The capitals of A, B and C as on 31.3.2016 amounted to ₹18,000, ₹66,000 and ₹1,32,000 respectively. The profits amounting to ₹36,000 for the year 2015-16 were distributed in the ratio of 4:1:1 after allowing interest on capital @10%p.a. During the year each partner withdrew ₹72,000. The partnership deed provided for interest on capital @12%p.a.
Give the necessary adjustment entry.
Answers
Correct question:
The capitals of A, B and C as on 31.3.2016 amounted to Rs 18,000, Rs 66,000 and Rs 1,32,000 respectively. The profits amounting to Rs 36,000 for the year 2015 - 16 were distributed in the ratio of 4:1:1 after allowing interest on capital @10% p.a. During the year each partner withdrew Rs 72,000. The partnership deed provided for interest on capital @12%p.a. and was silent as to the profit-sharing ratio and interest on drawings. Give the necessary adjustment entry.
Given:
- The closing capitals of A, B and C were Rs 18,000, Rs 66,000 and Rs 1,32,000 respectively.
- The profit for the year was Rs 36,000.
- A, B and C share their profits and losses in the ratio 4:1:1.
- Interest on capital is to be charged at 12% p.a., but was charged at 10% p.a. instead.
- Each partner withdrew Rs 72,000 during the year.
Objective: To pass the necessary adjustment entry.
Answer:
Calculation of profit distribution:
Since they share their profits and losses in the ratio 4:1:1, it will be distributed accordingly.
For A:
- Profit share = Rs 36,000 × 4/6 = Rs 24,000
For B:
- Profit share = Rs 36,000 × 1/6 = Rs 6,000
For C:
- Profit share = Rs 36,000 × 1/6 = Rs 6,000
The wrongly calculated profit shares are recorded on the debit side of the adjustment table.
Calculation of the opening capitals [including the interests on capitals]:
Opening capital = Closing capital + Drawings - Profit
For A:
- Opening capital = Rs 18,000 + Rs 72,000 - Rs 24,000 = Rs 66,000
For B:
- Opening capital = Rs 66,000 + Rs 72,000 - Rs 6,000 = Rs 1,32,000
For C:
- Opening capital = Rs 1,32,000 + Rs 72,000 - Rs 6,000 = Rs 1,98,000
Calculation of opening capitals [excluding the interests on capitals]:
Opening capital = Opening capital [including the interest] - (Opening capital × Rate) ÷ (100 + Rate)
For A:
- Opening capital = Rs 66,000 - (Rs 66,000 × 10 ÷ 110) = Rs 60,000
For B:
- Opening capital = Rs 1,32,000 - (Rs 1,32,000 × 10 ÷ 110) = Rs 1,20,000
For C:
- Opening capital = Rs 1,98,000 - (Rs 1,98,000 × 10 ÷ 110) = Rs 1,80,000
Calculation of interests on capitals [wrong amount]:
Interest on capital = Opening capital × (Rate ÷ 100)
For A:
- Interest on capital = Rs 60,000 × (10 ÷ 100) = Rs 6,000
For B:
- Interest on capital = Rs 1,20,000 × (10 ÷ 100) = Rs 12,000
For C:
- Interest on capital = Rs 1,80,000 × (10 ÷ 100) = Rs 18,000
The interests on capitals are recorded on the debit side of the adjustment table if they were wrongly credited.
Calculation of interests on capitals [right amount]:
Interest on capital = Opening capital × (Rate ÷ 100)
For A:
- Interest on capital = Rs 60,000 × (12 ÷ 100) = Rs 7,200
For B:
- Interest on capital = Rs 1,20,000 × (12 ÷ 100) = Rs 14,400
For C:
- Interest on capital = Rs 1,80,000 × (12 ÷ 100) = Rs 21,600
The right interests on capitals are recorded on the credit side of the adjustment table.
Calculation of profit/loss:
To determine profit/loss, observe the firm's balancing figure. If the balancing figure appears on the debit side, it is profit. Else, loss.
Credit = Rs 36,000 + Rs 36,000 = Rs 72,000
Debit = Rs 43,200
Balancing figure = Rs 72,000 - Rs 43,200 = Rs 28,800 [Dr.]
Calculation of profit shares:
Since the partnership deed was silent, they share their profits and losses equally.
For A:
- Profit share = Rs 28,800 × 1/3 = Rs 9,600
For B:
- Profit share = Rs 28,800 × 1/3 = Rs 9,600
For C:
- Profit share = Rs 28,800 × 1/3 = Rs 9,600
Rectifying entry:
A's capital A/c ... Dr - Rs 13,200
- To B's capital A/c - Rs 6,000
- To C's capital A/c - Rs 7,200
