Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Working Note 1: Calculation of Divisible Profit

Working Note 1: Ascertaining the Correct Net Profit

The given profit of ₹ 1,80,000 is after deducting B's salary, which is an appropriation of profit, not a charge. So, we must add it back to find the profit before any appropriations.

Working Note 2: Calculation of Manager's Commission

Manager's commission is a charge against profit and should be debited to the Profit and Loss Account, not the P&L Appropriation Account. It is calculated on the net profit before appropriations.

Commission = 5% of ₹ 2,40,000 = ₹ 12,000

Working Note 3: Calculation of Net Profit for Appropriation

This is the profit to be transferred from the P&L Account to the P&L Appropriation Account.

Profit and Loss Appropriation Account

For the year ended March 31, 2021

Dr.Cr.

Calculation of Interest on Saloni's Capital (Product Method)

Interest on Saloni's Capital = $ \text{₹ } 26,70,000 \times \frac{8}{100} \times \frac{1}{12} = \textbf{₹ 17,800}$

Calculation of Interest on Srishti's Capital (Product Method)

Interest on Srishti's Capital = $ \text{₹ } 40,95,000 \times \frac{8}{100} \times \frac{1}{12} = \textbf{₹ 27,300}$

Step 1: Calculation of Opening Capital

Step 2: Calculation of Interest on Capital

For Josh:

Since there were no additions or withdrawals of capital for Josh, interest is calculated on his opening capital for the full year.

Interest = $ \text{₹ } 1,58,000 \times \frac{12}{100} = \textbf{₹ 18,960} $

For Krish:

Krish introduced additional capital during the year.

Interest on opening capital (₹ 60,000 for 12 months): $ \text{₹ } 60,000 \times \frac{12}{100} = \text{₹ } 7,200 $

Interest on additional capital (₹ 16,000 from Oct 1 to Mar 31, i.e., 6 months): $ \text{₹ } 16,000 \times \frac{12}{100} \times \frac{6}{12} = \text{₹ } 960 $

Total Interest for Krish = ₹ 7,200 + ₹ 960 = ₹ 8,160

(a) Deed is Silent

When the partnership deed is silent, no interest on capital will be allowed. The entire profit of ₹ 50,000 will be distributed between Anupam and Abhishek in their profit-sharing ratio of 3:2.

Anupam's Share = $ 50,000 \times \frac{3}{5} = \text{₹ } 30,000 $. Abhishek's Share = $ 50,000 \times \frac{2}{5} = \text{₹ } 20,000 $.

(b) In Case of Loss

When the firm has incurred a loss, no interest on capital will be allowed, as interest is an appropriation of profit. The loss of ₹ 10,000 will be borne by the partners in their profit-sharing ratio of 3:2.

Anupam's Share of Loss = $ 10,000 \times \frac{3}{5} = \text{₹ } 6,000 $. Abhishek's Share of Loss = $ 10,000 \times \frac{2}{5} = \text{₹ } 4,000 $.

(c) Profit is Sufficient

First, we calculate the total interest on capital due:

Interest for Anupam = $ 1,50,000 \times \frac{8}{100} = \text{₹ } 12,000 $

Interest for Abhishek = $ 2,00,000 \times \frac{8}{100} = \text{₹ } 16,000 $

Total Interest = ₹ 12,000 + ₹ 16,000 = ₹ 28,000.

Since the available profit (₹ 50,000) is more than the total interest due (₹ 28,000), the full interest will be allowed. The remaining profit of ₹ 22,000 (₹ 50,000 - ₹ 28,000) will be distributed in the 3:2 ratio.

(d) Profit is Insufficient

The total interest due is ₹ 28,000, but the available profit is only ₹ 14,000. In this case, the interest allowed will be restricted to the amount of available profit. The profit of ₹ 14,000 will be distributed between the partners in the ratio of their interest on capital, not their profit-sharing ratio.

Ratio of Interest on Capital = ₹ 12,000 : ₹ 16,000 = 12:16 or 3:4.

Interest allowed to Anupam = $ 14,000 \times \frac{3}{7} = \textbf{₹ 6,000} $.

Interest allowed to Abhishek = $ 14,000 \times \frac{4}{7} = \textbf{₹ 8,000} $.

Total annual drawings in cases (a) and (b) = ₹ 3,000 × 12 = ₹ 36,000.

