Krishna, Sandeep and Karim are partners sharing profits in the ratio of 3:2:1. Their fixed capitals are: Krishan Rs. 1,20,000, Sandeep 90,000 and Karim 60,000. For the year 2014-15, interest was credited to them @ 6% p.a. instead of 5% p.a. Record adjustment entries through P&L adjustments account.
Journal Entry:
Krishna's Capital A/c Dr. 1,200 Sandeep's Capital A/c Dr. 900 Karim's Capital A/c Dr. 600 To P&L Adjustment A/c 2,700 (Being excess interest on capital @ 6% instead of 5% adjusted)
Working Notes:
1. Interest already credited @ 6% p.a.: Krishna: 1,20,% = Rs. 7,200 Sandeep: 90,% = Rs. 5,400 Karim: 60,% = Rs. 3,600 Total = Rs. 16,200
2. Correct interest @ 5% p.a.: Krishna: 1,20,% = Rs. 6,000 Sandeep: 90,% = Rs. 4,500 Karim: 60,% = Rs. 3,000 Total = Rs. 13,500
3. Excess interest credited: Krishna: 7,200 - 6,000 = Rs. 1,200 Sandeep: 5,400 - 4,500 = Rs. 900 Karim: 3,600 - 3,000 = Rs. 600 Total Excess = Rs. 2,700
Explanation
This question from the NCERT textbook (Do it Yourself section) tests the student's understanding of adjustment entries when interest on capital is credited at a wrong rate. Since interest was credited at a higher rate (6%) than the correct rate (5%), partners received excess credit. The adjustment requires debiting partners' capital accounts for the excess amount and crediting the P&L Adjustment Account. The solution follows the standard format of showing calculations for interest at both rates and then passing the adjustment entry.
Solution Steps
Step 1: Calculate interest already credited @ 6% p.a. on each partner's capital
Step 2: Calculate correct interest @ 5% p.a. on each partner's capital
Step 3: Find the difference (excess interest credited) for each partner
Step 4: Pass adjustment entry debiting partners' capital accounts and crediting P&L Adjustment Account