Question

P, Q and R are equal partners with fixed capitals of `5,00,000, `4,00,000 and `3,00,000 respectively. After closing the accounts for the year ending 31st March, 2019 it was discovered that interest on capitals was provided @ 7% instead of 9% p.a. In the adjusting entry

Answer 1

Given data:

• P, Q and R are partners with fixed capitals of Rs 5,00,000, Rs 4,00,000 and Rs 3,00,000 respectively, sharing profits and losses equally.
• Instead of charging interest on capital at 9%, it was charged at 7%.

Objective: To rectify the error and pa‎ss the necessary entry.

Answer:

Calculation of interest on capitals [wrong amount]:

Interest on capital = (Capital × Rate) ÷ 100

For P:

• Interest on capital = (Rs 5,00,000 × 7) ÷ 100 = Rs 35,000

For Q:

• Interest on capital = (Rs 4,00,000 × 7) ÷ 100 = Rs 28,000

For R:

• Interest on capital = (Rs 3,00,000 × 7) ÷ 100 = Rs 21,000

Calculation of interest on capitals [right amount]:

Interest on capital = (Capital × Rate) ÷ 100

For P:

• Interest on capital = (Rs 5,00,000 × 9) ÷ 100 = Rs 45,000

For Q:

• Interest on capital = (Rs 4,00,000 × 9) ÷ 100 = Rs 36,000

For R:

• Interest on capital = (Rs 3,00,000 × 9) ÷ 100 = Rs 27,000

Calculation of loss:

To calculate the profit/loss, observe which side of the firm has a higher amount and subtract the one with the lesser amount from it. If the resultant value is on the debit side, it is profit. Else, loss.

Cr = Rs 84,000

Dr = Rs 1,08,000

Since the credit side is less, the resultant value of their difference will appear on the credit side, i.e., loss.

Loss = Rs 1,08,000 - Rs 84,000 = Rs 24,000

Calculation of loss shares:

Since the losses are shared equally, they must be distributed accordingly.

For P:

• Loss share = Rs 24,000 × 1/3 = Rs  8,000

For Q:

• Loss share = Rs 24,000 × 1/3 = Rs 8,000

For R:

• Loss share = Rs 24,000 × 1/3 = Rs 8,000

Rectifying entry:

R's current account ... Dr - Rs 2,000

• To P's current account - Rs 2,000

Answer 2

Concept:

Adjustments-

• Past adjustments are an important entry in the Net Profit section of a firm's Profit and Loss Appropriation A/C in Partnership Accounting. A firm's Net Profit A/C represents the overall profit distribution among all firm owners.
• These adjustments can be made with regard to partner remuneration and interest on drawings, interest on capital, and so on.

Given:

• Interest on capital was charged 7% instead of 9%.
• Partner's Capital-
• P = 500000
• Q = 400000
• R = 300000

Find:

Pass adjustment entry

Solution:

R's Current A/c     2000

      To P's Current A/c     2000

(Being the profit adjusted)

Working Notes-

Particulars                          P               Q                 R

IOC 9%                          45000         36000       27000

IOC 7%                          (35000)       (28000)    (21000)

Difference                      10000          8000           6000           24000

Profit to be adjusted    10000          8000           6000           24000

Allocation of Profit        (8000)        (8000)         (8000)

Dr. / Cr.                           2000                 -              (2000)

Interest on capital @9%

P = 500000 x 0.09 = 45000
Q= 400000 x 0.09 = 36000
R= 300000 x0.09 = 27000

Interest on Capital @ 7%

P = 500000 x 0.07 = 35000
Q= 400000 x 0.07 = 28000
R= 300000 x 0.07 = 21000

Hence, we can conclude that, R will give P , P's share of profit amount which R has received in excess due to wrong amount of interest on capital credited to his account.

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