000 = Rs. 21,000. As amount gu aran-
teed to her is Rs. 22,500.
Deficit = Rs. 1,500 to be shared by Susmita and Aishw arya as 3 : 2.
Final Distribution of Profit shou ld be :
Susmita = 3/ 6 of 1,26,000 3/ 5 of 1,500
= 63,000 900
= Rs. 62, 100;
Susmitas Cap iital A/ c Dr. 900 Aishw arya = 2/ 6 of 1,26,000 2/ 5 of 1,500
Aishw aryas Capital A/ c Dr.600 = 42,000 600 = Rs. 41,400;
To Manpr eets Cap ital A/ c 1,500 Manpr eet = 1/ 6 of 1,26,000 + 1,500
= 21,000 + 1,500
= Rs. 22,500.
Illustration 14 :
Guarantee with Retrospective e ffect
Kalyani and Ranu commenced bu siness on 1st July, 2005 as partners w ith cap itals of Rs. 1,80,000
and Rs. 1,20,000 respectively. The capitals would remain fixed and carry interest at 10% p.a.
profit and losses were to be shared in prop ortion to their capitals.
They appointed Anita as their Manager on 1st July, 2005 at a salary of Rs. 9,600 per ann um plu s
a bonu s of 5% of the net p rofits after charging such bonu s and interest as a partner from the
comm encemen t of the business. She had to d eposit Rs. 80,000 as security, carrying an interest
@ 12%p.a. It was ag reed th at she w ould be entitled to one-fifth share of the p rofits and her
security dep osit wou ld be treated as her capital carrying interest @ 10% p.a. It w as further
agreed that this new arrangement should not result in Anitas share for any of these years
being less than wh at she had alread y received und er the original agreement and terms of her
appointment.
The profits before charging Anitas bonus and interest on Capital of the partners or giving
effect to the new arrangemen t w ere (a) for the year 2005-06 - Rs. 60,000; (b) for the year 2006
07 Rs. 1,20,000; (c) for the year 2007-08 Rs. 1,60,000
Show by a single journ al entry to give effect to the new arrangement with explanatory compu -
tation.
Points to be noted :
1. As a Manager, Anita received (a) bonus @ 5% on Net Profits after charging such bonus
and interest on cap ital at 10% p.a. to Kalyani an d Ranu (b) Salary Rs. 9,600 p .a. (c) Interest
on security d eposit at 12% p.a.
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PARTNERSHIP ACCOUNTING
2. As a Partner Anita is entitled to (a) Interest on Capital at 10% p.a. (b) 1/ 5th of profit after
provid ing interest on capital at 10% p.a. to all partners includ ing herself.
3. If total du es of Anita under (2) above is more than that und er (1) above, she should get the
difference. But if such dues under (1) above is more, she would not refund the excess
already received.
(2) Calculation of Distributable profit und er the new arrangement
2005-06 2006-07 2007-08
Rs. Rs. Rs.
Net p rofits given (after charging interest on security d eposit
and Anitas salary but before charging interest on capitals) 60,000 1,20,000 1,60,000
Add : Anitas Salary and Interest on Deposit no more
payable [9,600 +9,600] 19,200 19,200 19,200
79,200 1,39,200 1,79,200
Less : Interest on Capitals to all partners @ 10% of 38,000 38,000 38,000
[1,80,000 + 1,20,000 + 80,000]
Distributable Profits 41,200 1,01,200 1,41,200
Anitas Share of Profit = 1/ 5th of Distributable Profit 8,240 20,240 28,240
(1) Solution :
Workings Calculation of Anitas Dues as Manager
2005-06 2006-07 2007-08
Rs. Rs. Rs.
