Past Adjustments & Guarantee of profits to a partner

3 Marks Questions

1. Mukesh and Ramesh are partners sharing profits and losses in the ratio of 2: 1

respectively. They admit Rupesh as a partner with 1/4 share in profits with a guarantee that his share of profit shall be at least Rs 55,000. The net profit of the firm for the year ending 31st March, 2013 was Rs. 1,60,000. Prepare profit and loss appropriation account. (Compartment 2014)

Ans.

Profit and Loss Appropriation Account for the year ending 31st March, 2013

Particulars Amt (₹) Particulars Amt (₹)

To Profit Transferred to By Net Profit as per Profit and Loss A/c 1,60,000

Mukesh's Capital A/c 80,000 (–) to Rupesh (10,000) 70,000 Ramesh's Capital A/c 40,000 (-) to Rupesh (5,000) 35,000 Rupesh's Capital A/c 40,000 (+) from Mukesh 10,000 (+) from Ramesh 5,000 55,000 1,60,000

Working Note

Calculation of New Profit Sharing Ratio

Rupesh's share = <math>\frac{1}{4}</math>

Remaining share = <math>1 - \frac{1}{4} = \frac{3}{4}</math>

Mukesh's share <math>=\frac{3}{4} \times \frac{2}{3} = \frac{2}{4}</math>

Ramesh's share <math>=\frac{3}{4} \times \frac{1}{3} = \frac{1}{4}</math>

• ٠. New ratio = 2:1:1

Distributable profits = 1,60,000 to be distributed between Mukesh, Ramesh and Rupesh in 2:1:1 ratio Mukesh's share = <math>1,60,000 \times \frac{2}{4} = 80,000</math>, Ramesh's share = <math>1,60,000 \times \frac{1}{4} = 40,000</math>. Rupesh's share =1,60,000 <math>\times \frac{1}{4}</math> = 40,000, which is less than the guaranteed amount of ₹ 55,000, therefore difference ₹ 15,000 (55,000 – 40,000) shall be borne by Mukesh and Ramesh in 2:1 ratio.

1. Mona, Nisha and Priyanka are partners in a firm. They contributed Rs. 50,000

each as capital three years ago. At that time, Priyanka agreed to look after the business as Mona and Nisha were busy. The profits for the past three years were Rs. 15,000, Rs. 15,000 and Rs. 50,000 respectively. While going through the books of accounts, Mona noticed that the profit had been distributed in the ratio of 1: 1:

1. When she enquired from Priyanka about this, Priyanka answered that since she looked after the business she should get more profit. Mona disagreed and it was decided to distribute profit equally retrospectively for the last three years.
2. You are required to make necessary correction in the books of accounts of Mona, Nisha and Priyanka by passing an adjustment entry.
3. Identify the value which was not practised by Priyanka while distributing profits

Ans. (i)

JOURNAL

Date Particulars LF Amt (Dr) Amt (Cr)

Priyanka's Capital A/c Dr 15,000

To Mona's Capital A/c 7,500

To Nisha's Capital A/c 7,500

(Being profits of last three years distributed wrongly now rectified)

Working Note

Statement Showing Adjustments

Particulars Mona (₹) Nisha (₹) Priyanka (₹)

Profits wrongly distributed now to be debited (15,000 + 25,000 + 50,000) in the ratio 1:1:2 22,500 (Dr) 22,500 (Dr) 45,000 (Dr)

Profits to be distributed equally, now to be credited 30,000 (Cr) 30,000 (Cr) 30,000 (Cr)

Net Effect 7,500 (Cr) 7,500 (Cr) 15,000 (Dr)

1. Value not practised by Priyanka while distributing profits is (Any one)
2. Honesty Priyanka has not shown honesty towards co-partners by not

distributing profits as per the provision of Partnership Act.

1. Transparency Priyanka has not shown transparency while distributing profits as per her wish and not communicating the same to other partners.
2. Equity Priyanka has not shown equity in profit distribution.
3. Team work Priyanka has not shown team work by hiding profit sharing ratio from other partners.

1. Mohan, Neeraj and Peeyush are partners in a firm. They contributed Rs. 75,000

each as capital three years ago. At that time, Peeyush agreed to look after the business as Mohan and Neeraj were busy. The profits for the past three years were Rs. 45,000, Rs. 30,000 and Rs. 60,000 respectively. While going through the books of accounts, Mohan noticed that profit had been distributed in 1:1:2 ratio. When he enquired from Peeyush about this, Peeyush answered that since he looked after the business he should get more profit. Mohan disagreed and it