Chapter 2 Accounting for Partnership Basic Concepts Solutions

Question - 11 : - Illustrate how interest on drawings will be calculated under various situations.

Answer - 11 : -

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.

Question - 12 : - How will you deal with a change in the profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer?

Answer - 12 : -

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.

Particulars	Ram	Shyam	Mohan
Share of profit as per 3:2:1	45,000	30,000	15,000
Profit on revaluation of plant and machinery	15,000	10,000	5,000

	60,000	40,000	20,000
Share of profit as per 1:1:1	50,000	50,000	5,000

Difference (Gain or Loss)	25,000	–	25,000
	(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/c	Dr.	25,000
To Ram’s Capital A/c			25,000
( Adjustment entry passed)

Question - 13 : -
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.

Answer - 13 : -

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

Profit and Loss Appropriation Account
Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
Profit transferred to		Profit and Loss	30,000
Tripathi’s Current Account	18,000
Chauhan’s Current Account	12,000
	30,000		30,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
			Balance b/d	60,000	40,000

Balance c/d	60,000	40,000
	60,000	40,000		60,000	40,000

Partners’ Current Account
Dr.					Cr.
Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
Drawings	12,000	8,000	Interest on Capital	3,000	2,000
Interest on Drawings	600	400	Partners’ Salaries	12,000	12,000
Balance c/d	20,400	17,600	Profit & Loss Appropriation	18,000	12,000
	33,000	26,000		33,000	26,000

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

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount ₹	Particulars		Amount ₹
Partners’ Salary			Profit and Loss (Profit)		30,000
Tripathi 1,000 × 12 =	12,000		Interest on Drawings
Chauhan 1,000 × 12 =	12,000	24,000	Tripathi	600
			Chauhan	400	1,000
Interest on Capital
Tripathi	3,000
Chauhan	2,000	5,000

Profit Transferred to
Tripathi’s Current	1,200
Chauhan’s Current	800	2,000

		31,000			31,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
			Balance b/d	60,000	40,000
Balance c/d	60,000	40,000

	60,000	40,000		60,000	40,000

Partners’ Current Account
Dr.					Cr.
Particulars	Tripathi	Chauhan	Particulars	Tripathi	Chauhan
Drawings	12,000	8,000	Partners’ Salaries	12,000	12,000
Interest on Drawings	600	400	Interest on Capital	3,000	2,000
Balance c/d	3,600	6,400	Profit and Loss Appropriation	1,200	800
	16,200	14,800		16,200	14,800

Question - 14 : - 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.

Answer - 14 : -

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

Profit and Loss Appropriation Account
Dr.				Cr.
Particulars		Amount ₹	Particulars	Amount ₹
Profit Transferred to Current A/c			Profit and Loss	45,000
Anubha’s Capital	30,000
Kajal’s Capital	15,000	45,000

		45,000		45,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Anubha	Kajal	Particulars	Anubha	Kajal
Drawings	8,500	6,500	Balance b/d	90,000	60,000
Interest on Drawings	425	325	Partners’ Salaries	8,400	6,000
			Interest on Capital	4,500	3,000
Balance c/d	1,23,975	77,175	Profit and Loss Appropriation	30,000	15,000
	1,32,900	84,000		1,32,900	84,000

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

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount ₹	Particulars		Amount ₹
Partners’ Salaries:			Profit and Loss Account		45,000
Anubha	8,400		Interest on Drawings
Kajal	6,000	14,400	Anubha	425
			Kajal	325	750
Interest on Capital:
Anubha	4,500
Kajal	3,000	7,500

Profit transferred to
Anubha’s Capital	15,900
Kajal’s Capital	7,950	23,850

		45,750			45,750

Partners’ Capital Account
Dr.					Cr.
Particulars	Anubha	Kajal	Particulars	Anubha	Kajal
Drawings	8,500	6,500	Balance b/d	90,000	60,000
Interest on Drawings	425	325	Partners’ Salaries	8,400	6,000
			Interest on Capital	4,500	3,000
Balance c/d	1,09,875	70,125	Profit and Loss Appropriation	15,900	7,950
	1,18,800	76,950		1,18,800	76,950

Question - 15 : -
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.

Answer - 15 : -

DISTRIBUTIONOF PROFITS

Harshad Claims:

Decisions

(i) If there is noagreement on interest on partner’s capital, according to Indian partnership act1932, no interest will be allowed to partners.

(ii) If there is noagreement on the matter of profit sharing, according to partnership act 1932,profit shall be distributed equally.

