Question

Aakash and Baadal entered into partnership on 1st October, 2023 with the capitals of Rs 80,00,000 and Rs 60,00,000 respectively. They decided to share profits and losses equally. Partners were entitled to interest on capital @ 10\% per annum as per the provisions of the partnership deed. Baadal is given a guarantee that his share of profit, after charging interest on capital will not be less than Rs 7,00,000 per annum. Any deficiency arising on that account shall be met by Aakash. The profit of the firm for the year ended 31st March, 2024 amounted to Rs 13,00,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024.

Hint:

When preparing P\ Appropriation A/c with a guarantee: 1. Calculate appropriations like Interest on Capital (check the period). 2. Find Divisible Profit (Net Profit - Appropriations). 3. Distribute Divisible Profit as per PSR. 4. Check if the guaranteed partner's share (Divisible Profit share) meets the guarantee amount (adjust guarantee for the period if needed). 5. If deficient, deduct the deficiency from the guaranteeing partner(s) and add it to the guaranteed partner's share.

Answer 1

Working Notes:
1. Calculation of Interest on Capital (IoC):
Partnership started on 1st Oct 2023, so interest is for 6 months (Oct 23 to Mar 24).
Aakash's IoC = Rs 80,00,000 \( \times \) 10\% \( \times \) 6/12 = Rs 4,00,000
Baadal's IoC = Rs 60,00,000 \( \times \) 10\% \( \times \) 6/12 = Rs 3,00,000
Total IoC = Rs 4,00,000 + Rs 3,00,000 = Rs 7,00,000
2. Calculation of Divisible Profit:
Profit before IoC = Rs 13,00,000
Divisible Profit = Profit before IoC - Total IoC
Divisible Profit = Rs 13,00,000 - Rs 7,00,000 = Rs 6,00,000
3. Initial Distribution of Divisible Profit:
Profit Sharing Ratio = Equal (1:1)
Aakash's Share = \( \frac{1}{2} \times 6,00,000 = Rs 3,00,000 \)
Baadal's Share = \( \frac{1}{2} \times 6,00,000 = Rs 3,00,000 \)
4. Applying Guarantee to Baadal:
Guaranteed Profit for Baadal (after IoC) = Rs 7,00,000 per annum.
Since the business ran for 6 months, the guarantee applicable for the period is \( \frac{1}{2} \times 7,00,000 = Rs 3,50,000 \).
Baadal's Actual Share of Divisible Profit = Rs 3,00,000.
Deficiency = Guaranteed Amount - Actual Share
Deficiency = Rs 3,50,000 - Rs 3,00,000 = Rs 50,000.
This deficiency is to be met by Aakash.
5. Final Distribution:
Aakash's Final Share = Initial Share - Deficiency Borne
Aakash's Final Share = Rs 3,00,000 - Rs 50,000 = Rs 2,50,000.
Baadal's Final Share = Initial Share + Deficiency Received
Baadal's Final Share = Rs 3,00,000 + Rs 50,000 = Rs 3,50,000.
Profit and Loss Appropriation Account
for the year ended 31st March, 2024
Interest on Capital and Partners' Capital Accounts
\begin{longtable}{|l|r|l|r|} \hline Dr. & Amount (Rs) & Cr. & Amount (Rs)
\hline \endfirsthead \hline Dr. & Amount (Rs) & Cr. & Amount (Rs)
\hline \endhead \hline \endfoot \hline \endlastfoot To Interest on Capital: & & By Profit and Loss A/c & 13,00,000
\quad Aakash & 4,00,000 & &
\quad Baadal & 3,00,000 & 7,00,000 & (Net Profit)
To Partners' Capital A/cs: & & &
\quad Aakash (3,00,000 - 50,000) & 2,50,000 & &
\quad Baadal (3,00,000 + 50,000) & 3,50,000 & 6,00,000 &
\hline Total & 13,00,000 & Total & 13,00,000
\hline \end{longtable}