Distribution of Profits Solutions

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Accounting for Partnership : Basic Concepts – Distribution of Profits Solutions
3. Harshad and Dhiman are in partnership since April 01, 2016. No Partnership agreement was made. They contributed ₹ 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of ₹ 1,00,000 to the firm, on October 01, 2016. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2017 amounted to ₹ 1,80,000.
Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i)
he should be given interest @ 10% per annum on capital and loan;
(ii)
Profit should be distributed in proportion of capital;
Dhiman Claims:
(i)
Profits should be distributed equally;
(ii)
He should be allowed ₹ 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;
(iii)
Interest on Capital and loan should be allowed @ 6% p.a.
You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.
Considering the Indian Partnership Act, 1932, the following will be the final verdict regarding Harshad and Dhiman’s claims
Validity of Harshad’s claims:
(i)
Invalid claim. If there is no agreement regarding the interest on partners’ capital, no interest will be allowed on capital.
(ii)
Invalid Claim. If there is no agreement regarding the proportion in which the profit should be distributed, the profit should be distributed equally, irrespective of the amount of capital contributed by the partners.
Validity of Dhiman’s claims:
(i)
Valid Claim. If there is no agreement regarding the proportion in which the profit should be distributed, the profit should be distributed equally, irrespective of the amount of capital contributed by the partners.
(ii)
Invalid Claim. If there is no agreement regarding the salary to be paid to the partners, no salary should be paid.
(iii)
Partially Valid. If there is no agreement regarding the rate of interest to be paid on capital, no interest should be paid. However, if there is no agreement regarding the rate of interest to be paid on loan, then the interest should be paid @ 6% p.a.
Working Notes:
Particulars
Calculation
Amount
Interest on Loan
Loan Amount
1,00,000
Interest Rate
6%
Loan Duration
6 months
Interest on Loan
{1,00,000 × \dfrac{6}{100} × \dfrac{6}{12}}
3,000
Profit
Net Profit
1,80,000
Interest on Loan
(3,000)
1,77,000
Profit sharing of each partner
{= \dfrac{1,77,000}{2}}
88,000
Particulars
Amount
Particulars
Amount
To Interest on Partner’s Loan
3,000
By Profit and Loss A/c
1,80,000
Profit Transferred
To Harshad’s Capital A/c
88,500
To Dhiman’s Capital A/c
88,500
1,77,000
1,80,000
1,80,000

4. Aakriti and Bindu entered into partnership for making garment on April 01, 2016 without any Partnership agreement. They introduced Capitals of ₹ 5,00,000 and ₹ 3,00,000 respectively on October 01, 2016. Aakriti Advanced. ₹ 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31 2017 showed profit of ₹ 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them by preparing Profit and Loss Appropriation Account. Also give reasons in Support of your answer.
According to Indian Partnership Act, 1932, nn the absence of partnership agreement between partners, the following rules apply:
Interest on Capital is not allowed.
Interest on Loan should be @ 6% p.a.
Profits should be shared equally among the partners.
Working Notes:
Particulars
Calculation
Amount
Interest on Loan
Loan Amount
20,000
Interest Rate
6%
Loan Duration
6 months
Interest on Loan
{20,000 × \dfrac{6}{100} × \dfrac{6}{12}}
600
Profit
Net Profit
43,000
Interest on Loan
(600)
42,400
Profit sharing of each partner
{= \dfrac{42,400}{2}}
21,200
Particulars
Amount
Particulars
Amount
To Interest on Partner’s Loan
600
By Profit and Loss A/c
43,000
Profit Transferred
To Akriti’s Capital A/c
21,200
To Bindu’s Capital A/c
21,200
42,400
43,000
43,000

5. Rakhi and Shikha are partners in a firm, with capitals of ₹ 2,00,000 and ₹ 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is ₹ 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of ₹ 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew ₹ 7,000 and Shikha ₹ 10,000 for their personal use. As per partnership deed, salary and interest on capital appropriation treated as charge on profit. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.
Note that, in this case, it is specified that in the partnership deed, it is agreed to treat salary and interest on capital appropriation as charge on profit.
Working Notes:
Particulars
Calculation
Amount
Salary:
Shikha’s monthly salary
5,000
Shikha’s annual salary
= 5,000 × 12
60,000
Interest on Capital:
Interest rate on capital
10%
Rakhi’s Capital
2,00,000
Interest on Rakhi’s capital
{= 2,00,000 × \dfrac{10}{100}}
20,000
Shikha’s Capital
3,00,000
Interest on Shikha’s capital
{= 3,00,000 × \dfrac{10}{100}}
30,000
Total Interest on Capital
50,000
Share of Profit/Loss
Net Profit
23,200
Salary
(60,000)
Interest on Capital
(50,000))
(86,800)
Profit/Loss sharing ratio
2,00,000:3,00,000
2:3
Rakhi’s share of loss
{= 86,800 × \dfrac{2}{5}}
34,720
Shikha’s share of loss
{= 86,800 × \dfrac{3}{5}}
52,080
Particulars
Amount
Particulars
Amount
To Salary to Partner A/c
By Profit and Loss A/c
23,200
Shikha
60,000
Loss Transferred
To Interest on Capital A/c
By Rakhi’s Capital A/c
34,700
Rakhi
20,000
By Shikha’s Capital A/c
52,080
86,800
Shikha
30,000
50,000
1,10,000
1,10,000
Date
Particulars
J.F.
Amount

