Question

A, B and C entered into partnership on 1st July, 2023 to share Profit and Losses in the ratio of 5 : 3 : 2. A personally guaranteed that C's share of profit after charging interest on capital @ 8% per annum would not be less than ₹ 1,60,000 p.a. The capital contributed were: A - ₹ 4,00,000; В - ₹ 3,00,000 and C - ₹ 2,00,000. Profit for the year ended on 31st March, 2024 was ₹ 4,74,000. Prepare Profit and Loss Appropriation Account.

Answer 1

Profit & Loss Appropriation Account For the year ended 31st March, 2024
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital A/cs:			By Net Profit b/d (from P&L A/c)	4,74,000
A:	24,000
B:	18,000
C:	12,000	54,000
To Profit transferred to
A's Capital A/c:
Initial Share	2,10,000
Less: Deficiency to C	36,000	1,74,000
B's Capital A/c		1,26,000
C's Capital A/c:
Initial Share	84,000
Add: From A	36,000	1,20,000
Total		4,74,000	Total	4,74,000

Working note:

Interest on Capital (from 1st July 2023 to 31st March 2024 = 9 months)

A: `4,00,000 xx 8% xx 9/12 = 24,000`

B: `3,00,000 xx 8% xx 9/12 = 18,000`

C: `2,00,000 xx 8% xx 9/12 = 12,000`

Total Interest on Capital = ₹ 54,000

Divisible Profit

4,74,000 (Net Profit) − 54,000 (Total IOC) = 4,20,000

Initial Profit Distribution (5 : 3 : 2)

A's Share: `4,20,000 xx 5/10 = 2,10,000`

B's Share: `4,20,000 xx 3/10 = 1,26,000`

C's Share: `4,20,000 xx 2/10 = 84,000`

Guarantee Adjustment for C

C's Annual Guaranteed Minimum: ₹ 1,60,000 p.a.

C's Proportionate Guarantee for 9 Months: `1,60,000 xx 9/12 = 1,20,000`

Deficiency in C's Share: 1,20,000 − 84,000 (Aactual Share) = 36,000

Since A personally guaranteed the amount, this deficiency of ₹ 36,000 is deducted from A and added to C.

Final Adjusted Profits

A: 2,10,000 − 36,000 = 1,74,000

B: 1,26,000 (No change)

C: 84,000 + 36,000 = 1,20,000