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.
Working Notes:
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:
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

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.
Working Notes:
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:
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

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.
Working Notes:
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:
Note that, in the year ending March 31, 2017, Kusum got more than ₹ 10,000 as her profit share. So, there is no deficiency.
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

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.
The share of profit as per the profit sharing ration 3:2:1 will be as follows:
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)
Working Notes:
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.
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

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.
Working Notes:
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:
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

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.
(i) When the profift is ₹ 2,50,000
(ii) When the profit is ₹ 3,60,000
Working Notes:
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:
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
(ii) When the profit is ₹ 3,60,000
The share of profit as per the profit sharing ratio 3:2:1 will be as follows:
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.

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.
Working Notes:
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:
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

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.
Working Notes:
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:
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
Ratio of Profits
{= \dfrac{1}{2}:\dfrac{1}{3}:\dfrac{1}{6}}
{= \dfrac{6}{2}:\dfrac{6}{3}:\dfrac{6}{6}}
= 3:2:1

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.
Working Notes:
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:
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
Distribution of Profits among the partners:
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