Rakhi
Amount

Shikha
Date
Particulars
J.F.
Amount

Rakhi
Amount

Shikha
To Drawings A/c
7,000
10,000
By Balance b/d
2,00,000
3,00,000
To Profit and Loss
34,720
52,080
By Salary to Partner A/c
60,000
Appropriation A/c
By Interest on Capital A/c
20,000
30,000
To Balance c/d
1,78,280
3,27,920
2,20,000
3,90,000
2,20,000
3,90,000

6. Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of ₹ 50,000 and 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of ₹ 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to ₹ 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare partner’s capital accounts and profit and loss Appropriation Account.
Note that the net profit provided is after charging Azad’s salary. So, to get the actual net profit we need to add Azad’s salary to the net profit amount provided.
Working Notes:
Particulars
Calculation
Amount
Interest on Capital
Interest on Capital
6% p.a.
Lokesh’s Capital
50,000
Interest on Lokesh’s capital
={50,000 × \dfrac{6}{100}}
3,000
Azad’s Capital
30,000
Interest on Azad’s capital
{= 30,000 × \dfrac{6}{100}}
1,800
Total Interest on Capital
= 3,000 + 1,800
4,800
Profit
Profit after charging Salary
12,500
Salary
2,500
15,000
Manager’s commission
{= 15,000 × \dfrac{5}{100}}
750
Profit available for sharing
Net Profit
15,000
Interest on Capital
(4,800)
Salaries
(2,500)
Commission
(750)
6,950
Lokesh’s share
{= 6,950 × \dfrac{3}{5}}
4,170
Azad’s share
{= 6,950 × \dfrac{2}{5}}
2,780
Profit and Loss Appropriation Account
Particulars
Amount
Particulars
Amount
To Interest on Capital A/c
By Profit and Loss A/c
15,000
Lokesh
3,000
(12,500 + 2,500)
Azad
1,800
4,800
To Salary to Partner A/c
Azad
2,500
To Manager’s Commission A/c
750
Profit Transferred
To Lokesh’s Capital A/c
4,170
To Azad’s Capital A/c
2,780
6,950
15,000
15,000
Partners’ Capital A/c
Date
Particulars
J.F.
Amount

Lokesh
Amount

Azad
Date
Particulars
J.F.
Amount

Lokesh
Amount

Azad
To Balance c/d
57,170
37,080
By Balance b/d
50,000
30,000
By Interest on Capital A/c
3,000
1,800
By Salary to Partner A/c
2,500
By Profit and Loss
Appropriation A/c
4,170
2,780
57,170
37,080
57,170
37,080

7. The partnership agreement between Maneesh and Girish provides that:
(i)
Profits will be shared equally;
(ii)
Maneesh will be allowed a salary of ₹ 400 p.m;
(iii)
Girish who manages the sales department will be allowed a commission equal to 10% of the net profits,after allowing Maneesh’s salary;
(iv)
7% p.a. interest will be allowed on partner’s fixed capital;
(v)
5% p.a. interest will be charged on partner’s annual drawings;
(vi)
The fixed capitals of Maneesh and Girish are ₹ 1,00,000 and ₹ 80,000, respectively. Their annual drawings were ₹ 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2015 amounted to ₹ 40,000;
Prepare firm’s Profit and Loss Appropriation Account.
Working Notes:
Particulars
Calculation
Amount
Salary
Maneesh’s monthly Salary
400
Maneesh’s annual Salary
= 400 × 12
4,800
Commission
Net Profit
40,000
Profit after allowing Maneesh’s Salary
= 40,000 – 4,800
35,200
Girish’s Commission
{= 35,200 × \dfrac{10}{100}}
3,520
Interest on Capital
Maneesh’s Capital
1,00,000
Interest on Maneesh’s capital
{= 1,00,000 × \dfrac{7}{100}}
7,000
Girish’s Capital
80,000
Interest on Girish’s capital
{= 80,000 × \dfrac{7}{100}}
5,600
Total Interest on Capital
= 7,000 + 5,600
12,600
Interest on Drawings
Maneesh’s Drawings
16,000
Interest on Maneesh’s Drawings
{= 16,000 × \dfrac{5}{100}}
800
Girish’s Drawings
14,000
Interest on Girish’s Drawings
{= 14,000 × \dfrac{5}{100}}
700
Total Interest on Drawings
= 800 + 700
1,500
Profit Sharing
Net Profit
40,000
Maneesh’s Salary
(4,800)
Girish’s Commission
(3,520)
Interest on Capital
(12,600)
Interest on Drawings
1,500
20,580
Profit sharing ratio
1:1
Maneesh’s share of profit
{= \dfrac{20,580}{2}}
10,290
Girish’s share of profit
{= \dfrac{20,580}{2}}
10,290
Profit and Loss Appropriation Account
Particulars
Amount
Particulars
Amount
To Salary to Partner A/c
By Profit and Loss A/c
40,000
Maneesh
4,800
By Interest on Drawings A/c
To Commission to Partner A/c
Maneesh
800
Girish
3,520
Girish
700
1,500
To Interest on Capital A/c
Maneesh
7,000
Girish
5,600
12,600
Profit Transferred
To Maneesh’s Current A/c
10,290
To Girish’s Current A/c
10,290
20,580
41,500
41,500

8. Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of ₹ 10,000 as his share of profits every year. The net profit for the year 2013 amounted to ₹ 40,000. Prepare the Profit and Loss Appropriation Account.
George should be guaranteed a minimum of ₹ 10,000. So, if George’s proift is less than ₹ 10,000, it should first be adjusted to make it ₹ 10,000. Then the rest of the profit should be shared among Ram and Raj in the ratio 5:3.
Working Notes:
Particulars
Calculation
Amount
Share of profit
Profit Earned
40,000
George’s profit as per ratio
{= 40,000 × \dfrac{2}{10}}
8,000
Adjustment to George’s share
(To make it ₹ 10,000)
2,000
George’s profit
(After adjustment)
10,000
Remaining Profit
30,000
Ram’s share
{= 30,000 × \dfrac{5}{8}}
18,750
Ram’s share
{= 30,000 × \dfrac{3}{8}}
11,250
Profit and Loss Appropriation Account
Particulars
Amount
Particulars
Amount
Profit Transferred
By Profit and Loss A/c
40,000
To Ram’s Capital A/c
18,750
To Raj’s Capital A/c
11,250
To George’s Capital A/c
10,000
40,000
40,000

9. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed an amount of ₹ 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2016 and March 31, 2017 were ₹ 40,000 and ₹ 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.
As Suresh is guaranteed a profit of ₹ 10,000, the deficiency in profit should be adjusted from Babita’s account.
Working Notes:
Particulars
Calculation
Amount
Profits Before Adjustment (for 2016)
Profit available for sharing
40,000
Amann
{= 40,000 × \dfrac{2}{5}}
16,000
Babita
{= 40,000 × \dfrac{2}{5}}
16,000
Suresh
{= 40,000 × \dfrac{2}{5}}
8,000
Deficiency in Suresh’s Profit
= 10,000 – 8,000
2,000
Profits After Adjustment (for 2016)
Suresh
= 8,000 + 2,000
10,000
Babita
= 16,000 – 2,000
14,000
Profits for 2017
Profit available for sharing
60,000
Amann
{= 60,000 × \dfrac{2}{5}}
24,000
Babita
{= 60,000 × \dfrac{2}{5}}
24,000
Suresh
{= 60,000 × \dfrac{2}{5}}
12,000
Note: In 2017, no adjustment is needed to Suresh’s profit as it is more than ₹ 10,000
Particulars
Amount
Particulars
Amount
Profit Transferred
By Profit and Loss A/c
40,000
To Amann’s Capital A/c
16,000
To Babita’s Capital A/c
14,000
To Suresh’s Capital A/c
10,000
40,000
40,000
Particulars
Amount
Particulars
Amount
Profit Transferred
By Profit and Loss A/c
60,000
To Amann’s Capital A/c
24,000
To Babita’s Capital A/c
24,000
To Suresh’s Capital A/c
12,000
60,000
60,000

10. Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2017 shows a net profit of Rs. 1,50,000. Prepare the Profit and Loss Appropriation Account and partners current account by taking into consideration the following information:
(i)
Partners capital on April 1, 2016;
Simmi, Rs. 30,000; Sonu, Rs. 60,000;
(ii)
Current accounts balances on April 1, 2016;
Simmi, Rs. 30,000 (cr.); Sonu, Rs. 15,000 (cr.);
(iii)
Partners drawings during the year amounted to
Simmi, Rs. 20,000; Sonu, Rs. 15,000;
(iv)
Interest on capital was allowed @ 5% p.a.;
(v)
Interest on drawing was to be charged @ 6% p.a. at an average of six months;
(vi)
Partners’ salaries : Simmi Rs. 12,000 and Sonu Rs. 9,000.
Working Notes:
Particulars
Calculation
Amount
Interest on Capital
Simmi
{= 30,000 × \dfrac{5}{100}}
1,500
Sonu
{= 60,000 × \dfrac{5}{100}}
3,000
Total
1,500 + 3,000
4,500
Interest on Drawings
Duration
6 months
Simmi
{= 20,000 × \dfrac{6}{100} × \dfrac{6}{12}}
600
Sonu
{= 15,000 × \dfrac{6}{100} × \dfrac{6}{12}}
450
Total
= 600 + 450
1,050
Salary
Simmi
12,000
Sonu
9,000
Total
21,000
Profit Sharing
Net Profit
1,50,000
Interest on Capital
(4,500)
Salaries
(21,000)
Interest on Drawings
1,050
125,550
Simmi
{= 125,550 × \dfrac{3}{4}}
94,162
Sonu
{= 125,550 × \dfrac{1}{4}}
31,388
Profit and Loss Appropriation Account
Particulars
Amount
Particulars
Amount
To Interest on Capital A/c
By Profit and Loss A/c
1,50,000
Simmi
1,500
By Interest on Drawings A/c
Sonu
3,000
4,500
Simmi
600
To Salary to Partner A/c
Sonu
450
1,050
Simmi
12,000
Sonu
9,000
21,000
Profit Transferred
To Simmi’s Current A/c
94,162
To Sonu’s Current A/c
31,388
125,550
1,51,050
1,51,050
Date
Particulars
J.F.
Amount

Simmi
Amount

Sonu
Date
Particulars
J.F.
Amount

Simmi
Amount

Sonu
To Balance c/d
30,000
60,000
By Balance b/d
30,000
60,000
30,000
60,000
30,000
60,000
Date
Particulars
J.F.
Amount