Salary 9,600 9,600 9,600
Interest on Security Deposit : 12% of 80,000 9,600 9,600 9,600
Bonus 5/ 105 of profit after charging interest on capitals
of Kalyani and Ranu
2005-06 = 5/ 105 of (60,000 - 10% of 3,00,000) 1,429
2006-07 = 5/ 105 of 1,20,000 10% of 3,00,000) 4,286
2007-08 = 5/ 105 of 1,60,000 10% of 3,00,000) 6,190
20,629 23,486 25,390
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189Financial Accounting
Journal
Dr. Cr.
Date Particulars L.F Amount Amount
Rs. Rs.
Kalyanis Current A/ c [3/ 5 of 15,604]Dr. 9,362
Ranus Current A/ c [2/ 5 of 15,604]Dr. 6,242
To Anitas Current A/ c
[Adjustments made through Partners Current 15,604
A/ cs to the to new arrangement regarding profits]
As capitals remained fixed and interest was calculated every year on these fixed capitals,the
necessary adjustment has been mad e through current accoun ts.
Illustration 15 :
Adjusments w ithout alterat ion of book values
R,S and T are partn ers of a firm, shar ing p rofits and losses as 5 : 3 : 2. Their Balance Sheet as
on 31st March, 2007 stood as follows :
(3) Difference in Paym ents to Anita
2005-06 2006-07 2007-08
Rs. Rs. Rs.
A. Anitas Dues a s Partner :
Interest on Capital @ 10% of 80,000 8,000 8,000 8,000
Share of Profit [as perworkings 2] 8,240 20,240 28,240
16,240 28,240 36,240
B. Anitas Dues as manager [as perworkings 1] 20,629 23,486 25,390
Difference Payable to Anita - 4,754 10,850
Total 15,604
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PARTNERSHIP ACCOUNTING
From 1st April, 2007 the par tners decided to change their p rofit sharing ratio as 2 : 1 : 2 in p lace
of their p revious ratio 5 : 3 : 2 and the following ad justm ents were agreed u pon :
(1) The Reserve for Bad Debts was to be raised to 10%; (2) Furnitu re was to be appreciated byRs. 5,200.
They did not w ant to alter the book values of the assets and reserve but recorded the change by
passing one single journ al entry.
The profit for the year ended 31st March, 2008 showed a net p rofit of Rs. 22,900.
You are requ ired :-
1. To show the single journal entry adjusting the partners capital on 1st April, 2007, and
2. To prepare the Profits and Loss Account for the year ended 31st March, 2008 after takinginto accoun t the following : (i) Interest on Capita l at 5% p.a.; (ii) Interest on Ss loan an d
(iii) Transfer 25% of the d ivisible profit to Reserve Fund after changing such transfer.
Working Notes :
1. Calculation of Net Effect of the adjustments
Rs.
Profit d ue to increase of Value of Furnitu re
General Reserve
Less : Additional Reserve for Bad Debts (Provision)
[10% of (Rs.22,000-Rs.2000)]
Profit
Liabilities Rs. Assets Rs.
Sundry Creditors 25,000 Cash at bank 10,000
General Reserve 20,000 Sundry Debtors 22,000
S Loan Account 15,000 Less: Reserve for Bad Debts 2,000 20,000Capital Account : Furniture 10,000
R 25,000 Machinery 35,000
S 10,000 Stock 25,000
T 5,000
1,00,000 100,000
5,200
20,000
25,200
200
25,000
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191Financial Accounting
Solution :
Books o f R, S & T
Journal Entry
Date Particulars L.F. Amount Amount
1.4.07 Ts Capital A/ c ...Dr. 5,000
To, Rs Capital 2,500
Ss Capital 2,500
(Adjustment made due to change in profit sharing ratio)
2. Adjustment of Capital as on 01.04.07
Rs. Rs. Rs.
Profit Rs. 25,000 shared in old ration 5 : 3 : 2 12,500 7,500 5,000
Loss Rs. 25,000 shared in new ratio 2 : 1 : 2 (10,000) (5,000) (10,000)
Net Effect 2,500 2,500 (5,000)
Capitals as on 31.03.07 25,000 10,000 5,000
Adjusted Capital on 1.4.07 27,500 12,500
Dr. Profit & Loss Account for the year ended 31st March, 2008 Cr.
