Question 32 of 50intermediate🔧 ApplyNumerical6 marks

Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were Rs. 80,000 and Rs. 60,000 respectively. The firm started business on April 1, 2019. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of Rs. 2,000 and Rs. 3,000, respectively. The profits for year ended March 31, 2017 before making above appropriations was Rs. 1,00,300. The drawings of Ramesh and Suresh were Rs. 40,000 and Rs. 50,000, respectively. Interest on drawings amounted to Rs. 2,000 for Ramesh and Rs. 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.

Correct Answer

Profit and Loss Appropriation Account Dr. for the year ended March 31, 2017 Cr.

ParticularsAmount (Rs.)ParticularsAmount (Rs.)
To Interest on Capital:By Net Profit1,00,300
Ramesh (80,000×12000 \times 12%)9,600By Interest on Drawings:
Suresh (60,000×12000 \times 12%)7,200Ramesh2,000
To Salary:Suresh2,500
Ramesh (2,000×12000 \times 12)24,000
Suresh (3,000×12000 \times 12)36,000
To Profit transferred to:
Ramesh (4/7)16,000
Suresh (3/7)12,000
Total1,04,800Total1,04,800

Partners' Capital Accounts Dr. Cr.

ParticularsRamesh (Rs.)Suresh (Rs.)ParticularsRamesh (Rs.)Suresh (Rs.)
To Drawings40,00050,000By Balance b/d80,00060,000
To Interest on Drawings2,0002,500By Interest on Capital9,6007,200
To Balance c/d87,60062,700By Salary24,00036,000
By Profit16,00012,000
Total1,29,6001,15,200Total1,29,6001,15,200
Exercise: Numerical Questions | Q: 12 | (Page 40)
For More Understanding

Explanation

The question requires preparation of Profit and Loss Appropriation Account and Partners' Capital Accounts under fluctuating capital method. The profit sharing ratio is based on capital contribution (80,000:60,000 = 4:3). Interest on capital is calculated at 12% on opening capitals. Monthly salaries are multiplied by 12 for annual amount. Interest on drawings is given directly. The profit available for distribution after all appropriations is divided in 4:3 ratio.

Solution Steps

  1. Step 1: Calculate Profit Sharing Ratio = 80,000 : 60,000 = 4:3

  2. Step 2: Calculate Interest on Capital: Ramesh = 80,000×12000 \times 12% = Rs. 9,600; Suresh = 60,000×12000 \times 12% = Rs. 7,200

  3. Step 3: Calculate Annual Salary: Ramesh = 2,000×12000 \times 12 = Rs. 24,000; Suresh = 3,000×12000 \times 12 = Rs. 36,000

  4. Step 4: Interest on Drawings (given): Ramesh = Rs. 2,000; Suresh = Rs. 2,500

  5. Step 5: Total Appropriations = 9,600 + 7,200 + 24,000 + 36,000 = Rs. 76,800

  6. Step 6: Profit available for distribution = 1,00,300 + 4,500 (interest on drawings) - 76,800 = Rs. 28,000

  7. Step 7: Profit distribution: Ramesh = 28,000×4000 \times 4/7 = Rs. 16,000; Suresh = 28,000×3000 \times 3/7 = Rs. 12,000

  8. Step 8: Closing Capital: Ramesh = 80,000 + 9,600 + 24,000 + 16,000 - 40,000 - 2,000 = Rs. 87,600; Suresh = 60,000 + 7,200 + 36,000 + 12,000 - 50,000 - 2,500 = Rs. 62,700

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