Simmi
Amount

Sonu
Date
Particulars
J.F.
Amount

Simmi
Amount

Sonu
To Drawings A/c
20,000
15,000
By Balance b/d
30,000
15,000
To Interest on Drawings A/c
600
450
By Interest on Capital A/c
1,500
3,000
To Balance b/d
1,17,662
43,388
By Salary to Partner A/c
12,000
9,000
By Profit and Loss
94,162
31,388
Appropriation A/c
1,37,662
58,388
1,37,662
58,388

11. Arvind and Anand are partners sharing profits and losses in the ratio 8:3:1 3:1 Balances in their capital accounts on April 01, 2019 were, Arvind- ₹ 4,40,000 and Anand ₹ 2,60,000. As per their agreement, partners were entitled to interest on capital @ 5% p.a., and interest on drawings was to be charged @ 6% p.a. Arvind was allowed an annual salary of ₹ 35,000/- for the additional responsibilities taken up by him. Partners drawings for the year were, Arvind ₹ 40,000 and Anand ₹ 28,000. Profit and loss account of the firm for the year ending March 31, 2020 showed a Net Loss of ₹ 32,400. Prepare Profit and Loss Appropriation Account.
Note: In case firm suffers a loss, no interest on capital, salary, remuneration is to be allowed to partners. Also, as the period for which the drawings were made is not given, we assume that the drawings remained drawn for 6 months.
Working Notes:
Particulars
Calculation
Amount
Interest on Drawings
Duration
6 months
Arvind
{= 40,000 × \dfrac{6}{100} × \dfrac{6}{12}}
1,200
Anand
{= 28,000 × \dfrac{6}{100} × \dfrac{6}{12}}
840
Total
= 1,200 + 840
2,040
Share of Loss
Net Loss
(32,400)
Interest on Drawings
2,040
(30,360)
Arvind
= 30,360 × \dfrac{3}{4}
(22,770)
Anand
= 30,360 × \dfrac{1}{4}
(7,590)
Particulars
Amount
Particulars
Amount
To Profit and Loss A/c
32,400
By Interest on Drawings A/c
Arvind
1,200
Anand
840
2,040
Loss Transferred
By Arvind’s Capital A/c
22,770
By Anand’s Capital A/c
7,590
30,360
32,400
32,400

12. Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were ₹ 80,000 and ₹ 60,000 respectively. The firm started business on April 1, 2016. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of ₹ 2,000 and ₹ 3,000, respectively.
The profits for year ended March 31, 2017 before making above appropriations was ₹ 1,00,300. The drawings of Ramesh and Suresh were ₹ 40,000 and ₹ 50,000, respectively. Interest on drawings amounted to ₹ 2,000 for Ramesh and ₹ 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.
Working Notes:
Particulars
Calculation
Amount
Interest on Capital
Ramesh
{= 80,000 × \dfrac{12}{100}}
9,600
Suresh
{= 60,000 × \dfrac{12}{100}}
7,200
Total
= 9,600 + 7,200
16,800
Interest on Drawings
Ramesh
2,000
Suresh
2,500
Total
= 2,000 + 2,500
4,500
Salaries
Ramesh
= 2,000 × 12
24,000
Suresh
= 3,000 × 12
36,000
Total
= 24,000 + 36,000
60,000
Profit Sharing
Profit Sharing Ratio
= 80,000:60,000
4:3
Net Profit
1,00,300
Interest on Capital
(16,800)
Interest on Drawings
4,500
Salaries
(60,000)
28,000
Ramesh’s share
{= 28,000 × \dfrac{4}{7}}
16,000
Suresh’s share
{= 28,000 × \dfrac{3}{7}}
12,000
Particulars
Amount
Particulars
Amount
To Interest on Capital A/c
By Profit and Loss A/c
1,00,300
Ramesh
9,600
By Interest on Drawings A/c
Suresh
7,200
16,800
Ramesh
2,000
To Salary to Partner A/c
Suresh
2,500
4,500
Ramesh
24,000
Suresh
36,000
60,000
Profit Transferred:
To Ramesh’s Capital A/c
16,000
To Suresh’s Capital A/c
12,000
1,04,800
1,04,800
Date
Particulars
J.F.
Amount

Suresh
Amount

Ramesh
Date
Particulars
J.F.
Amount

Suresh
Amount

Ramesh
To Drawings A/c
40,000
50,000
By Cash A/c
80,000
60,000
To Interest on Drawings A/c
2,000
4,500
By Interest on Capital A/c
9,600
7,200
To Balance c/d
87,600
60,700
By Salary to Partner A/c
24,000
36,000
By Profit and Loss
Appropriation A/c
16,000
12,000
1,29,600
1,15,200
1,29,600
1,15,200



13. Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:
(i)
Profits would be shared by Sukesh and Vanita in the ratio of 3:2;
(ii)
5% interest is to be allowed on capital;
(iii)
Vanita should be paid a monthly salary of ₹ 600.
The following balances are extracted from the books of the firm, on March 31, 2017.
Sukesh
Vanita
Capital Accounts
40,000
40,000
Current Accounts
(Cr.) 7,200
(Cr.) 2,800
Drawings
10,850
8,150
Net profit for the year, before charging interest on capital and after charging Sukesh’s partner’s salary was ₹ 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.
In the problem, the net profit is provided after charging partner’s salary. So, we don’t have to consider the salary in the Profit and Loss appropriation account.
Working Notes:
Particulars
Calculation
Amount
Interest on Capital
Sukesh
{= 40,000 × \dfrac{5}{100}}
2,000
Vanita
{= 40,000 × \dfrac{5}{100}}
2,000
Total
= 2,000 + 2,000
4,000
Profit Sharing:
Net Profit
9,500
Interest on Capital
(4,000)
5,500
Profit Sharing Ratio
3:2
Sukesh’s share
{= 5,500 × \dfrac{3}{5}}
3,300
Vanita’s share
{= 5,500 × \dfrac{2}{5}}
2,200
Particulars
Amount
Particulars
Amount
To Interest on Capital A/c
By Profit and Loss A/c
9,500
Sukesh
2,000
Vanita
2,000
4,000
Profit Transferred:
To Sukesh’s Current A/c
3,300
To Vanita’s Current A/c
2,200
5,500
9,500
9,500
Date
Particulars
J.F.
Amount

