Question

A, B and C are in partnership sharing profits and losses in the ratio of 2 : 1 : 1. The following particulars are available from their books:

	A (₹)	B (₹)	C (₹)
Capital Accounts 1st April, 2021	20,000	15,000	10,000
Current Accounts 1st April, 2021	1,500	2,500	(Dr.) 2,000
Drawings	6,000	4,000	4,000
Life Insurance Premium 1st October, 2021	2,000

Life insurance premium of A has been paid by the firm and has been charged to General Expenses A/c. Partners are allowed 8% p.a. interest on their capital and charged at 10% p.a. on their drawings. Profits for the year ending 31st March, 2022, amounted to ₹ 20,800 before taking into account the interest on capital and drawings. While calculating profits, depreciation at the rate of 20% p.a. has been omitted on a building of the value of ₹ 20,000. Prepare a profit and loss appropriation account and partner’s current accounts for the year.

Hints:

1. If it is not clearly mentioned whether the balance of a current account is debit or credit, it will be presumed that its balance is credit.
2. Interest on drawings will be calculated for six months.

Answer 1

Dr.	Profit and Loss Appropriation Account for the year ended 31st March 2022				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital A/cs:		3,600	By Profit and Loss A/c (Net Profit)		18,800
A	1,600		By Interest on Drawings A/cs:		800
B	1,200		A	400
C	800		B	200
To Profit transferred to:		16,000	C	200
A’s Current A/c	8,000
B’s Current A/c	4,000
C’s Current A/c	4,000
		19,600			19,600

 

Dr.	Partners’ Current Account						Cr.
Particulars	A	B	C	Particulars	A	B	C
To Balance b/d	-	-	2,000	By Balance b/d	1,500	2,500	-
To Drawings A/c	8,000	4,000	4,000	By Interest on Capitals	1,600	1,200	800
To Interest on Drawings	400	200	200	By Profit and Loss Appropriation A/c	8,000	4,000	4,000
To Balance c/d	2,700	3,500	-		-	-	1,400
	11,100	7,700	6,200		11,100	7,700	6,200

Working Notes:

1. Calculation of interest on drawings:

A’s drawings = 6,000 + 2,000 (for life insurance premium)

= 8,000

Interest on drawings = `"Total drawings" xx "Rate"/100 xx "Average period"/12`

= `8000 xx 10/100 xx 6/12`

= 30

Interest on drawings of B = `"Total drawings" xx "Rate"/100 xx "Average period"/12`

= `4000 xx 10/100 xx 6/12`

= 200

Interest on drawings of C = `"Total drawings" xx "Rate"/100 xx "Average period"/12`

= `4000 xx 10/100 xx 6/12`

= 200

2. Calculation of net profit before appropriation:

	Amount (₹)	Amount (₹)
Net profit before adjustments		20,800
Add: Life insurance premium paid for A		2,000
		22,800
Less: Depreciation on building @ 20%		4,000
		18,800