Question

Santosh and Sandeep share profits and losses in the ratio of 3.2. They admit Sachin into their firm for 1/6 share in profits. Santosh personally guaranteed that Sachin's share of profit, after charging interest on capital @10% P.a. would not be less than Rs 15000 in any year. The capital provided was as follows Santosh Rs 125000, Sandeep Rs 100000 and Sachin Rs 75000. The profit for the year ending March 31" 2016 amounted to Rs 75000 before providing Interest on capital. Show the profit and Loss Appropriation A/C if NPSR is 3:2:1

Answer 1

Given:

• Santosh and Sandeep are partners in a firm, sharing profits and losses in the ratio 3:2.
• Sachin is admitted into the firm for 1/6 shares in profits/losses.
• Their capitals are Rs 1,25,000, Rs 1,00,000 and Rs 75,000.
• Interest on capital is to be charged at 10% p.a.
• Santosh guaranteed that Sachin's share of profit [after interest on capital] would not be less than Rs 15,000.

Objective: To prepare a Profit & Loss Appropriation Account.

Answer:

Calculation of interests on capitals:

Interest on capital = Capital × (Rate ÷ 100)

For Santosh:

• Interest on capital = Rs 1,25,000 × (10 ÷ 100) = Rs 12,500

For Sandeep:

• Interest on capital = Rs 1,00,000 × (10 ÷ 100) = Rs 10,000

For Sachin:

• Interest on capital = Rs 75,000 × (10 ÷ 100) = Rs 7,500

The interests on capitals will be recorded on the debit side of the appropriation account.

The profit for the year, i.e., Rs 75,000, will be recorded on the credit side of the appropriation account.

Calculation of profit/loss:

To determine profit/loss, observe the debit and the credit sides of the appropriation account. If the balancing figure appears on the debit side, it is profit. Else, loss.

Debit = Rs 30,000

Credit = Rs 75,000

Balancing figure = Rs 45,000 [Dr.]

Calculation of profit distribution:

Since their new profit-sharing ratio is 3:2:1, the profit will be distributed accordingly.

For Santosh:

• Profit share = Rs 45,000 × 3/6 = Rs 22,500

For Sandeep:

• Profit share = Rs 45,000 × 2/6 = Rs 15,000

For Sachin:

• Profit share = Rs 45,000 × 1/6 = Rs 7,500

Deficiency in Sachin's share = Guaranteed share - Actual share acquired

Deficiency in Sachin's share = Rs 15,000 - Rs 7,500

Deficiency in Sachin's share = Rs 7,500

The deficiency will be deducted from Santosh's share [as made the guarantee] and will be added to Sachin's share.

Corrected profit distributed:

For Santosh:

• Profit share = Rs 22,500 - Rs 7,500 = Rs 15,000

For Sandeep:

• Profit share = Rs 15,000

For Sachin:

• Profit share = Rs 7,500 + 7,500 = Rs 15,000

The Profit & Loss Appropriation A/c has been attached below.