Dhiman Claims:

Decisions

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

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

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

Profit and Loss Adjustment Account
Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
Interest on Partner’s Loan		Profit and Loss	1,80,000
Harshad 1,00,000 × (6/100) × (6/12)	3,000
Profit and Loss Appropriation	1,77,000
	1,80,000		1,80,000

Profit and Loss Account
Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
Profit transferred to		Profit and Loss Adjustment	1,77,000
Harshad’s Capital	88,500
Sharma’s Capital	88,500

	1,77,000		1,77,000

Question - 16 : - 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.

Answer - 16 : -

Profit and Loss Adjustment Account
Dr.				Cr.
Particulars		Amount ₹	Particulars	Amount ₹
Interest on Partner’s Loan			Profit and Loss	43,000
Aakriti 20,000 × (6/100) × (6/12)		600
Profit transferred to
Aakriti’s Capital	21,200
Bindu’s Capital	21,200	42,400
		43,000		43,000

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.

Question - 17 : -
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.

Answer - 17 : -

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount ₹	Particulars		Amount ₹
Partner’s Salaries			Profit and Loss		23,200
Shikha		60,000	Loss transferred to
			Rakhi Capital	34,720
Interest on Capital			Shikha’s Capital	52,080	86,800
Rakhi	20,000
Shikha	30,000	50,000
		1,10,000			1,10,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Rakhi	Shikha	Particulars	Rakhi	Shikha
Drawings	7,000	10,000	Balance b/d	2,00,000	3,00,000
Profit & Loss Appropriation	34,720	52,080	Partner’s Salaries		60,000
Balance c/d	1,78,280	3,27,920	Interest on Capital	20,000	30,000

	2,20,000	3,90,000		2,20,000	3,90,000

Ifinterest on capital and salaries will be provided out of profit

Profit and Loss Appropriation Account
Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
Partner’s Salaries		Profit and Loss	23,200
Shikha {23,200 × (6/11)}	12,655
Interest on Capital
Rakhi {23,200 × (2/11)}	4,218
Shikha {23,200 × (3/11)}	6,327
	23,200		23,200

Ifprofit is less than the sum of distributable items, distribution shall be inproportion of items for distribution.

Partners Salaries	Ratio
Shikhar (₹ 60,000)	6	23,200 × (6/11)	12,655
Interest on Capital
Rakhi (₹ 20,000)	2	23,200 × (2/11)	4,218
Shikhar (₹ 30,000)	3	23,200 × (3/11)	6,327
	11		23,200

Partners’ Capital Account
Dr.					Cr.
Particulars	Rakhi	Shikha	Particulars	Rakhi	Shikha
Drawings	7,000	10,000	Balance b/d	2,00,000	3,00,000
			Partner’s Salaries		12,655
Balance c/d	1,97,218	3,08,972	Interest on Capital	4,218	6,327

	2,04,218	3,18,972		2,04,218	3,18,972

Question - 18 : - 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.

Answer - 18 : -

Profit and Loss Adjustment Account
Dr.				Cr.
Particulars		Amount ₹	Particulars	Amount ₹
Interest on Capital			By Profit and Loss (12,500 + 2,500)	15,000
Lokesh	3,000
Azad	1,800	4,800

Partner’s Salaries
Azad		2,500

Provision for Manager’s Commission 15,000 × (5/100)		750
Profit transferred to
Lokesh Capital	4,170
Azad Capital	2,780	6,950
		15,000		15,000

Partners’ Capital Account
Dr.					Cr.
Particulars	Lokesh	Azad	Particulars	Lokesh	Azad
			Balance b/d	50,000	30,000
			Interest on Capital	3,000	1,800
Balance c/d	57,170	37,080	Partner’s Salaries		2,500
			Profit and Appropriation	4,170	2,780
	57,170	37,080		57,170	37,080

Question - 19 : -
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.

Answer - 19 : -

Profit and Loss Appropriation Account
Dr.					Cr.
Particulars		Amount ₹	Particulars		Amount ₹
Partner’s Salary			Profit and Loss		40,000
Maneesh		4,800	Interest on Drawings
			Maneesh	800
Partner’s commission			Girish	700	1,500
Girish {(40,000 – 4,800) × (10/100)}		3,520
Interest on Capital
Mannesh	7,000
Girish	5,600	12,600

Profit transferred to
Maneesh’s Current	10,290
Girish’s Current	10,290	20,580
		41,500			41,500

Question - 20 : - 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.

Answer - 20 : -

Profit and Loss Appropriation Account
Dr.			Cr.
Particulars	Amount ₹	Particulars	Amount ₹
Profit transferred to		Profit and Loss	40,000
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
	40,000		40,000

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Chapter 2 Accounting for Partnership Basic Concepts Solutions

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