Guarantee of Profit to the Partners Solutions

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Accounting for Partnership : Basic Concepts – Guarantee of Profit to the Partners Solutions
28. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to be a minimum sum of ₹ 8,000. Profits for the year ended March 31, 2017 was ₹ 36,000. Divide profit among the partners by preparing profit and loss appropriation account.
As Samiksha is guaranteed a minimum profit of ₹ 8,000, any deficiency in Samiksha’s profit should be born by both Amit and Sumit in the ratio 3:2.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
Amit
{= 36,000 × \dfrac{3}{6}}
18,000
Sumit
{= 36,000 × \dfrac{2}{6}}
12,000
Samiksha
{= 36,000 × \dfrac{1}{6}}
6,000
Guaranteed Profit to Samiksha
8,000
Deficiency in Samiksha’s profit
= 8,000 – 6,000
2,000
Amit’s Share in Deficiency
{= 2,000 × \dfrac{3}{5}}
1,200
Sumit’s Share in Deficiency
{= 2,000 × \dfrac{2}{5}}
800
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
36,000
To Amit’s Capital A/c
Share in Profit
18,000
Share in Deficiency
(1,200)
16,800
To Sumit’s Capital A/c
Share in Profit
12,000
Share in Deficiency
(800)
11,200
To Samiksha’s Capital A/c
Share in Profit
6,000
Deficiency Received From
Amit
1,200
Sumit
800
8,000
36,000
36,000

29. Pinki, Deepati and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than ₹ 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to ₹ 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.
As Kaku is guaranteed a minimum profit of ₹ 8,000, any deficiency in Kaku’s profit should be born by both Pinki and Deepati equally i.e. in the ratio 1:1.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
Pinki
{= 40,000 × \dfrac{5}{10}}
20,000
Deepati
{= 40,000 × \dfrac{4}{10}}
16,000
Kaku
{= 40,000 × \dfrac{1}{10}}
4,000
Guaranteed Profit to Kaku
5,000
Deficiency in Kaku’s profit
= 5,000 – 4,000
1,000
Pinki’s Share in Deficiency
{= 1,000 × \dfrac{1}{2}}
500
Deepati’s Share in Deficiency
{= 1,000 × \dfrac{1}{2}}
500
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
40,000
To Pinki’s Capital A/c
Share in Profit
20,000
Share in Deficiency
(500)
19,500
To Deepati’s Capital A/c
Share in Profit
16,000
Share in Deficiency
(500)
15,500
To Kaku’s Capital A/c
Share in Profit
4,000
Deficiency Received From
Pinki
500
Deepati
500
5,000
40,000
40,000

30. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed ₹ 10,000 as her share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are ₹ 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.
As Kusum is guaranteed a minimum profit of ₹ 10,000, any deficiency in Kusum’s profit should be born by Siddharth.
The share of profit as per the profit sharing ration 5:3:2 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profits
(For the year ending March 31, 2016)
Net Profit
40,000
Abhay’s Share
{= 40,000 × \dfrac{5}{10}}
20,000
Siddharth’s Share
{= 40,000 × \dfrac{3}{10}}
12,000
Kusum’s Share
{= 40,000 × \dfrac{2}{10}}
8,000
Guaranteed Profit to Kusum
10,000
Deficiency in Kusum’s profit
= 10,000 – 8,000
2,000
Siddharth’s Share in Deficiency
2,000
Profits
(For the year ending March 31, 2017)
Net Profit
60,000
Abhay’s Share
{= 60,000 × \dfrac{5}{10}}
30,000
Siddharth’s Share
{= 60,000 × \dfrac{3}{10}}
18,000
Kusum’s Share
{= 60,000 × \dfrac{2}{10}}
12,000
Note that, in the year ending March 31, 2017, Kusum got more than ₹ 10,000 as her profit share. So, there is no deficiency.
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
40,000
To Abhay’s Capital A/c
20,000
To Siddharth’s Capital A/c
Share in Profit
12,000
Share in Deficiency
(2,000)
10,000
To Kusum’s Capital A/c
Share in Profit
8,000
Deficiency Received
From Siddharth
2,000
10,000
40,000
40,000
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss Account A/c
60,000
To Abhay’s Capital A/c
30,000
To Siddharth’s Capital A/c
18,000
To Kusum’s Capital A/c
12,000
60,000
60,000

31. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than ₹ 5,000. The profits for the year ending March 31, 2017 amounted to ₹ 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show distributioin of profit among the partner.
As Fatima is guaranteed a minimum profit of ₹ 5,000, any deficiency in Samiksha’s profit should be born by both Amit and Sumit in the ratio 3:2.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
Radha
{= 35,000 × \dfrac{5}{10}}
17,500
Mary
{= 35,000 × \dfrac{4}{10}}
14,000
Fatima
{= 35,000 × \dfrac{1}{10}}
3,500
Guaranteed Profit to Fatima
5,000
Deficiency in Fatima’s profit
= 5,000 – 3,500
1,500
Deficiency bearing Ratio
3:2
Radha’s Share in Deficiency
{= 1,500 × \dfrac{3}{5}}
900
Mary’s Share in Deficiency
{= 1,500 × \dfrac{2}{5}}
600
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
35,000
To Radha’s Capital A/c
Share in Profit
17,500
Share in Deficiency
(900)
16,600
To Mary’s Capital A/c
Share in Profit
14,000
Share in Deficiency
(600)
13,400
To Fatima’s Capital A/c
Share in Profit
3,500
Deficiency Received From
Radha
900
Mary
600
8,000
34,000
35,000
The entries in the journal can be
a.
Single Compound Entry.
b.
Separate entries for Share of Profit and Deficiency
a. Single Compound Entry
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Profit and Loss
Appropriation A/c
Dr.
35,000
To Radha’s Capital A/c
16,600
To Mary’s Capital A/c
13,400
To Fatima’s Capital A/c
5,000
(Being profit distributed among partners)
b. Separate entries for Share of Profit and Deficiency
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Profit and Loss
Appropriation A/c
Dr.
35,000
To Radha’s Capital A/c
17,500
To Mary’s Capital A/c
14,000
To Fatima’s Capital A/c
3,500
(Being profit distributed among partners)
Radha’s Capital A/c
Dr.
900
Mary’s Capital A/c
Dr.
500
To Fatima’s Capital A/c
1,500
(Being deficiency in Fatima’s profit born by Radha and Mary)

32. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of ₹ 8,000. The net profit for the year ended March 31, 2017 was ₹ 30,000. Prepare Profit and Loss Appropriation Account.
As Z is guaranteed a minimum profit of ₹ 8,000, any deficiency in Z’s profit should be born by both X and Y in the ratio 3:2.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
X
{= 30,000 × \dfrac{3}{6}}
15,000
Y
{= 30,000 × \dfrac{2}{6}}
10,000
Z
{= 30,000 × \dfrac{1}{6}}
5,000
Guaranteed Profit to Z
8,000
Deficiency in Z’s profit
= 8,000 – 5,000
3,000
X’s Share in Deficiency
{= 3,000 × \dfrac{3}{5}}
1,800
Y’s Share in Deficiency
{= 2,000 × \dfrac{2}{5}}
1,200
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
30,000
To X’s Capital A/c
Share in Profit
15,000
Share in Deficiency
(1,800)
13,200
To Y’s Capital A/c
Share in Profit
10,000
Share in Deficiency
(1,200)
8,800
To Z’s Capital A/c
Share in Profit
5,000
Deficiency Received From
Amit
1,800
Sumit
1,200
8,000
30,000
30,000

33. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of ₹ 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the Profit and loss Appropriation Account showing distribution of profits among the partners in case the profits for year 2015 are: (i) ₹ 2,50,000; (ii) 3,60,000.
As Chintu is guaranteed a minimum profit of ₹ 8,000, any deficiency in Chintu’s profit should be totally born by only Arun.
(i) When the profift is ₹ 2,50,000
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
Arun
{= 2,50,000 × \dfrac{2}{5}}
1,00,000
Boby
{= 1,00,000 × \dfrac{2}{5}}
1,00,000
Chintu
{= 2,50,000 × \dfrac{1}{5}}
50,000
Guaranteed Profit to Chintu
8,000
Deficiency in Chintu’s profit
= 60,000 – 50,000
10,000
Arun’s Share in Deficiency
10,000
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
2,50,000
To Arun’s Capital A/c
Share in Profit
1,00,000
Share in Deficiency
(10,000)
90,000
To Boby’s Capital A/c
1,00,000
To Chintu’s Capital A/c
Share in Profit
50,000
Deficiency Received
(From Arun)
10,000
60,000
2,50,000
2,50,000
(ii) When the profit is ₹ 3,60,000
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
Arun
{= 3,60,000 × \dfrac{2}{5}}
1,44,000
Boby
{= 3,60,000 × \dfrac{2}{5}}
1,44,000
Chintu
{= 2,50,000 × \dfrac{1}{5}}
72,000
As the profit share of Chintu is more than ₹ 60,000, the guarantee is fulfilled.
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
3,60,000
To Arun’s Capital A/c
1,44,000
To Boby’s Capital A/c
1,44,000
To Chintu’s Capital A/c
72,000
3,60,000
3,60,000

34. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall be ₹ 20,000. The net profit for the year ended March 31, 2017 amounted to ₹ 70,000. Prepare Profit and Loss Appropriation Account.
As Cheena is guaranteed a minimum profit of ₹ 20,000, any deficiency in Samiksha’s profit should be born by both Amit and Sumit in the ratio 2:2 i.e. 1:1 i.e equally.
The share of profit as per the profit sharing ration 2:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Profit:
Ashok
{= 70,000 × \dfrac{2}{5}}
28,000
Brijesh
{= 70,000 × \dfrac{2}{5}}
28,000
Cheena
{= 70,000 × \dfrac{1}{5}}
14,000
Guaranteed Profit to Cheena
20,000
Deficiency in Cheena’s profit
= 20,000 – 14,000
6,000
Ashok’s Share in Deficiency
{= 6,000 × \dfrac{1}{2}}
3,000
Brijesh’s Share in Deficiency
{= 6,000 × \dfrac{1}{2}}
3,000
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
70,000
To Ashok’s Capital A/c
Share in Profit
28,000
Share in Deficiency
(3,000)
25,000
To Brijesh’s Capital A/c
Share in Profit
28,000
Share in Deficiency
(3,000)
25,000
To Samiksha’s Capital A/c
Share in Profit
14,000
Deficiency Received From
Ashok
3,000
Brijesh
3,000
20,000
70,000
70,000

