Question

Ajay and Vinod are partners in the ratio of 3 : 2. Their fixed Capital were ₹ 3,00,000 and ₹ 4,00,000 respectively. After the close of accounts for the year it was observed that the Interest on Capital which was agreed to be provided at 5% p.a. was erroneously provided at 10% p.a. By what amount will Ajay’s account be affected if partners decide to pass an adjustment entry for the same? 

Options

• Ajay’s Current A/c will be Debited by ₹ 15,000

• Ajay’s Current A/c will be Credited by ₹ 6,000

• Ajay’s Current A/c will be Credited by ₹ 35,000

• Ajay’s Current A/c will be Debited by ₹ 20,000

Answer 1

Ajay’s Current A/c will be Credited by ₹ 6,000

Explanation:

Actual Interest Given (wrong at 10%)

• Ajay: ₹ 3,00,000 × 10% = ₹ 30,000
• Vinod: ₹ 4,00,000 × 10% = ₹ 40,000

Correct Interest (should be at 5%)

• Ajay: ₹ 3,00,000 × 5% = ₹ 15,000
• Vinod: ₹ 4,00,000 × 5% = ₹ 20,000

Excess Interest Credited by Mistake

• Ajay: ₹ 30,000 − ₹ 15,000 = ₹ 15,000 extra
• Vinod: ₹ 40,000 − ₹ 20,000 = ₹ 20,000 extra

Total Over-credited Interest = ₹ 15,000 + ₹ 20,000 = ₹ 35,000

This extra ₹ 35,000 needs to be reversed and treated as profit, so now we redistribute it in their profit-sharing ratio 3 : 2.

Redistributed Profit Share

• Ajay’s correct share = ₹ 35,000 × 3/5 = ₹ 21,000
• Vinod’s correct share = ₹ 35,000 × 2/5 = ₹ 14,000

Ajay got ₹ 15,000 extra but deserves ₹ 21,000 from reallocation → he should get ₹ 6,000 more
→ Ajay’s A/c is Credited by ₹ 6,000

Vinod got ₹ 20,000 extra but deserves only ₹ 14,000 → he got ₹ 6,000 too much
→ Vinod’s A/c is Debited by ₹ 6,000