Question

A, B and C are partners sharing profits in the ratio of 5 : 4 : 1. C is given a guarantee that his minimum share of profit in any given year would be at least ₹ 5,000. Deficiency, if any, would be borne by A and B equally. The profit for the year 2017-18 amounted to ₹ 40,000.
Pass necessary Journal entries in the books of the firm.

Answer 1

Solution:

                       Profit and Loss Appropriation Account

                                 For the year ended 2017-18  

Dr                                                                                                                      Cr  

Particulars                            Rs.                Particulars                                 Rs.

To Profit transferred to :                      By Profit and Loss A/c            40,000 A's Capital A/c      19,500                          (Net Profit)

B's Capital A/c      15,500

Cs Capital A/c       5,000                                                                     40,000

                                         40,000                                                       40,000  

Working Notes :

Profit for the year = 40, 000

Profit sharing ratio= 5:4:1

C is given a guarantee of minimum profit of 5, 000

A's Profit Share = 40,000 x $\frac{5}{10}$ = 20, 000

B's Profit Share = 40,000 x $\frac{4}{10}$= 16 000

Cs Profit Share = 40,000 x $\frac{1}{10}$ = 34,000

Deficiency in C's Share = 5, 000 - 4000 = 1,000

This deficiency is to be borne by A and B equally.

Deficiency borne by A = 1,000 x $\frac{1}{2}$ = 500

Deficiency borne by B =1,000 x $\frac{1}{2}$ =  500  

Therefore, Final Profit Share of A = 20,000 -500 = 19,500

Final Profit Share of B = 16,000 - 500 = 15,500

Final Profit Share of C = 4,000 + 1,000= 5, 000