Sukesh
Amount

Vanita
Date
Particulars
J.F.
Amount

Sukesh
Amount

Vanita
To Balance c/d
40,000
40,000
By Balance b/d
40,000
40,000
40,000
40,000
40,000
40,000
Date
Particulars
J.F.
Amount

Sukesh
Amount

Vanita
Date
Particulars
J.F.
Amount

Sukesh
Amount

Vanita
To Drawings A/c
10,850
8,150
By Balance b/d
7,200
2,800
To Balance c/d
1,650
6,050
By Salary to Partner A/c
7,200
By Interest on Capital A/c
2,000
2,000
By Profit and Loss
Appropriation A/c
3,300
2,200
12,500
14,200
12,500
14,200
14. Rahul, Rohit and Karan started partnership business on April 1, 2016 with capitals of ₹ 20,00,000, ₹ 18,00,000 and ₹ 16,00,000, respectively. The profit for the year ended March 2017 amounted to ₹ 1,35,000 and the partner’s drawings had been Rahul ₹ 50,000, Rohit and Karan ₹ 40,000. The profits are distributed among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.
Note here that the information about the drawings is redundant (we don’t need it to solve the problem). Also note that we just have to calculate the interest on capital. Preparation of any accounts is not asked for in this problem.
Interest on Capital:
Partner
Calculation
Interest on Capital
Rahul
{20,00,000 × \dfrac{5}{100}}
1,00,000
Rohit
{18,00,000 × \dfrac{5}{100}}
90,000
Karan
{16,00,000 × \dfrac{5}{100}}
80,000
15. Sunflower and Pink Rose started partnership business on April 01, 2016 with capitals of ₹ 2,50,000 and ₹ 1,50,000, respectively. On October 01, 2016, they decided that their capitals should be ₹ 2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2017.
The interest on capital can be calculated by either
1.
Simple Interest Method
2.
Product Method Method
1. Simple Interest Method
Particulars
Calculation
Amount
Sunflower
Capital
(Before adjustment)
(From Apr 01, 2016 to Sep 30, 2016)
2,50,000
Duration
6 months
Interest on Capital
{= 2,50,000 × \dfrac{10}{100} × \dfrac{6}{12}}
12,500
Capital
(After ajustment)
(From Oct 01, 2016 to Mar 31, 2017)
2,00,000
Duration
6 months
Interest on Capital
{= 2,00,000 × \dfrac{10}{100} × \dfrac{6}{12}}
10,000
Total Interest on Capital
= 12,500 + 10,000
22,500
Pink Rose
Capital
(Before adjustment)
(From April 01, 2016 to Sep 30, 2016)
1,50,000
Duration
6 months
Interest on Capital
{= 1,50,000 × \dfrac{10}{100} × \dfrac{6}{12}}
7,500
Capital
(After adjustment)
(From Oct 01, 2016 to Mar 31, 2017)
2,00,000
Duration
6 months
Interest on Capital
{= 2,00,000 × \dfrac{10}{100} × \dfrac{6}{12}}
10,000
Total Interest on Capital
= 7,500 + 10,000
17,500
2. Product Method
Sunflower
From
To
Amount
Time Period
Product
Apr 01, 2016
Sep 30, 2016
2,50,000
6 months
15,00,000
Oct 01, 2016
Mar 31, 2017
2,00,000
6 months
12,00,000
Total
27,00,000
Pink Rose
From
To
Amount
Time Period
Product
Apr 01, 2016
Sep 30, 2016
1,50,000
6 months
9,00,000
Oct 01, 2016
Mar 31, 2017
2,00,000
6 months
12,00,000
Total
21,00,000
We know that
Interest on Capital
{= Sum~of~Products × \dfrac{Rate}{100} × \dfrac{1}{12}}
Interest on Sunflower’s Capital
{= 27,00,000 × \dfrac{10}{100} × \dfrac{1}{12}}
= 22,500
Interest on Pink Rose’s Capital
{= 21,00,000 × \dfrac{10}{100} × \dfrac{1}{12}}
= 17,500
16. On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at ₹ 4,00,000, ₹ 3,00,000 and ₹ 2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to ₹ 1,50,000 and the partner’s drawings had been Mountain: ₹ 20,000, Hill ₹ 15,000 and Rock ₹ 10,000. Calculate interest on capital.
We need to find the opening capital to calculate the interest on capital. In the problem the closing capitals are given. Note that, if we subtract the drawings from the opening capital and add profits to the opening capital, we get the closing capital. So, to get the opening capital from the closing capital (which is given in the problem), we need to perform the reverse calculation i.e. Take the closing capital, add Drawings and subtract profit
Also note that the ratio in which the profits are shared is not given. So, we assume that the profits are shared equally among the partmers
Profit for each partner
{= 1,50,000 × \dfrac{1}{3}}
= 50,000
Amount

