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Question
A, B and C were in partnership sharing profits and losses as one-half, one-fourth and one-fourth respectively. It was agreed that interest should be allowed @ 10% p.a. on Partners' Capital Accounts and charged @ 8% p.a. on their drawings.
No interest was to be allowed or charged on current accounts. The following particulars are provided:
| Partner | Capital Accounts balance on 1.1.2022 (₹) | Current Accounts balance on 1.1.2022 (₹) | Drawings for the year to 31.12.2022 (₹) | Interest on Drawings (₹) |
|---|---|---|---|---|
| A | 3,00,000 (Cr.) | 20,000 (Cr.) | 30,000 | 2,000 |
| B | 2,00,000 (Cr.) | 10,000 (Cr.) | 20,000 | 760 |
| C | 1,00,000 (Cr.) | 10,000 (Dr.) | 20,000 | 1,400 |
The accounts for the year ended 31st December, 2022 showed a net profit of ₹ 1,20,000 before taking into account interest on Partners' Capital Accounts balances and drawings. The following errors were noted:
- The rent of A's private house, amounting to ₹ 1,500 and paid on 31st December, 2022, had been included in rents charged in Profit and Loss Account.
- Repairs amounting to ₹ 20,000 had been treated as additions to machinery, depreciation on which had been charged @ 20%.
- The premium, amounting to ₹ 6,000, on B's life insurance policy, and paid on 30th June, 2022 had been included in insurance charges in the Profit and Loss Account.
C retired from the partnership on 31st December 2022. A and B agreed to continue in partnership sharing profits and losses as two-third and one-third. It was agreed to make the following adjustments:
Goodwill to be valued at ₹ 1,44,000.
The value of freehold premises to be increased by ₹ 40,000.
The provision for bad debts to be increased by ₹ 12,000.
You are required to prepare:
- The Profit and Loss Appropriation Account for the year ended 31st December, 2022, making all the necessary adjustments for the errors revealed, and
- Partners' Capital and Current Acounts for the year ended 31st December 2022 on C's retirement.
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Solution
Working Notes:
(1) Ascertainment of Net Profit
| Particulars | ₹ |
|---|---|
| Net Profit | 1,20,000 |
| Add: Rent wrongly charged to Profit & Loss A/c | 1,50,000 |
| Add: Depreciation wrongly debited in Profit & Loss A/c | 4,000 |
| Add: Premium on B's Life Insurance Policy wrongly charged in Profit & Loss A/c | 6,000 |
| 1,31,500 | |
| Less: Repairs wrongly capitalised | 20,000 |
| Adjusted Net Profit | 1,11,500 |
(2) Adjustment for B's Interest on Drawings
| Particulars | ₹ |
|---|---|
| Interest on drawings (as given) | 760 |
| Add: Interest for life insurance premium (paid by the firm @ 8% on ₹6,000 for 6 months) | 240 |
| B's interest on drawings | 1,000 |
(3)
| Dr. | Revaluation Account | Cr. | ||
|---|---|---|---|---|
| Particulars | Amount (₹) | Amount (₹) | Particulars | Amount (₹) |
| To Provision for Bad Debts A/c | 12,000 | By Freehold Premises A/c | 40,000 | |
| To Partners' Current A/cs: |
||||
| A | 14,000 | |||
| B | 7,000 | |||
| C | 7,000 | 28,000 | ||
| 40,000 | 40,000 | |||
(4) Gaining Ratio Formula: New Ratio - Old Ratio
$A = \frac{2}{3} - \frac{1}{2} = \frac{1}{6}$
$B = \frac{1}{3} - \frac{1}{4} = \frac{1}{12}$
Gaining Ratio $= \frac{1}{6} : \frac{1}{12}$ or 2 : 1
Adjustment for Goodwill:
C's share $= 1,44,000 \times \frac{1}{4} = \text{₹}36,000$
A will be debited by $36,000 \times \frac{2}{3} = \text{₹}24,000$
B will be debited by $36,000 \times \frac{1}{3} = \text{₹}12,000$
| Dr. | Profit and Loss Appropriation Account (for the year ended 31st December, 2022) |
Cr. | |||
|---|---|---|---|---|---|
| Particulars | Amount (₹) | Amount (₹) | Particulars | Amount (₹) | Amount (₹) |
| To Interest on Capital A/c |
By Net Profit (Note 1) | 1,11,500 | |||
| A | 30,000 | By Interest on Drawings A/c (Note 2) |
|||
| B | 20,000 | A | 2,000 | ||
| C | 10,000 | 60,000 | B | 1,000 | |
| To Current A/cs |
C | 1,400 | 4,440 | ||
| A | 27,950 | ||||
| B | 13,975 | ||||
| C | 13,975 | 55,900 | |||
| 1,15,900 | 1,15,900 | ||||
| Dr. | Partners' Capital Accounts | Cr. | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Date | Particulars | A (₹) | B (₹) | C (₹) | Date | Particulars | A (₹) | B (₹) | C (₹) |
| 31.12.2022 | To C's Loan A/c | — | — | 1,35,575 | 1.1.2022 | By Balance b/d | 3,00,000 | 2,00,000 | 1,00,000 |
| 31.12.2022 | To Balance c/d | 3,00,000 | 2,00,000 | — | 31.12.2022 | By C's Current A/c | — | — | 35,575 |
| 3,00,000 | 2,00,000 | 1,35,575 | 3,00,000 | 2,00,000 | 1,35,575 | ||||
| Dr. | Partners' Current Accounts | Cr. | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Date | Particulars | A (₹) | B (₹) | C (₹) | Date | Particulars | A (₹) | B (₹) | C (₹) |
| 2022 | 2022 | ||||||||
| Jan. 1 | To Balance b/d | — | — | 10,000 | Jan. 1 | By Balance b/d | 20,000 | 10,000 | — |
| Dec. 31 | To Drawings A/c | 30,000 | 20,000 | 20,000 | Dec. 31 | By Int. on Capital A/c | 30,000 | 20,000 | 10,000 |
| Dec. 31 | To Rent (Drawings) | 1,500 | — | — | Dec. 31 | By A's Current A/c | — | — | 24,000 |
| Dec. 31 | To Life Insurance Premium (Drawings) | — | 6,000 | — | Dec. 31 | By B's Current A/c | — | — | 12,000 |
| Dec. 31 | To Interest on Drawings A/c | 2,000 | 1,000 | 1,400 | Dec. 31 | By Revaluation A/c (Note 3) | 14,000 | 7,000 | 7,000 |
| Dec. 31 | To C's Current A/c | 24,000 | 12,000 | — | Dec. 31 | By P & L Appropriation A/c (Share of Profit) | 27,950 | 13,975 | 13,975 |
| Dec. 31 | To C's Capital A/c | — | — | 35,575 | |||||
| Dec. 31 | To Balance c/d | 34,450 | 11,975 | — | |||||
| 91,950 | 50,975 | 66,975 | 91,950 | 50,975 | 66,975 | ||||