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
To Interest on Capital : By, Profit & Loss 22,900
R - [5% of 27,500] 1,375 A/ c Net Profit
S - [5% of 12,500] 625 2,000
Interest on Ss loan 900
[6% of 15,000]
Reserve Fund 4,000
[25/ 125 x (22,900 2,900)]
Shares of Profit :
R [ 2/ 5 ] 6,400
S [ 1/ 5 ] 3,200
T [ 2/ 5 ] 6,400 16,000
22,900 22,900
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Illustration 16 :
Adjustment of Profit s A t ypical problem
Agni and Bani started a p artnership on Ap ril 1, 2005 with respective capital contributions of
Rs. 60,000 and Rs. 20,000. On 31.03.2007 they prepared the following Trial Balance for theirbusiness :
Dr. (Rs.) Cr. (Rs.)
Stock 46,000 -
Machinery 46,500 -
Debtors and Creditors 58,000 12,000
Provision for Depreciation 9,500
Cash and Bank 21,000 -
Capitals : Agni - 1,04,750
Bahni - 45,250
1,71,500 1,71,500
The transactions recorded in the Capital Accounts during these two years were interest on
capital at 10% p.a. on initial investmen ts and allocation of incomes. On 31.03.07 it was furth er
d iscovered that total d raw ings of Rs. 21,000 by Agn i and Rs. 15,000. By Bahn i had been w rongly
treated as business expenses. The Partnership Accoun ts were to be correctly adjusted.
On 1.4.2007 Agni and Bahni offered par tnership to Clara and Dela on the following term s :
1. The new partners should introduce capitals as Clara Rs. 50,000 and Dela Rs. 40,000.
2. All partners would be entitled to interest on opening balance of the new p artnership @
10% p.a.
3. Agni and Bahni are to receive salaries for their special services @ Rs. 10,000 p.a. and Rs.
6,000 p.a.
4. The minimu m d ues of Clara and Dela wou ld be Rs. 10,000 p.a. and 12,000 p.a. respec-
tively (inclusive of their interest on capital)
5. Profits after charging Partners salaries and interests on capitals would be shared as 3 : 3
: 2 : 2 among Agni, Bahn i, Clara and Dela.
You are required to show : (1) Correct Capital balan ce of Agni and Bahn i on31.03.07 (2) the n et
income that must be earned by the new firm during the year ended 31st March 2008 so that
Agnni and Bahni receive equal shares of Profit and Agni receives an aggregate of Rs. 30,000
inclusive of interest on Cap ital Salary an d Share of Profit.
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193Financial Accounting
Solution :
Notes :
1. Profits already credited
Agni Bahni
Rs. Rs.
Opening Capitals 60,000 20,000
+ In terest on Cap ital for 2 years @ 10% p .a. on or igin al cap itals 12,000 4,000
+ Profits Credited (Balance) 32,750 21,250
Closing Balance 1,04,750 45,250
Therefore Total Profit Cred ited = 32,750 + 21,250 = Rs.54,000
Therfore rectified Pr ofit = Profits Credited + d raw ings treated a s an expense
= 54,000 + 21,000 + 12,000 + 15,000 = 90,000/ -
2. Sharing Profits
Agni Bahni
Rs. Rs.
Correct Profit equally divided [ 90,000 as 1 : 1 ] 45,000 45,000
Profits wrongly credited 32,750 21,250
Adjust ment Required 12,250 23,750
Stat ement show ing correction of Capit als of Agni and Bahni on 31.03.08
And correction of Profit s upto that dat e
Correction of Capital Balance Agni Bahni
Rs. Rs.