Mountain
Amount

Hill
Amount

Rock
Closing Capital
4,00,000
3,00,000
2,00,000
Drawings
20,000
15,000
10,000
Profit
(50,000)
(50,000)
(50,000)
Opening Capital
3,70,000
2,65,000
1,60,000
Interest on Capital
{3,70,000 × \dfrac{10}{100}}
{2,65,000 × \dfrac{10}{100}}
{1,60,000 × \dfrac{10}{100}}
= 37,000
= 26,500
= 16,000
17. Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2017:
Liabilities
Amount
Assets
Amount
Neelkant’s Capital
10,00,000
Sundry Assets
30,00,000
Mahadev’s Capital
10,00,000
Neelkant’s Current Account
1,00,000
Mahadev’s Current Account
1,00,000
Profit and Loss Apprpriation
(March 2017)
8,00,000
30,00,000
30,00,000
During the year Mahadev’s drawings were ₹ 30,000. Profits during 2016-17 is ₹ 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2017.
Note that in the balance sheet provided the capital and current account details are provided. This means that the books are prepared using the Fixed Capital Method. So, the capital would remain the same at the beginning and at the end of the accounting period. So, while calculating the interest on the capital, we can consider the capital provided in the balance sheet. Also note that the rest of the information in the problem is redundant (not used to arrive at the solution)
Partner
Interest Calculation
Interest on Capital
Neelkant
{= 10,00,000 × \dfrac{5}{100}}
50,000
Mahadev
{= 10,00,000 × \dfrac{5}{100}}
50,000
18. Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2017.
May 01, 2017
₹ 12,000
July 31, 2017
₹ 6,000
September 30, 2017
₹ 9,000
November 30, 2017
₹ 12,000
January 01, 2018
₹ 8,000
March 31, 2018
₹ 7,000
Interest on drawings is charged @ 9% p.a.
Calculate interest on drawings
We use the product method to calculate the interest on drawings.
From
To
Drawings
Duration
(months)
Calculation
Product
May 01, 2017
Mar 31, 2018
12,000
11
= 12,000 × 11
1,32,000
July 31, 2017
Mar 31, 2018
6,000
8
= 6,000 × 8
48,000
Sep 30, 2017
Mar 31, 2018
9,000
6
= 9,000 × 6
54,000
Nov 30, 2017
Mar 31, 2018
12,000
4
= 12,000 × 4
48,000
Jan 01, 2017
Mar 31. 2018
8,000
3
= 8,000 × 3
24,000
Mar 31, 2017
Mar 31. 2018
7,000
0
= 7,000 × 0
0
3,06,000
Interest on Drawings
{= Products~Total × \dfrac{Rate}{100} × \dfrac{1}{12}}
{= 3,06,000 × \dfrac{9}{100} × \dfrac{1}{12}}
= 2,295
19. The capital accounts of Moli and Golu showed balances of ₹ 40,000 and ₹ 20,000 as on April 01, 2016. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu advanced a loan of ₹ 10,000 to the firm on August 01, 2016.
During the year, Moli withdrew Rs. 1,000 per month at the beginning of every month whereas Golu withdrew ₹ 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was ₹ 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.
As we know, when the fixed amounts of drawings are made at the beginning of every month, the average period is considered as 6½ months. So, for Moli, the average period for which interest is to be calculated is 6½ months.
As we know, when the fixed amounts of drawings are made at the beginning of every month, the average period is considered as 5½ months. So, for Goli, the average period for which interest is to be calculated is 5½ months.
Also, the interest on loan is not given in the problem. So, it is assumed to be @ 6% p.a.
Also, Interest on Loan need to be charged on the profits. In otherwords, it should be deducted from the net profit before considering it in the Profit and Loss Appropriation Account.
Working Notes:
Particulars
Calculation
Amount
Interest on Capital
Moli
{= 40,000 × \dfrac{10}{100}}
4,000
Golu
{= 20,000 × \dfrac{10}{100}}
2,000
Total
= 4,000 + 2,000
6,000
Interest on Drawings
Moli’s annual Drawings
= 1,000 × 12
12,000
Interest on Moli’s Drawings
{= 12,000 × \dfrac{12}{100} × \dfrac{6½}{100}}
780
{= 12,000 × \dfrac{12}{100} × \dfrac{13}{2} × \dfrac{1}{12}}
Golu’s annual Drawings
= 1,000 × 12
12,000
Interest on Golu’s Drawings
{= 12,000 × \dfrac{12}{100} × \dfrac{5½}{100}}
660
{= 12,000 × \dfrac{12}{100} × \dfrac{11}{2} × \dfrac{1}{12}}
Total
1,440
Interest on Golu’s Loan
Loan Amount
10,000
Duration
8 months
Interest Rate
6%
Interest
{= 10,000 × \dfrac{6}{100} × \dfrac{8}{12}}
400
Net Profit
Before Considering interest on loan
20,950
Interest on loan
(400)
20,550
Share of Profit
Net Profit Available
20,550
Interest on Capital
(6,000)
Interest on Drawings
400
15,990
Moli’s Share
{= 15,990 × \dfrac{3}{5}}
9,594
Golu’s Share
{= 15,990 × \dfrac{2}{5}}
6,396
Particulars
Amount
Particulars
Amount
To Interest on Capital A/c
By Profit and Loss A/c
20,550
Moli
4,000
By Interest on Drawings A/c
Golu
2,000
6,000
Moli
780
Profit Transferred
Golu
660
1,440
To Moli’s Capital A/c
9,594
To Golu’s Capital A/c
6,396
15,990
21,990
21,990
Date
Particulars
J.F.
Amount