(a) Drawings at the Beginning of Each Month

Average Period = 6.5 months.

Interest on Drawings = $ \text{₹ } 36,000 \times \frac{9}{100} \times \frac{6.5}{12} = \textbf{₹ 1,755} $.

(b) Drawings at the End of Each Month

Average Period = 5.5 months.

Interest on Drawings = $ \text{₹ } 36,000 \times \frac{9}{100} \times \frac{5.5}{12} = \textbf{₹ 1,485} $.

(c) Varying Amounts (Product Method)

Interest on Drawings = $ \text{Total of Products} \times \frac{\text{Rate}}{100} \times \frac{1}{12} $

Interest on Drawings = $ \text{₹ } 2,34,000 \times \frac{9}{100} \times \frac{1}{12} = \textbf{₹ 1,755} $.

Calculation of Interest on Harry's Drawings

Interest on Harry's Drawings = $ \text{₹ } 1,56,000 \times \frac{10}{100} \times \frac{1}{12} = \textbf{₹ 1,300} $

Calculation of Interest on Ali's Drawings

Interest on Ali's Drawings = $ \text{₹ } 1,49,000 \times \frac{10}{100} \times \frac{1}{12} = \textbf{₹ 1,242 (approx.)} $

Profit and Loss Appropriation Account

for the year ended March 31, 2015

Dr.Cr.

Working Notes:

1. Calculation of New Profit Sharing Ratio: Rahul's Share = $1/4$. Remaining Share = $1 - 1/4 = 3/4$. This is divided between Mohit and Rohan in their old ratio of 2:1. Mohit's New Share = $ \frac{3}{4} \times \frac{2}{3} = \frac{2}{4} $. Rohan's New Share = $ \frac{3}{4} \times \frac{1}{3} = \frac{1}{4} $. The new ratio is 2:1:1.

2. Initial Distribution of Profit ($\text{₹} \ 1,60,000$) in 2:1:1 ratio:

   • Mohit's Share = $\text{₹} \ 1,60,000 \times \frac{2}{4} = \text{₹} \ 80,000$
   • Rohan's Share = $\text{₹} \ 1,60,000 \times \frac{1}{4} = \text{₹} \ 40,000$
   • Rahul's Share = $\text{₹} \ 1,60,000 \times \frac{1}{4} = \text{₹} \ 40,000$

3. Calculation of Deficiency: Rahul's Guaranteed Profit = $\text{₹} \ 50,000$. Rahul's Actual Share = $\text{₹} \ 40,000$. Deficiency = $\text{₹} \ 50,000 - \text{₹} \ 40,000 = \textbf{$\text{₹} \ 10,000$}$.

4. Distribution of Deficiency: The deficiency of $\text{₹} \ 10,000$ will be borne by Mohit and Rohan in their mutual profit-sharing ratio of 2:1.

   • Borne by Mohit = $\text{₹} \ 10,000 \times \frac{2}{3} = \text{₹} \ 6,667$
   • Borne by Rohan = $\text{₹} \ 10,000 \times \frac{1}{3} = \text{₹} \ 3,333$

Profit and Loss Appropriation Account

for the year ended March 31, 2015

Dr.Cr.

Working Notes:

1. Divisible Profit after Interest on Capital: Divisible Profit = $\text{₹} \ 1,50,000$ (Net Profit) - $\text{₹} \ 60,000$ (Total Interest) = $\text{₹} \ 90,000$.

2. Initial Distribution of Profit ($\text{₹} \ 90,000$) in 3:2:1 ratio:

   • John's Share = $\text{₹} \ 90,000 \times \frac{3}{6} = \text{₹} \ 45,000$
   • Mathew's Share = $\text{₹} \ 90,000 \times \frac{2}{6} = \text{₹} \ 30,000$
   • Mohanty's Share = $\text{₹} \ 90,000 \times \frac{1}{6} = \text{₹} \ 15,000$

3. Calculation of Deficiency: Mohanty's Guaranteed Profit = $\text{₹} \ 30,000$. Mohanty's Actual Share = $\text{₹} \ 15,000$. Deficiency = $\text{₹} \ 30,000 - \text{₹} \ 15,000 = \textbf{$\text{₹} \ 15,000$}$.

4. Distribution of Deficiency: The guarantee was given personally by John. Therefore, the entire deficiency of $\text{₹} \ 15,000$ will be borne by John alone.

