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 Rs. 5,000. The profits for the year ending March 31, 2020 amounted to Rs. 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.
Calculation of Profit Shares The profit of Rs. 35,000 is distributed in the ratio of 5:4:1. Radha’s Share = 5/,000 = Rs. 17,500. Mary’s Share = 4/,000 = Rs. 14,000. Fatima’s Share = 1/,000 = Rs. 3,500.
Calculation of Deficiency Fatima is guaranteed a minimum profit of Rs. 5,000. Deficiency = Guaranteed Amount – Actual Share Deficiency = 5,000 – 3,500 = Rs. 1,500.
Distribution of Deficiency The deficiency of Rs. 1,500 is borne by Radha and Mary in the ratio of 3:2. Radha’s Share of Deficiency = 3/,500 = Rs. 900. Mary’s Share of Deficiency = 2/,500 = Rs. 600.
Final Distribution of Profit Radha’s Final Share = 17,500 – 900 = Rs. 16,600. Mary’s Final Share = 14,000 – 600 = Rs. 13,400. Fatima’s Final Share = 3,500 + 1,500 = Rs. 5,000.
Journal Entry Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) 2020 Mar 31 | 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 after adjusting deficiency borne by Radha and Mary) | | |
Explanation
The solution follows the guarantee method illustrated in similar problems within the provided context (e.g., Question 29 and Illustration 13). First, the actual share is calculated based on the profit-sharing ratio. Since Fatima's actual share (Rs. 3,500) is less than the guaranteed amount (Rs. 5,000), a deficiency of Rs. 1,500 arises. This deficiency is distributed between Radha and Mary in their agreed ratio of 3:2, resulting in Radha bearing Rs. 900 and Mary bearing Rs. 600. The final profit shares are adjusted accordingly, matching the answer key provided in the text.
Solution Steps
Step 1: Calculate actual share of profit for each partner based on ratio 5:4:1.
Step 2: Identify Fatima's deficiency by subtracting her actual share from the guaranteed minimum (5,000 - 3,500).
Step 3: Distribute the deficiency of Rs. 1,500 between Radha and Mary in the ratio 3:2.
Step 4: Deduct the deficiency shares from Radha and Mary's actual shares and add the total deficiency to Fatima's share.
Step 5: Pass the journal entry debiting Profit and Loss Appropriation A/c and crediting partners' capital accounts with final amounts.