Moli
Amount

Golu
Date
Particulars
J.F.
Amount

Moli
Amount

Golu
To Drawings A/c
12,000
12,000
By Balance b/d
40,000
20,000
To Interest on Drawings A/c
780
660
By Interest on Capital A/c
4,000
2,000
To Balance c/d
40,814
15,736
By Profit and Loss
Appropriation A/c
9,594
6,396
53,594
28,396
53,594
28,396
20. Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of ₹ 40,000 and ₹ 30,000, respectively. They withdrew from the firm the following amounts, for their personal use:
Rakesh
Month
May 31, 2016
June 30, 2016
August 31, 2016
November 1, 2016
December 31, 2016
January 31, 2017
March 01, 2017
600
500
1,000
400
1,500
300
700
Rohan
At the beginning of each month
400
Interest on drawings is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of accounts are closed on March 31, 2017, every year.
As Rakesh has withdrawn varying amounts at different times, we need to use products method to find the interest on drawings.
As Rohan has withdrawn the amount at the beginning of each month, his average duration would be 6½ months.
Rakesh’s Total Drawings
Products Method
From
To
Drawings
Duration
(months)
Calculation
Product
May 31, 2016
Mar 31 2017
600
10
= 600 × 10
6,000
Jun 30, 2016
Mar 31 2017
500
9
= 500 × 9
4,500
Aug 31, 2016
Mar 31 2017
1,000
7
= 1,000 × 7
7,000
Nov 01, 2016
Mar 31 2017
400
5
= 400 × 5
2,000
Dec 31, 2016
Mar 31 2017
1,500
3
= 1,500 × 3
4,500
Jan 31, 2016
Mar 31 2017
300
2
= 300 × 2
600
Mar 01, 2016
Mar 31 2017
700
1
= 700 × 1
700
25,300
Rakesh’s Drawings
= 25,300
Interest on Rakesh’s Drawings
{= Sum~of~Products × \dfrac{Rate}{100} × \dfrac{1}{12}}
{= 25,300 × \dfrac{6}{100} × \dfrac{1}{12}}
= 126.50
Roshan’s Drawings
= 400 × 12
= 4,800
Interest on Roshan’s Drawings
{= Total~Amount × \dfrac{Rate}{100} × \dfrac{6½}{12}}
{= 4,800 × \dfrac{6}{100} × \dfrac{13}{2} × \dfrac{1}{12}}
= 156
21. Himanshu withdrew ₹ 2,500 at the end of each month. The Partnership deed provides for charging interest on drawings @ 12% p.a. Calculate interest on Himanshu’s drawings for the year ending March 31, 2017.
When the drawings are made at the end of each month, the average period is considered to be 5½ months.
Total Drawings
= 2,500 × 12
= 30,000
Interest on Drawings
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{Duration}{12}}
{= 30,000 × \dfrac{12}{100} × \dfrac{5½}{12}}
{= 30,000 × \dfrac{12}{100} × \dfrac{11}{2} × \dfrac{1}{12}}
= ₹ 1,650
22. Bharam is a partner in a firm. He withdraws ₹ 3,000 at the starting of each month for 12 months. The books of the firm are closed on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.
When the drawings are made at the beginning of each month, the average period is considered to be 6½ months.
Total Drawings
= 3,000 × 12
= 36,000
Interest on Drawings
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{Duration}{12}}
{= 36,000 × \dfrac{12}{100} × \dfrac{6½}{12}}
{= 36,000 × \dfrac{12}{100} × \dfrac{13}{2} × \dfrac{1}{12}}
= ₹ 1,950
23. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2017 were ₹ 2,50,000 and ₹ 1,50,000, respectively. They share profits equally. On July 01, 2017, they decided that their capitals should be ₹ 1,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2018.
The interest on capital can be calculated by either
1.
Simple Interest Method
2.
Product Method Method
1. Simple Interest Method
Particulars
Calculation
Amount
Raj
Capital
(Before adjustment)
(From April 01, 2017 to Jun 30, 2017)
2,50,000
Duration
3 months
Interest on Capital
{= 2,50,000 × \dfrac{8}{100} × \dfrac{3}{12}}
5,000
Capital
(After ajustment)
(From Jul 01, 2017 to Mar 31, 2018)
1,00,000
Duration
9 months
Interest on Capital
{= 1,00,000 × \dfrac{8}{100} × \dfrac{9}{12}}
6,000
Total Interest on Capital
= 5,000 + 6,000
11,000
Neeraj
Capital
(Before adjustment)
(From April 01, 2017 to Jun 30, 2017)
1,50,000
Duration
3 months
Interest on Capital
{= 1,50,000 × \dfrac{8}{100} × \dfrac{3}{12}}
3,000
Capital
(After adjustment)
(From Jul 01, 2017 to Mar 31, 2018)
1,00,000
Duration
9 months
Interest on Capital
{= 1,00,000 × \dfrac{8}{100} × \dfrac{9}{12}}
6,000
Total Interest on Capital
= 3,000 + 6,000
9,000
2. Product Method
Raj
From
To
Amount
Time Period
Product
April 01, 2017
Jun 30, 2017
2,50,000
3 months
7,50,000
Jul 01, 2017
Mar 31, 2018
1,00,000
9 months
9,00,000
Total
16,50,000
Neeraj
From
To
Amount
Time Period
Product
April 01, 2017
Jun 30, 2017
1,50,000
3 months
4,50,000
Jul 01, 2017
Mar 31, 2018
1,00,000
9 months
9,00,000
Total
13,50,000
We know that
Interest on Capital
{= Sum~of~Products × \dfrac{Rate}{100} × \dfrac{1}{12}}
Interest on Raj’s Capital
{= 16,50,000 × \dfrac{8}{100} × \dfrac{1}{12}}
