A and B enter into partnership contributing₹20,000 and₹10,000 respectively as capital on which they agree to allow interest @12%p.a. Their profit sharing ratio is 2:3 and the business profit for the first year is ₹3,000 before allowing interest on capital. Show the profit and loss appropriation account showing distribution of profit.
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Class 12
>>Accountancy
>>Accounting for Partnership: Basic Concepts
>>Profit and Loss Appropriation Account
>>X and Y contribute Rs 20,000 and Rs.10,0
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X and Y contribute Rs 20,000 and Rs.10,000 respectively towards capital. They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2:3 and the net profit for the year is Rs.1,500. Show distribution of profits:
(i) where there is no agreement except for interest on capitals and
(ii) where there is an agreement that the interest on capital as a charge.
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Solution
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Calculation of interest on capital.
Interest on X capital
20,000×
100
6
=Rs1200
Interest on Y's capital
10,000×
100
6
=Rs600
Total interest (1200+600)=Rs1800
Total profits available = Rs.1500
As total interest on capital is more than total profits, so profits of Rs 1500 to be distributed between X & Y as per their interest on capital ratio.
X:Y
Interest on capital = 1200:600 or 2:1
∴ X share = 1500×
3
2
=Rs1000
Y share = 1500×
3
1
=Rs500
Part (ii)
When interest on capital is charge, complete interest on capital will be charged.
Total interest = Rs. 1800
Total Profit = Rs. 1500
There is loss of Rs. 300. This loss of Rs. 300 will be distributed between X and Y in 2:3 ratio.
X share of loss = 300*2/5 = Rs. 120
Y share of loss = 300*3/5 = Rs. 180.