Balance as per Trial Balance on 31.3.07 1,04,750 45,250Less : Drawing 21,000 15,000
83,750 30,250
Add : Adjustment for Profit [ Note 1 & Note 2 ] 12,250 23,750
Adjusted Capitals on 31.3.07 96,000 54,000
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Statement Showing Calculation of Minimum Income to be earned during the year
ended 31.3.08
Amt Amt
Rs. Rs.
Minimu m Am ount Payable to :
Agni : Interest on Capital [ 10% of 96,000 ] 9,600
Salary 10,000
Share of Profit [ Balancing amount to make total dues Rs. 30,000 ] 10,400 30,000
Bahni : Interest on Capital [ 10% of 54,000 ] 5,400
Salary 6,000
Share of Profit [ Balancing Amount to make total du es Rs. 30,000 ] 10,400 21,800
Clara : Interest on Capital [ 10% of 50,000 ] 5,000
Share of Profit [ Balancing Amount to make total Rs. 10,000 ] 5,000 10,000
Dela : Interest on Capital [ 10% of 40,000 ] 4,000
Share of Profit [ Balancing Amount to make total Rs. 12,000 ] 8,000 12,000
Total Profit s Required t o be earned 73,800
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195Financial Accounting
EXERCISE
1. In which set of business organization Profit and Loss approp riation Account is to be main-
tained?
2. What do you mean by guranteed Partnership?
3. In absence of partnership deed which item will be reflected in Profit and Loss appr opria-
tion Accoun t
Problem 1.
Guarantee with retrospective ef fect
A and B comm enced business on 1st April, 2005 as partn ers w ith cap itals of Rs. 1,20,000 and Rs.
80,000 respectively. The capitals rem ained fixed carrying interest @ 7% per ann um . Profits
were shared in prop ortion to their capitals.
They app ointed C as their manager on 1st April, 2005 at a salary of Rs. 4,800 per ann um plu s a
bonus of 5% of the p rofits after charging su ch bonus an d interest on capital. C had to deposit
on 1.4.05 Rs. 40,000 as secur ity deposit carrying in terest at 8% per ann um.
In March, 2008 it was settled that C should be treated as partner from 1st April, 2005. It was
agreed that h e should be entitled to 1/ 6th of the profits and his security deposit would be
treated as his capital carrying interest at 7% instead of the 8% he had received. It was furth er
agreed that this new arrangement should not result in Cs share for any of these years being
less than w hat he h ad received u nder the original agreement and terms of his app ointment.
The profits before charging Cs bonu s and interest on capital or giving effect to th e new ar-
rangem ent w ere : (a) for the year ended 31st March, 2006 Rs. 30,000; (b) for the year en ded 31stMar ch, 2007 Rs. 58,000; (c) for th e year ended 31st March, 2008 Rs. 83,000.
Show the necessary Journal entries to give effect to the new arrangement with explanatory
computation.
[Ans : As Current A/ c Dr. 2,872
Bs Current A/ c Dr. 1,914
To Cs Current A/ c 4,786]
Problem 2.Conversion of method of accounting from Cash Basis to Mercantile Basis w ith retrospective
basis.
P, Q and R are partn ers of a firm of consultants since 1st Janu ary, 2005 shar ing p rofits and losses
as 3 : 2 : 1. They mainta in their accoun ts und er cash basis after allowing salaries as P Rs. 1,500
per mon th, Q Rs. 1,200 per month and R Rs. 300 per m onth . Besides Rs share is guaran teed to
a fixed min imu m of Rs. 6,000 (includ ing h is salary).
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PARTNERSHIP ACCOUNTING
In 2008 they d ecide to change the method of accounting to mercantile basis w ith retrospective
effect. Relevant pieces of information are :
Year Profit under cash basis before Outstanding Expenses on the Fees earned
charging partners salaries closing date of the year but not receivedon the closing
date of the year
Rs. Rs. Rs.
2005 50,000 10,000 14,500
2006 61,000 9,000 16,500
2007 40,000 10,500 8,000
Pass a single Journ al Entry ad justing th e par tners accoun ts to give effect to th e above change.
