Question

X, Y and Z contribute ₹ 3,00,000, ₹ 2,00,000 and ₹ 1,00,000, respectively, by way of capital, on which they agree to allow interest at 12% p.a. They share profits and losses in the ratio of 5 : 3 : 2. Profit for the year ended 31st March 2022 is ₹ 60,000 before allowing interest on capitals. Prepare a Profit and Loss Appropriation Account if:

1. partnership deed is silent as to the treatment of interest as a charge or appropriation.
2. partnership deed provides for interest even if it involves the firm in loss.

Answer 1

(i)

Dr.	Profit and Loss Appropriation Account for the year ended 31st March 2022				Cr.
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Interest on Capital A/c		60,000	By Profit and Loss A/c		60,000
X: `60,000 xx 3/6`	30,000
Y: `60,000 xx 2/6`	20,000
Z: `60,000 xx 1/6`	10,000
		60,000			60,000

Working Note:

Interest @ 12% p.a.

Interest on X’s Capital = `3,00,000 xx 12/100`

= 36,000

Interest on Y’s Capital = `2,00,000 xx 12/100`

= 24,000

Interest on Z’s Capital = `1,00,000 xx 12/100`

= 12,000

Total interest on capital = 36,000 + 24,000 + 12,000

= ₹ 72,000

When deed is silent,

Available profit = ₹ 60,000

Interest required = ₹ 72,000

Since profit is less than interest, the available profit will be distributed in the ratio of interest, i.e., 36,000 : 24,000 : 12,000 = 3 : 2 : 1.

Distribution of ₹ 60,000:

X = `60,000 xx 3/6`

= ₹ 30,000

Y = `60,000 xx 2/6`

= ₹ 20,000

Z = `60,000 xx 1/6`

= ₹ 10,000

(ii) When interest is allowed even if there is loss.

Total interest on capital = ₹ 72,000

Profit before interest = ₹ 60,000

Loss = 72,000 − 60,000

= ₹ 12,000

This loss will be shared in the profit-sharing ratio 5 : 3 : 2.

X’s share of loss = `12,000 xx 5/10`

= ₹ 6,000

Y’s share of loss = `12,000 xx 3/10`

= ₹ 3,600

Z’s share of loss = `12,000 xx 2/10`

= ₹ 2,400