Question

Prem, Param and Priya were partners in a firm. Their fixed capitals were Prem ₹ 2,00,000; Param ₹ 3,00,000 and Priya ₹ 5,00,000. They were sharing profits in the ratio of their capitals. It was decided that the new profit sharing ratio will be 2 : 1 : 2 and its effect will be introduced retrospectively for the last four years. The profits of the last four years were ₹ 2,00,000; ₹ 3,50,000; ₹ 4,75,000 and ₹ 5,25,000 respectively.

Showing your calculations clearly, pass a necessary adjustment entry to give effect to the new agreement between Prem, Param and Priya.

Answer 1

Date	Particualrs	L.F.	Debit (₹)	Credit (₹)
	Param's Capital A/c   ...Dr.		1,55,000
	Priya's Capital A/c   ...Dr.		1,55,000
	To Prem's Capital A/c			3,10,000
	(Being adjustment made for retrospective change in profit-sharing ratio.)

Working note:

Old Profit Sharing Ratio = Ratio of Capitals = 2 : 3 : 5

New Profit Sharing Ratio = 2 : 1 : 2

Profit for 4 years = ₹ 2,00,000 + ₹ 3,50,000 + ₹ 4,75,000 + ₹ 5,25,000 = ₹ 15,50,000

1. Share under Old Ratio (2 : 3 : 5):

• Prem = ₹ 15,50,000 × `2/10` = ₹ 3,10,000
• Param = ₹ 15,50,000 × `3/10` = ₹ 4,65,000
• Priya = ₹ 15,50,000 × `5/10` = ₹ 7,75,000

2. Share under New Ratio (2 : 1 : 2):

• Prem = ₹ 15,50,000 × `2/5` = ₹ 6,20,000
• Param = ₹ 15,50,000 × `1/5` = ₹ 3,10,000
• Priya = ₹ 15,50,000 × `2/5` = ₹ 6,20,000

3. Adjustment:

• Prem has to receive = ₹ 6,20,000 − ₹ 3,10,000 = ₹ 3,10,000
• Param has to give = ₹4,65,000 − ₹ 3,10,000 = ₹ 1,55,000
• Priya has to give = ₹ 7,75,000 − ₹ 6,20,000 = ₹ 1,55,000