Profit and Loss Appropriation Account

for the year ended March 31, 2021

Dr.Cr.

Working Notes:

1. Calculation of New Profit Sharing Ratio: Diya's Share = $1/8$. Remaining Share = $1 - 1/8 = 7/8$. This is divided between Piya and Riya in their old ratio of 5:3.

   • Piya's New Share = $ \frac{7}{8} \times \frac{5}{8} = \frac{35}{64} $
   • Riya's New Share = $ \frac{7}{8} \times \frac{3}{8} = \frac{21}{64} $
   • Diya's Share = $ \frac{1}{8} = \frac{8}{64} $
   The new ratio is 35:21:8.

2. Initial Distribution of Profit ($\text{₹} \ 4,00,000$) in 35:21:8 ratio:

   • Piya's Share = $\text{₹} \ 4,00,000 \times \frac{35}{64} = \text{₹} \ 2,18,750$
   • Riya's Share = $\text{₹} \ 4,00,000 \times \frac{21}{64} = \text{₹} \ 1,31,250$
   • Diya's Share = $\text{₹} \ 4,00,000 \times \frac{8}{64} = \text{₹} \ 50,000$

3. Calculation of Deficiency: Diya's Guaranteed Profit = $\text{₹} \ 75,000$. Diya's Actual Share = $\text{₹} \ 50,000$. Deficiency = $\text{₹} \ 75,000 - \text{₹} \ 50,000 = \textbf{$\text{₹} \ 25,000$}$.

4. Distribution of Deficiency: The deficiency is to be borne by Piya and Riya in the specifically agreed ratio of 3:2.

   • Borne by Piya = $\text{₹} \ 25,000 \times \frac{3}{5} = \text{₹} \ 15,000$
   • Borne by Riya = $\text{P} \ 25,000 \times \frac{2}{5} = \text{₹} \ 10,000$

Calculation of Omissions:

• Interest on Rameez's Capital = 6% of $\text{₹} \ 50,000 = \text{₹} \ 3,000$
• Interest on Zaheer's Capital = 6% of $\text{₹} \ 1,00,000 = \text{₹} \ 6,000$
• Total Interest Omitted = $\text{₹} \ 3,000 + \text{₹} \ 6,000 = \text{₹} \ 9,000$

This omission means the firm's profit was overstated by $\text{₹} \ 9,000$, and this amount was wrongly distributed equally between the partners ($\text{₹} \ 4,500$ each) instead of being paid as interest on capital.

Table Showing Adjustment

Explanation: Rameez should have received $\text{₹} \ 3,000$ as interest but was wrongly credited with $\text{₹} \ 4,500$ as profit. He received $\text{₹} \ 1,500$ in excess (Debit). Zaheer should have received $\text{₹} \ 6,000$ as interest but was only credited with $\text{₹} \ 4,500$ as profit. He received $\text{₹} \ 1,500$ short (Credit).

Adjustment Journal Entry

Journal

Step 1: Calculation of Opening Capital

Interest on capital is calculated on opening capital. Since closing capitals are given, we must calculate the opening capitals first.

Step 2: Calculation of Omitted Items

(a) Interest on Capital @ 5% p.a. (on Opening Capital)

• P: 5% of $\text{₹} \ 30,000 = \text{₹} \ 1,500$
• Q: 5% of $\text{₹} \ 17,500 = \text{₹} \ 875$
• R: 5% of $\text{₹} \ 4,500 = \text{₹} \ 225$
• Total Interest on Capital = $\text{₹} \ 2,600$

(b) Interest on Drawings @ 6% p.a. (for an average period of 6 months)

• P: $\text{₹} \ 10,000 \times \frac{6}{100} \times \frac{6}{12} = \text{₹} \ 300$
• Q: $\text{₹} \ 7,500 \times \frac{6}{100} \times \frac{6}{12} = \text{₹} \ 225$
• R: $\text{₹} \ 4,500 \times \frac{6}{100} \times \frac{6}{12} = \text{₹} \ 135$
• Total Interest on Drawings = $\text{₹} \ 660$

Step 3: Table Showing Adjustment

Working Note 1: Calculation of Correct Divisible Profit
Profit already distributed: $\text{₹} \ 60,000$.
Net effect of adjustments on profit = Interest on Drawings - Interest on Capital = $\text{₹} \ 660 - \text{₹} \ 2,600 = \text{₹} \ 1,940$ (Loss)
Correct Divisible Profit = $\text{₹} \ 60,000 - \text{₹} \ 1,940 = \text{₹} \ 58,060$.
This is distributed in the 3:2:1 ratio.

