Question

Ram , Shyam and Mohan were partners , their capital on 1st January , 2016 were 50,000 30,000 and 20,000 respectively . Before division of profit , Shyam is entitled for salary of 33,000 and Mohan 2,000 per annum . Interest is allowed on capital @ 10 % per annum . Out of net divisible profits , first * 50,000 will be divided in their capital ratio and the balance of profits is to be divided equally . The profit of the firm for the year ending on 31st December 2016 amounted to 95,000 before making all the above adjustments . Prepare Profit and Loss Appropriation Account and give Journal Entries ​

Answer 1

Correct question:

Ram, Shyam and Mohan were partners, with capitals on 1st January, 2016, as Rs 50,000, Rs 30,000 and Rs 20,000 respectively. Before the division of profits, Shyam was entitled to a salary of Rs 3,000 and Mohan 2,000 per annum. Interest is allowed on capital @10% per annum. Out of the net divisible profits, the first Rs 50,000 will be divided in their capital ratio and the balance of profits is to be divided equally. The profit of the firm for the year ending 31st December, 2016, amounted to Rs 95,000 before making all the above adjustments. Prepare a Profit and Loss Appropriation Account and give Journal Entries.

Given data:

• Ram, Shyam and Mohan are partners with capitals Rs 50,000, Rs 30,000 and Rs 20,000 respectively.
• Shyam is entitled to a salary of Rs 33,000 p.a. and Mohan is entitled to a salary of Rs 2,000 p.a.
• Interest on capital is to be charged at 10% p.a.
• From the available profits, the first Rs 50,000 will be divided in the ratio of their capitals, and the rest will be divided equally.
• The net profit for the firm was Rs 95,000.

Objective: To prepare a Profit & Loss Appropriation A/c and pa‎ss the necessary journal entries.

Answer:

Calculation of interest on capitals:

Interest on capital = (Capital × Rate) ÷ 100

For Ram:

• Interest on capital = (Rs 50,000 × 10) ÷ 100 = Rs 5,000

For Shyam:

• Interest on capital = (Rs 30,000 × 10) ÷ 100 = Rs 3,000

For Mohan:

• Interest on capital = (Rs 20,000 × 10) ÷ 100 = Rs 2,000

Calculation of profit shares:

As per the question, the first Rs 50,000 out of the available profit should be divided as per the capital ratio.

Capital ratio = 50000:30000:20000

Capital ratio = 5:3:2

The available profit [balancing figure for the account] = Rs 80,000

Calculation of profit shares [the first 50,000]:

For Ram:

• Profit share = Rs 50,000 × 5/10 = Rs 25,000

For Shyam:

• Profit share = Rs 50,000 × 3/10 = Rs 15,000

For Mohan:

• Profit share = Rs 50,000 × 2/10 = Rs 10,000

The remaining profit = Rs 80,000 - Rs 50,000 = 30,000

Calculation of profit shares [equally]:

For Ram:

• Profit share = Rs 30,000 × 1/3 = Rs 10,000

For Shyam:

• Profit share = Rs 30,000 × 1/3 = Rs 10,000

For Mohan:

• Profit share = Rs 30,000 × 1/3 = Rs 10,000

Calculation of total profits [capital ratio-based profits + equally shared profits]:

For Ram:

• Profit share = Rs 25,000 + Rs 10,000 = Rs 35,000

For Shyam:

• Profit share = Rs 15,000 + Rs 10,000 = Rs 25,000

For Mohan:

• Profit share = Rs 10,000 + Rs 10,000 = Rs 20,000

Journal entries:

1. Interest on capitals

Interest on capital A/c ... Dr - Rs 10,000

• To partners' capital A/c(s) - Rs 10,000

2. Salaries

Partners' salary A/c ... Dr - Rs 5,000

• To partners' capital A/c(s) - Rs 5,000

3. Transfer of profits

Profit and Loss Appropriation A/c ... Dr - Rs 80,000

• To partners' capital A/c(s) - Rs 80,000