Question

Assertion (A): A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. C is given a guarantee that his share of profit in any year will not be less than ₹ 1,00,000 and any deficiency will be met by A and B in 2 : 1. Net Profit for the year amounted to ₹ 6,00,000, and after appropriations, it was ₹ 5,10,000. A will be debited by ₹ 10,000 and B by ₹ 5,000 as shortfall in guaranteed profit to C.

Reason (R): Profit share of C will be ₹ 85,000 `(₹ 5,10,000 xx 1/6)`. Hence deficiency will be ₹ 15,000 and as such A will be debited by ₹ 10,000 `(₹ 15,000 xx 2/3)` and B will be debited by ₹ 5,000.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct, and (R) is the correct reason of (A).

• Both (A) and (R) are correct, but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct, and (R) is the correct reason of (A).

Explanation:

Profit available after appropriations = ₹ 5,10,000

Profit-sharing ratio = 3 : 2 : 1

C’s Share of Profit = `5,10,000 xx 1/6`

= ₹ 85,000

C is guaranteed a minimum of ₹ 1,00,000.

Deficiency = ₹ 1,00,000 – ₹ 85,000

= ₹ 15,000

Sharing of Deficiency A : B = 2 : 1

A’s share = `15,000 xx 2/3`

= ₹ 10,000

B’s share = `15,000 xx 1/3`

= ₹ 5,000

Thus, A will be debited by ₹ 10,000 and B by ₹ 5,000 to make good the shortfall, and C will receive the guaranteed ₹ 1,00,000.

Assertion (A) is correct because A and B bear the deficiency as given.
Reason (R) is also correct because it correctly explains the calculation of C’s deficiency and its distribution.

Therefore, both are correct, and R is the correct explanation of A.