Step 4: Adjustment Journal Entry

Journal

In the absence of a partnership agreement (or if the agreement is silent), the provisions of the Indian Partnership Act, 1932 will apply. Based on these provisions, the validity of the claims is as follows:

(i) Not Valid.

Reason: According to the Indian Partnership Act, 1932, no partner is entitled to receive any salary or remuneration for taking part in the conduct of the business unless it is explicitly provided for in the partnership deed. Since the agreement is silent, Mohan's claim for a salary is not valid, even though he is an active partner.

(ii) Not Valid.

Reason: As per the Act, a partner is entitled to receive interest on a loan advanced to the firm at a rate of 6% per annum if the partnership deed is silent. Shyam's claim for interest is valid, but his claim for a 10% rate is not. He is only entitled to interest @ 6% p.a.

(iii) Valid.

Reason: The Act specifies that in the absence of any agreement, the profits and losses of the firm are to be shared equally by all partners, irrespective of their capital contribution. Therefore, Mohan’s claim for an equal share in profits is valid.

(iv) Not Valid.

Reason: The Indian Partnership Act, 1932, states that no interest shall be paid on the capital contributed by the partners if the partnership deed does not have a specific clause for it. Since the agreement is silent, Shyam's claim for interest on his capital is not valid.

(i) TRUE.

Reason: A partnership is formed by an agreement. The Indian Partnership Act, 1932, does not mandate that the agreement must be in writing. An oral agreement is equally valid, although a written agreement (Partnership Deed) is always advisable to avoid future disputes.

(ii) TRUE.

Reason: This statement describes the principle of Mutual Agency, which is a cardinal feature of a partnership. Every partner acts as an agent when dealing with third parties on behalf of the firm and is bound by the actions of other partners. Simultaneously, each partner is a principal who is bound by the acts of the other partners.

(iii) TRUE.

Reason: While the Indian Partnership Act, 1932, does not prescribe a maximum limit, Section 464 of the Companies Act, 2013, empowers the government to set the maximum number of partners, which is currently prescribed as 50 under Rule 10 of the Companies (Miscellaneous) Rules, 2014.

(iv) FALSE.

Reason: A Partnership Deed is a comprehensive legal document that outlines the terms and conditions of the partnership. It can, and ideally should, include clauses regarding the methods for settling disputes, such as through arbitration, to ensure smooth functioning of the business.

(v) FALSE.

Reason: The Indian Partnership Act, 1932, has no provision for charging interest on drawings if the partnership deed is silent on the matter. Therefore, no interest will be charged.

(vi) FALSE.

Reason: If the partnership deed is silent, the Act provides for interest on a partner's loan to the firm at the rate of 6% per annum, not 12%.

Working Notes:

1. Calculation of Appropriations:

• Soumya's Salary: $\textsf{₹ } \ 500 \ \times \ 12 = \textsf{₹ } \ 6,000$

• Bimal's Commission: $\textsf{₹ } \ 40,000$ (given)

• Interest on Capital:

  • Soumya: $6\% \ \text{of} \ \textsf{₹ } \ 3,00,000 = \textsf{₹ } \ 18,000$

  • Bimal: $6\% \ \text{of} \ \textsf{₹ } \ 2,00,000 = \textsf{₹ } \ 12,000$

  • Total = $\textsf{₹ } \ 30,000$

• Total Interest on Drawings: $\textsf{₹ } \ 750 + \textsf{₹ } \ 250 = \textsf{₹ } \ 1,000$

2. Calculation of Divisible Profit:

3. Distribution of Profit (Ratio 3:2):

• Soumya's Share: $\textsf{₹ } \ 1,74,000 \ \times \ \frac{3}{5} = \textsf{₹ } \ 1,04,400$

• Bimal's Share: $\textsf{₹ } \ 1,74,000 \ \times \ \frac{2}{5} = \textsf{₹ } \ 69,600$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

Partners’ Current Accounts

Dr.Cr.