[Ans : Adjustment Entry :
As Capital (Dr.) 2,210 Outstanding Expenses (Cr.) 10,500
Bs Capital (Dr.) 1,473 Cs Capital (Cr.) 1,183
Problem 3.
S, T and O w ere partn ers shar ing p rofits as 3 : 2 : 1. Their capitals on 31st December, 1995 stood
as S Rs, 45,000, O Rs. 15,000 and T Rs. 15,500 after ad justm ents of net p rofit Rs. 18,000 for the
year ending that date and their drawings of Rs. 6,000 Rs. 4,000 and Rs. 2,000 respectively. It
was discovered however that while ascertaining the profit the accountant did not take into
consideration th e following m atters :
1. Interest @ 6% p.a. on Capital as on 1.1.2008
2. O was entitled to a salary of Rs. 2,000 per annu m of which Rs. 490 was unp aid.
3. Till 31.12.2007 partners were sharing profits equally and that goodwill was valued at Rs.
12,000 on th e d ate of re-ascertaining the p rofit the accoun tant did not t ake into consider-
ation the following m atters :
4. A loan of Rs. 5,000 from T as brought forward from 2007 carrying interest at 8% p.a. was
merged into his capital on July 1, 2008. No interest on loan was, however, charged to
profit & loss account.
You are requ ired to w ork out a Profit & Loss adjustment account and show the journ al entries
necessary for re-adjustment of capital accounts and the revised capital accounts of partners
assuming that all their dues are to be adjusted in Capitals Accoun ts.
[Hints : See App ropriation of Profits Wrong Distribution]
[Ans : Revised Profit 12,720; Cap ital Balan ces for cha rgin g interest S Rs. 46,000, T
Rs. 12,000; O Rs. 18,500;
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Revised Capitals : S Rs. 49,120, T Rs. 18,160, O Rs. 20,220
T A/ c Dr 840 Goodwill A/ c . Dr. 12,000
S A/ c (Cr.) 120 S, T & O each (Cr.) 12,000
O A/ c (Cr.) 720 (Rs. 4,000 each)
Problem 4.
Apportionment between Pre-admission and Post-admission Profits
A and B are partners in a firm sharing profit & losses in the ratio of 3 : 2, with capitals of Rs.
1,20,000 and Rs. 40,000 resp ectively. The interest on capital @ of 5% p.a. They ad mit C into
par tnership w ith effect from 1st October, 2008 on th e following cond itions :
(i) That C is to bring in Rs 15,000 as premium for goodwill, which w ill be withdraw n by A &
B in their old profit-sharing ratio.
(ii) That C is to contribute Rs. 22,400 to the firm as his share of capital.
(iii) That the partners capitals will carry interest at 5% p.a.
(iv) That the profit earned d uring 2008 will be apportioned between the pre-adm ission and
post-adm ission period on the basis of turn over.
The profits for the year end ing 31st December, 2008 before charging interest on partners Capi-
tals amounted to Rs. 66,500. The monthly average turnover during the first 9 months of the
calendar year was twice the correspond ing figure for the remaining 3 mon ths.
You are required to prepare : (1) Profits & Loss Account of the firm for the pre-admissionperiod and (2) Profit & Loss Accoun t of the firm for th e post-acquisition period.
[Hints : (1) Ratio of Turn over : 1.1.2008 to 30.9.08: 1.10.08 to 31.12.08 = 9 x 2 : 3 x 1 = 18 : 3 or 6 :
1 (2) Profit Sharing Ration between A & B = 3 : 2 and Profit Sharing Ratio between B & C = 3 :
2, So, Ratio between A, B and C = 9 : 6 : 4]
[Ans : (a) Pre-Admission Periods distributable profits = 51,000; (b) Post-Admission Periods
distributable p rofits = 7,220; (c) Interest on Capitals of Capitals for (a) = Rs. 6,000 and for (b) Rs.
2,280]
Recommended