= 11,000
Interest on Neeraj’s Capital
{= 13,50,000 × \dfrac{8}{100} × \dfrac{1}{12}}
= 9,000
24. Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings during 2017 were ₹ 24,000 and ₹ 16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.
As the amounts are drawn evenly, the average duration should be taken as 6 months.
Interest on Drawings
{= Drawings × \dfrac{Rate}{100} × \dfrac{Duration}{100}}
Interest on Amit’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{6}{12}}
= 1,200
Interest on Bhola’s Drawings
{= 16,000 × \dfrac{10}{100} × \dfrac{6}{12}}
= 800
25. Harish is a partner in a firm. He withdrew the following amounts during the year 2017 :
February 01
4,000
May 01
12,000
June 30
4,000
October 31
12,000
December 31
4,000
Interest on drawings is to be charged @ 7½% p.a.
Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2017.
We use the product method to calculate the interest on drawings.
Products Method
From
To
Drawings
Duration
(months)
Calculation
Product
Feb 01, 2017
Mar 31, 2018
4,000
11
= 4,000 × 11
44,000
May 01, 2017
Mar 31, 2018
10,000
8
= 10,000 × 8
80,000
Jun 30, 2017
Mar 31, 2018
4,000
6
= 4,000 × 6
24,000
Oct 31, 2017
Mar 31, 2018
12,000
2
= 12,000 × 2
24,000
Dec 31, 2017
Mar 31, 2018
4,000
0
= 4,000 × 0
0
Total
1,72,000
Interest on Drawings
{= Products~Total × \dfrac{Rate}{100} × \dfrac{1}{12}}
{= 1,72,000 × \dfrac{7½}{100} × \dfrac{1}{12}}
{= 1,72,000 × \dfrac{15}{2 × 100} × \dfrac{1}{12}}
= 1,075
26. Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are ₹ 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming that money is withdrawn: (i) in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of every month.
Total Drawings in each case
= 2,000 × 12
= 2,400
(i) When the withdrawals are made in the beginning of the month
When the drawings are made in the beginning of the month, the average duration of withdrawal is 6½ months
Interest on Drawings
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{6½}{12}}
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{13}{2} × \dfrac{1}{12}}
Interest on Menon’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{13}{2} × \dfrac{1}{12}}
= 1,300
Interest on Thomas’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{13}{2} × \dfrac{1}{12}}
= 1,300
(ii) When the withdrawals are made in the middle of the month
When the drawings are made in the middle of the month, the average duration of withdrawal is 6 months
Interest on Drawings
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{6}{12}}
Interest on Menon’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{6}{12}}
= 1,200
Interest on Thomas’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{6}{12}}
= 1,200
(ii) When the withdrawals are made in the beginning of the month
When the drawings are made in the end of the month, the average duration of withdrawal is 5½ months
Interest on Drawings
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{5½}{12}}
{= Total~Drawings × \dfrac{Rate}{100} × \dfrac{11}{2} × \dfrac{1}{12}}
Interest on Menon’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{11}{2} × \dfrac{1}{12}}
= 1,100
Interest on Thomas’s Drawings
{= 24,000 × \dfrac{10}{100} × \dfrac{11}{2} × \dfrac{1}{12}}
= 1,100
Note: As the calculation is the same for both the partners, you can perform the calculation of Interest on Capital once and declare that as the interest on capital for both the partners.
27. On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of ₹ 24,000, ₹ 18,000 and ₹ 12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to ₹ 36,000 and the partner’s drawings had been Ram, ₹ 3,600; Shyam, ₹ 4,500 and Mohan, ₹ 2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.
We need to find the opening capital to calculate the interest on capital. In the problem the closing capitals are given. Note that, if we subtract the drawings from the opening capital and add profits to the opening capital, we get the closing capital. So, to get the opening capital from the closing capital (which is given in the problem), we need to perform the reverse calculation i.e. Take the closing capital, add Drawings and subtract profit
Profit
36,000
Profit Share of Ram
{= 36,000 × \dfrac{3}{6}}
= 18,000
Profit Share of Shyam
{= 36,000 × \dfrac{2}{6}}
= 12,000
Profit Share of Mohan
{= 36,000 × \dfrac{1}{6}}
= 6,000
Amount

Ram
Amount

Shyam
Amount

Mohan
Closing Capital
24,000
18,000
12,000
Drawings
3,600
4,500
2,700
Profit
(18,000)
(12,000)
(6,000)
Opening Capital
9,600
10,500
8,700
Interest on Capital
{9,600 × \dfrac{5}{100}}
{10,500 × \dfrac{5}{100}}
{8,700 × \dfrac{5}{100}}
= 480
= 525
= 435