Question 23 of 50advanced🔍 AnalyzeNumerical5 marks

Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed Rs. 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs. 1,00,000 to the firm, on October 01, 2019. 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, 2020 amounted to Rs. 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 Rs. 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.

Correct Answer

Settlement of Dispute:

  1. Interest on Capital: Harshad's claim for interest @ 10% on capital is invalid. As per the Partnership Act, 1932, in the absence of a partnership agreement, no interest is allowed on capital.
  2. Profit Sharing: Harshad's claim for distribution of profit in proportion to capital is invalid. In the absence of an agreement, profits are shared equally by partners.
  3. Remuneration: Dhiman's claim for salary is invalid. No partner is entitled to remuneration in the absence of an agreement.
  4. Interest on Loan: Dhiman's claim for interest @ 6% on loan is valid. As per the Partnership Act, 1932, in the absence of an agreement, a partner is entitled to interest on the loan advanced to the firm @ 6% p.a.

Profit and Loss Appropriation Account Dr. for the year ended March 31, 2020 Cr.

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
To Interest on Harshad's Loan A/c3,000By Profit and Loss A/c1,80,000
To Profit transferred to:
Harshad's Capital A/c88,500
Dhiman's Capital A/c88,500
(Balancing figure)1,77,000
Total1,80,000Total1,80,000

Working Notes:

  1. Interest on Loan: Amount = Rs. 1,00,000; Time = Oct 01, 2019 to March 31, 2020 (6 months). Calculation: 1,00,000×6000 \times 6/100×6100 \times 6/12 = Rs. 3,000.
  2. Distribution of Profit: Net Profit = Rs. 1,80,000. Less: Interest on Loan = Rs. 3,000. Divisible Profit = Rs. 1,77,000. Distributed equally: 1,77,000 ÷ 2 = Rs. 88,500 each.
Exercise: Numerical Questions | Q: 3 | (Page 37)
For More Understanding

Explanation

The question tests the provisions of the Partnership Act, 1932 in the absence of a partnership deed. The context confirms that without an agreement, interest on capital and remuneration (salary) are not allowed, while interest on a partner's loan is allowed at 6% per annum. Profits must be shared equally regardless of capital contribution. The date of illness (2016) is treated as a typo for 2019 based on the partnership commencement date (April 01, 2019) and the accounting year (2019-20). The calculation for interest on the loan is for 6 months (Oct 1 to Mar 31). The final profit shares match the answer key provided in the context (Rs. 88,500 each).

Solution Steps

  1. Step 1: Analyze claims based on Partnership Act provisions. Reject Interest on Capital and Salary. Accept Interest on Loan @ 6% p.a.

  2. Step 2: Calculate Interest on Harshad's Loan: Rs. 1,00,000×6000 \times 6% × (6/12) = Rs. 3,000.

  3. Step 3: Calculate Divisible Profit: Rs. 1,80,000 (Total Profit) - Rs. 3,000 (Interest) = Rs. 1,77,000.

  4. Step 4: Distribute Divisible Profit equally: Rs. 1,77,000 / 2 = Rs. 88,500 to Harshad and Rs. 88,500 to Dhiman.

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