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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.

Profit and Loss Appropriation Account

Dr.

Cr

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

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.

Profit and Loss Appropriation Account

Dr.

Cr

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

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.

Profit and Loss Appropriation Account

as on March 31 2016

as on March 31 2016

Dr.

Cr

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

From Siddharth

2,000

10,000

40,000

40,000

Profit and Loss Appropriation Account

as on March 31, 2017

as on March 31, 2017

Dr.

Cr

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

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)

(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:

Profit and Loss Appropriation Account

Dr.

Cr

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

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Profit and Loss

Appropriation A/c

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

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Profit and Loss

Appropriation A/c

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.

Profit and Loss Appropriation Account

Dr.

Cr

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

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

Profit and Loss Appropriation Account

Dr.

Cr

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)

(From Arun)

10,000

60,000

2,50,000

2,50,000

(ii) When the profit is ₹ 3,60,000

Profit and Loss Appropriation Account

Dr.

Cr

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

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.

Profit and Loss Appropriation Account

Dr.

Cr

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

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.

Profit and Loss Appropriation Account

Dr.

Cr

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

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.

Profit and Loss Appropriation Account

Dr.

Cr

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

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