Question

Arun and Arora were partners in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals on 1-4-2023 were: Arun ₹ 60,000 and Arora ₹ 80,000. They agreed to allow interest on capital @ 12% per annum and to charge on drawings @ 15% per annum. The profit of the firm for the year ended 31-3 2024 before all above adjustments were ₹ 12,600. The drawings made by Arun were ₹ 2,000 and by Arora ₹ 4,000 during the year. Prepare Profit and Loss Appropriation Account of Arun and Arora. Show your calculations clearly. The interest on capital will be allowed even if the firm incurs loss.

Hint:

1. Interest on capital is a charge against profit. Hence, it will be debited to Profit and Loss A/c.
2. Although P & L A/c shows a loss of ₹ 4,200 (after debiting interest on capital), P & L Appropriation A/c will be prepared in this question, because interest on drawings is to be credited to this account.

Answer 1

Profit and Loss Appropriation Account for the year ended 31st March, 2024
Dr. Particulars	₹	Cr. Particulars	₹
To Interest on Capital A/c:		By Profit & Loss A/c	12,600
Arun	7,200	By Interest on Drawings A/c:
Arora	9,600	Arun	150
		Arora	300
		By Arun's Current A/c, Share of Loss	2,344
		By Arora's Current A/c, Share of Loss	1,406
Total	16,800	Total	16,800

Working note:

1. Interest on Capital @ 12% p.a.

Arun

`₹ 60,000 xx 12/10 = ₹ 7,200`

Arora:

`₹ 80,000 xx 12/100 ​= ₹ 9,600​`

Total Interest on Capital:

₹ 7,200 + ₹ 9,600 = ₹ 16,800​

The question specifically states that interest on capital will be allowed even if the firm incurs a loss, so the full ₹ 16,800 must be allowed.

2. Interest on Drawings @ 15% p.a.

Since the dates of drawings are not given, interest is calculated for an average period of 6 months.

Arun:

`₹ 2,000 xx 15/100 xx 6/12 ​= ₹ 150​`

Arora:

`₹ 4,000 xx 15/100 xx 6/12 ​= ₹ 300​`

Total Interest on Drawings:

₹ 150 + ₹ 300 = ₹ 450​

3. Amount available for appropriation

Profit before adjustments:

₹ 12,600

Add: Interest on Drawings:

₹ 450

Therefore:

₹ 12,600 + ₹ 450 = ₹ 13,050​

Less: Interest on Capital:

₹ 16,800

This creates a deficiency/loss of:

₹ 16,800 − ₹ 13,050 = ₹ 3,750

This loss is borne by Arun and Arora in the ratio 5 : 3.

Arun's share:

`₹ 3,750 xx 5/8​ = ₹ 2,343.75`

Arora's share:

`₹ 3,750 × 3/8 ​= ₹ 1,406.25​`