Question

Peter, Max and Som were partners in a firm sharing profits and losses in the ratio of 4 : 2 : 1. Their fixed capitals were ₹ 40,000, ₹ 30,000 and ₹ 30,000, respectively.

Som was guaranteed a profit of ₹ 39,000 by the firm.

It was decided that any loss arising because of the guarantee would be shared by Peter and Max equally.

The net profit of the firm for the year ended 31st March, 2018, was ₹ 1,47,000.

You are required to prepare the Profit and Loss Appropriation Account for the year 2017-18, showing the distribution of profits.

Answer 1

Dr.	Profit and Loss Appropriation Account for the year ending 31st March, 2018				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Profit transferred to:			By Profit and Loss A/c (Net Profit)		1,47,000
Peter’s Capital A/c	84,000	75,000
Less: Transferred to Som	9,000
Max’s Capital A/c	42,000	33,000
Less: Transferred to Som	9,000
Som’s Capital A/c	21,000	39,000
Add: Transferred from Peter	9,000
Add: Transferred from Max	9,000
		1,47,000			1,47,000

Working Note:

1. Profit share to Peter = `1,47,000 xx 4/7`

= ₹ 84,000

Profit share to Max = `1,47,000 xx 2/7`

= ₹ 42,000

Profit share to Som = `1,47,000 xx 1/7`

= ₹ 21,000

2. Som was guaranteed a profit of ₹ 39,000.

Normal Share of Som = ₹ 21,000

Guaranteed Amount = ₹ 39,000

Deficiency = Guaranteed Amount − Normal Share

= 39,000 − 21,000

= ₹ 18,000

As per the question, the deficiency arising due to the guarantee is to be borne equally by Peter and Max.

Share of Peter = `(18,000)/2`

= ₹ 9,000

Share of Max = `(18,000)/2`

= ₹ 9,000