Working Notes:

1. Calculation of Appropriations:

• Soniya's Salary: $\textsf{₹ } \ 10,000 \ \times \ 12 = \textsf{₹ } \ 1,20,000$

• Charu's Commission: $\textsf{₹ } \ 50,000$

• Interest on Capital:

  • Soniya: $6\% \ \text{of} \ \textsf{₹ } \ 5,00,000 = \textsf{₹ } \ 30,000$

  • Charu: $6\% \ \text{of} \ \textsf{₹ } \ 4,00,000 = \textsf{₹ } \ 24,000$

  • Smita: $6\% \ \text{of} \ \textsf{₹ } \ 3,00,000 = \textsf{₹ } \ 18,000$

• Total Interest on Drawings: $\textsf{₹ } \ 2,700 + \textsf{₹ } \ 1,800 + \textsf{₹ } \ 900 = \textsf{₹ } \ 5,400$

2. Calculation and Distribution of Divisible Profit:

• Profit available for distribution = $\textsf{₹ } \ 3,56,600 + \textsf{₹ } \ 5,400 = \textsf{₹ } \ 3,62,000$

• Total Appropriations = $\textsf{₹ } \ 1,20,000 \text{(Salary)} + \textsf{₹ } \ 50,000 \text{(Commission)} + \textsf{₹ } \ 72,000 \text{(IoC)} = \textsf{₹ } \ 2,42,000$

• Divisible Profit = $\textsf{₹ } \ 3,62,000 - \textsf{₹ } \ 2,42,000 = \textsf{₹ } \ 1,20,000$

• Profit Sharing (3:2:1):

  • Soniya: $\textsf{₹ } \ 1,20,000 \ \times \ \frac{3}{6} = \textsf{₹ } \ 60,000$

  • Charu: $\textsf{₹ } \ 1,20,000 \ \times \ \frac{2}{6} = \textsf{₹ } \ 40,000$

  • Smita: $\textsf{₹ } \ 1,20,000 \ \times \ \frac{1}{6} = \textsf{₹ } \ 20,000$

(i) Journal Entries

(ii) Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

(iii) Partners’ Capital Accounts

Dr.Cr.

Since there is no partnership agreement, the provisions of the Indian Partnership Act, 1932 will be applicable to settle the disputes. The correct position for each issue is as follows:

Analysis of Raju's Claims

(i) He should be given interest at 10% p.a. on capital and so also on loan.

Position: This claim is partially valid.

• Interest on Capital: The claim for interest on capital is invalid. As per the Act, no interest is payable on partners' capital if the deed is silent.

• Interest on Loan: The claim for interest on his loan is valid, but the rate of 10% p.a. is invalid. He is entitled to interest on the loan at the statutory rate of 6% per annum.

(ii) Profit should be distributed in the proportion of capitals.

Position: This claim is invalid.

Reason: The Act mandates that profits must be shared equally by all partners, irrespective of their capital contributions, if there is no agreement stating otherwise.

Analysis of Jai's Claims

(i) Net profit should be shared equally.

Position: This claim is valid.

Reason: As per the Indian Partnership Act, 1932, in the absence of a deed, profits must be distributed equally among all partners.

(ii) He should be allowed remuneration of Rs, 1,000 p.a. during the period of Raju’s illness.

Position: This claim is invalid.

Reason: The Act does not allow any salary, commission, or other remuneration to any partner for managing the business unless it is specifically provided for in the partnership agreement.

(iii) Interest on capital and loan should be given @ 6% p.a.

Position: This claim is partially valid.

• Interest on Capital: The claim for interest on capital is invalid. The Act does not permit interest on capital.

• Interest on Loan: The claim for interest on the loan at 6% p.a. is valid, as this is the rate prescribed by the Act.

Final Settlement of Profit

The profit will be distributed as follows:

This divisible profit of $\textsf{₹ } \ 44,600$ will be shared equally:

• Raju's Share of Profit = $\textsf{₹ } \ 44,600 \div 2 = \textsf{₹ } \ 22,300$

• Jai's Share of Profit = $\textsf{₹ } \ 44,600 \div 2 = \textsf{₹ } \ 22,300$

To determine the share of profit for each partner, we first need to calculate the correct Net Profit by treating rent to a partner as a 'charge against profit'. Then, we will prepare the Profit and Loss Appropriation Account to distribute the profits.

Working Notes:

1. Calculation of Net Profit:

Rent paid to a partner for the use of their property is a charge against profit and must be debited to the Profit and Loss Account.

