Question

A, B and C are partners sharing profits in the proportion of 5 : 3 : 2. A retires from the firm on 31st March, 2014 and you are informed that:

1. A’s capital on 1st April, 2013 stood at ₹ 5,00,000 and interest on capital is to be allowed @ 8% p.a.
2. A has withdrawn ₹ 5,000 per month at the beginning of each month during the year 2013-14. Interest on drawings is to be charged @ 12% p.a.
3. A’s share of profit for the year 2013-14 (after all adjustments) amounts to ₹ 75,000.
4. Goodwill of the firm is worth ₹ 1,00,000.

B and C decide to share future profits equally. The amount due to A in excess of ₹ 5,00,000 is to be paid in cash immediately on retirement and the balance due to him is to be paid in annual instalments of ₹ 2,50,000 each, interest being calculated @ 12% p.a. on the unpaid balances. The first instalment was paid on 31st March 2015.

You are required to prepare A’s Capital Account and also his Loan Account until the payment of the whole amount due to him was made.

Answer 1

Dr.	A’s Capital A/c		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawing A/c	60,000	By Balance b/d	5,00,000
To Interest on Drawing A/c	3,900	By B’s Capital A/c	20,000
To Cash A/c	1,01,100	By C’s Capital A/c	30,000
To A’s Capital A/c	5,00,000	By Interest on Capital A/c	40,000
		By Profit and Loss Appropriation A/c (Share of Profit)	75,000
	6,65,000		6,65,000

 

Dr.	A’s Loan A/c				Cr.
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2014			2014
March 31	To Balance c/d	5,00,000	March 31	By A’s Capital A/c	5,00,000
		5,00,000			5,00,000
2015			2014
March 31	To Bank A/c	2,50,000	April 1	By Balance b/d	5,00,000
March 31	To Balance c/d	3,10,000	2015
			March 31	By  Interest A/c @12% (5,00,000 × 12%)	60,000
		5,60,000			5,60,000
2016			2015
March 31	To Bank A/c	2,50,000	April 1	By Balance b/d	3,10,000
March 31	To Balance c/d	97,200	March 31	By  Interest A/c @12% (3,10,000 × 12%)	37,200
		3,47,200			3,47,200
2017			2016
March 31	To Bank A/c	1,08,864	April 1	By Balance b/d	97,200
			2017
			March 31	By  Interest A/c @12% (97,200 × 12%)	11,664
		1,08,864			1,08,864

Working notes:

Calculation of Interest on Drawings

`60,000 xx 12% xx 6.5/12` = 3,900

Where 6.5 months = Average period 

Average period = `("time left after first drawing + time left after last drawing")/2`

= `(12  "months" + 1  "month")/2`

= `13/2`

= 6.5