A. B and C have decided to set-up a business. For the purpose A.B and C are having 600000,300000 and 3,00,000 respectively. They wish to charge interest on their capital loan a 12% p. a. Salary A 20,000, B 10,000 andC 10,000 p. m. and share profits in the ratio.2:1:1 B and Receive half of the income as salary nominating A as the sole owner of the business. They expect the Income of ? 8,00,000 (before charging interest on capital/can) during the relevant year. As an income Tax express.route approached by A C for considered opinion.a to whether they should firm or a sole proprietary concern of A while m e becoming employees and moneylenders to concem so th they can reduce their tax liability ? What is your advice and what arguments would you ove in the support of your advice ?
Answers
Answer:
ANSWER
Calculation of Interest on capital
A = 30000*5% = 1500
B= 20000*5% = 1000
C= 10000*5% = 500
Salary to B = 500*12=6000
Calculation of C's commission = 30000-3000 = 27000*5/100= 1350
Profits to be distributed= 30000-3000-6000-1350 = 19,650
The adjustment entry to be passed is as follows:-
A's Capital A/c Dr. 3675
To B's capital A/c 2895
To C's capital A/c 780
(Being adjustment entry passed)
Table Showing Adjustment To be Made
A B C
Interest on capital 1500 1000 500
Salary 6000
Commission 1350
Profits to be distributed( 19650) 9825 5895 3930
Total 11325 12895 5780
Less: profits wrongly allocated (15000) (10000) (5000)
Adjustments (3675) 2895 780
Explanation:
this is your answer ji