Question

Three Chartered Accountants A, B and C form a partnership, profits being shared in the ratio of 3 : 2 : 1 subject to the following:
(a) C’s share of profit guaranteed to be not less than ₹ 15,000 p.a.
(b) B gives a guarantee to the effect that gross fee earned by him for the firm shall be equal to his average gross fee of the preceeding five years when he was carrying on profession alone, which on an average works out at ₹ 25,000.
The profit for the first year of the partnership are ₹ 75,000. The gross fee earned by B for the firm is ₹ 16,000. You are required to show Profit and Loss Appropriation Account after giving effect to the above.

Answer 1

Solution:

                           Profit and Loss Appropriation Account  

Dr                                                                                                                      Cr  

Particulars                           Rs.         Particulars                                         Rs.

To Profit transferred to :            By Profit and Loss A/c                      75,000

        A's Capital A/c         41,400        By B's Capital A/c                    9,000

        B's Capital A/c         27,600    (Deficiency in Revenue)             9,000

        Cs Capital A/c          15.000    84,000  

                                                          84,000                                         84,000  

Working Notes :

Deficiency in revenue guaranteed by B = 25,000 - 16,000 = 9,000

Profit to be distributed among Partners = 75,000 + B's deficiency = Rs.75,000 + Rs.9,000 = Rs.84,000

Profit Sharing ratio = 3 : 2 : 1  

A's Profit Share =84,000 x $\frac{3}{6}$  =42,000

B's Profit Share =84,000 x $\frac{2}{6}$ =28,000

Cs Profit Share = 84,000 x  $\frac{1}{6}$ = 14,000

C is guaranteed of minimum profit of Rs.15,000

Deficiency in Cs Profit Share = Rs.15,000 - Rs.14,000 = Rs.1,000

Deficiency borne by A =1,000 x $\frac{3}{5}$ =600

Deficiency borne by B=1,000 x $\frac{2}{5}$ =400  

Therefore, Final Profit Share of A = Rs.42,000 -Rs. 600 = Rs.41,400

Final Profit Share of B = Rs.28,000 - Rs.400 =Rs. 27,600"

Final Profit Share of C = Rs.14,000 +Rs. 1,000 = Rs.15,000

The answer is different from one provided in the book as the deficiency of Rs.9,000 that was guaranteed by B to the firm would not be deducted from his share as he is bearing it in form of profit.