35. Ram, Mohan and Sohan are partners with capitals of ₹ 5,00,000, ₹ 2,50,000 and 2,00,000 respectively. After providing interest on capital @ 10% p.a. the profits are divisible as follows:
Ram ½, Mohan ⅓ and Sohan ⅙. Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than ₹ 25,000, in any year. The net profit for the year ended March 31, 2017 is ₹ 2,00,000, before charging interest on capital.
You are required to show distribution of profit by by preparing P & L Appropriation Account.
Ratio of Profits
{= \dfrac{1}{2}:\dfrac{1}{3}:\dfrac{1}{6}}
{= \dfrac{6}{2}:\dfrac{6}{3}:\dfrac{6}{6}}
= 3:2:1
As Sohan is guaranteed a minimum profit of ₹ 25,000, any deficiency in Sohan’s profit should be born by both Ram and Mohan in the ratio 3:2.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Interest on Capital
Ram
{= 5,00,000 × \dfrac{10}{100}}
50,000
Mohan
{= 2,50,000 × \dfrac{10}{100}}
25,000
Sohan
{= 2,00,000 × \dfrac{10}{100}}
20,000
Total
= 50,000 + 25,000 + 20,000
95,000
Profit
Net Profit
2,00,000
Interest on Capital
95,000
1,05,000
Profit Sharing
Ram
{= 1,05,000 × \dfrac{3}{6}}
52,500
Mohan
{= 1,05,000 × \dfrac{2}{6}}
35,000
Sohan
{= 1,05,000 × \dfrac{1}{6}}
17,500
Guaranteed Profit to Sohan
25,000
Deficiency in Sohan’s profit
= 25,000 – 17,500
2,000
Ram’s Share in Deficiency
{= 7,500 × \dfrac{3}{5}}
4,500
Mohan’s Share in Deficiency
{= 7,500 × \dfrac{2}{5}}
3,000
Particulars
Amount
Particulars
Amount
To Interest on Capital A/c
By Profit and Loss A/c
36,000
Ram
50,000
Mohan
25,000
Sohan
20,000
95,000
Profit Transferred:
To Ram’s Capital A/c
Share in Profit
52,500
Share in Deficiency
(4,500)
48,000
To Mohan’s Capital A/c
Share in Profit
35,000
Share in Deficiency
(3,000)
32,000
To Sohan’s Capital A/c
Share in Profit
17,500
Deficiency Received From
Ram
4,500
Mohan
3,000
25,000
2,00,000
2,00,000

36. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following :
(i)
Sona’s share in the profits, guaranteed to be not less than ₹ 15,000 in any year.
(ii)
Babita gave guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is ₹ 25,000). The net profit for the year ended March 31, 2017 is ₹ 75,000. The gross fee earned by Babita for the firm was ₹ 16,000.
You are required to prepare Profit and Loss Appropriation Account.
As Sona is guaranteed a minimum profit of ₹ 15,000, any deficiency in Sona’s profit should be born by both Amit and Babita in the ratio 3:2.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
Working Notes:
Particulars
Calculation
Amount
Deficiency in Fee Earned
Guaranteed Earnings by Babita
25,000
Actual Earnings by Babita
16,000
Deficiency in Earnings
9,000
Profit:
Net Profit
75,000
Earned Fee Deficiency
9,000
84,000
Amit
{= 84,000 × \dfrac{3}{6}}
42,000
Babita
{= 84,000 × \dfrac{2}{6}}
28,000
Sona
{= 84,000 × \dfrac{1}{6}}
14,000
Guaranteed Profit to Sona
15,000
Deficiency in Sona’s profit
= 15,000 – 14,000
1,000
Amit’s Share in Deficiency
{= 1,000 × \dfrac{3}{5}}
600
Babita’s Share in Deficiency
{= 1,000 × \dfrac{2}{5}}
400
Particulars
Amount
Particulars
Amount
Profit Transferred:
By Profit and Loss A/c
84,000
To Amit’s Capital A/c
By Babita’s Capital A/c
9,000
Share in Profit
42,000
(Deficiency of Fee Earned)
Share in Deficiency
(600)
41,400
To Babita’s Capital A/c
Share in Profit
28,000
Share in Deficiency
(400)
27,600
To Sona’s Capital A/c
Share in Profit
14,000
Deficiency Received From
Amit
600
Babita
400
15,000
84,000
84,000