Priya and kajal are partners in firm, sharing profits and losses in ratio 5:3. The balance in their fixed capital accounts, on April 1, 2016 were: Priya, rs. 600000 and kajal rs. 800000. The profit for the firm for the year ended 2017 is rs. 126000. Calculate their share of profit when interest on capital will be allowed @12% p.a.
Answers
Given:
- Priya and Kajal are partners in a firm, sharing profits and losses in the ratio 5:3.
- Their capitals are Rs 6,00,000 and Rs 8,00,000 respectively.
- The profit for the year was Rs 1,26,000.
- Interest on capital is allowed at 12% p.a.
To find: The share in profit for Priya and Kajal after the interest has been charged.
Answer:
Calculation of interest on capital:
Interest on capital = (Capital × Rate) ÷ 100
For Priya:
- Interest on capital = (Rs 6,00,000 × 12) ÷ 100 = Rs 72,000
For Kajal:
- Interest on capital = (Rs 8,00,000 × 12) ÷ 100 = Rs 96,000
Interests on capitals are recorded on the debit side of the appropriation account.
The profit for the year is recorded on the credit side of the appropriation account.
Calculation of profit/loss:
To determine profit/loss, observe the debit and credit sides of the account. If the balancing figure appears on the debit side, it is profit. Else, loss.
Credit side = Rs 1,26,000
Debit side = Rs 72,000 + Rs 96,000 = Rs 1,68,000
Balancing figure = Rs 42,000
Since the debit side is more than the credit side, the balancing figure will appear on the credit side, resulting in a loss.
Hence, Priya and Kajal do not get profits. They get losses.
Calculation of the loss distribution:
Since they share their profits/losses in the ratio 5:3, it will be distributed accordingly.
For Priya:
- Loss share = Rs 42,000 × 5/8 = Rs 26,250
For Kajal:
- Loss share = Rs 42,000 × 3/8 = Rs 15,750
The Profit & Loss Appropriation A/c has been attached below.