2. Calculation of Interest on Capital:

• Reena: $6\% \ \text{of} \ \textsf{₹ } \ 3,00,000 = \textsf{₹ } \ 18,000$

• Raman: $6\% \ \text{of} \ \textsf{₹ } \ 1,00,000 = \textsf{₹ } \ 6,000$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

After all necessary appropriations, the share of profit for each partner is:

• Reena's Share of Profit = $\textsf{₹ } \ 33,750$

• Raman's Share of Profit = $\textsf{₹ } \ 33,750$

Interest on capital is calculated on the amount of capital that has been used in the business during the accounting period. Since there are withdrawals from capital, the capital balance has changed during the year. Therefore, interest needs to be calculated on a time basis.

Assumption: As the date of withdrawal from capital is not specified in the question, it is assumed that the withdrawals were made in the middle of the accounting year, i.e., on October 01, 2019 (after 6 months).

Calculation of Interest on Rani’s Capital

Rani's capital was $\textsf{₹ } \ 80,000$ for the first 6 months and $\textsf{₹ } \ 70,000$ ($\textsf{₹ } \ 80,000 - \textsf{₹ } \ 10,000$) for the remaining 6 months.

Interest on $\textsf{₹ } \ 80,000$ for 6 months:

$\textsf{₹ } \ 80,000 \ \times \ \frac{12}{100} \ \times \ \frac{6}{12} = \textsf{₹ } \ 4,800$

Interest on $\textsf{₹ } \ 70,000$ for 6 months:

$\textsf{₹ } \ 70,000 \ \times \ \frac{12}{100} \ \times \ \frac{6}{12} = \textsf{₹ } \ 4,200$

Total Interest on Rani's Capital = $\textsf{₹ } \ 4,800 \ + \ \textsf{₹ } \ 4,200 = \textbf{\textsf{₹ } \ 9,000}$

Calculation of Interest on Suman’s Capital

Suman's capital was $\textsf{₹ } \ 60,000$ for the first 6 months and $\textsf{₹ } \ 45,000$ ($\textsf{₹ } \ 60,000 - \textsf{₹ } \ 15,000$) for the remaining 6 months.

Interest on $\textsf{₹ } \ 60,000$ for 6 months:

$\textsf{₹ } \ 60,000 \ \times \ \frac{12}{100} \ \times \ \frac{6}{12} = \textsf{₹ } \ 3,600$

Interest on $\textsf{₹ } \ 45,000$ for 6 months:

$\textsf{₹ } \ 45,000 \ \times \ \frac{12}{100} \ \times \ \frac{6}{12} = \textsf{₹ } \ 2,700$

Total Interest on Suman's Capital = $\textsf{₹ } \ 3,600 \ + \ \textsf{₹ } \ 2,700 = \textbf{\textsf{₹ } \ 6,300}$

(a) When there was no agreement for Interest on Capital

In the absence of a partnership agreement (or if the deed is silent), the provisions of the Indian Partnership Act, 1932 apply. According to the Act, no interest on capital is to be allowed to the partners.

Therefore, the entire profit of $\textsf{₹ } \ 1,26,000$ will be distributed between Priya and Kajal in their profit-sharing ratio of 5:3.

Distribution of Profit:

Priya's Share of Profit = $\textsf{₹ } \ 1,26,000 \ \times \ \frac{5}{8} = \textbf{\textsf{₹ } \ 78,750}$

Kajal's Share of Profit = $\textsf{₹ } \ 1,26,000 \ \times \ \frac{3}{8} = \textbf{\textsf{₹ } \ 47,250}$

(b) When agreement provides for Interest on Capital @ 12% p.a.

First, we need to calculate the total interest on capital payable to the partners.

Calculation of Interest on Capital:

Interest on Priya's Capital = $12\% \ \text{of} \ \textsf{₹ } \ 6,00,000 = \textsf{₹ } \ 72,000$

Interest on Kajal's Capital = $12\% \ \text{of} \ \textsf{₹ } \ 8,00,000 = \textsf{₹ } \ 96,000$

Total Interest Payable = $\textsf{₹ } \ 72,000 \ + \ \textsf{₹ } \ 96,000 = \textsf{₹ } \ 1,68,000$

Now, we compare the total interest payable with the available profit.

Available Profit = $\textsf{₹ } \ 1,26,000$

Total Interest on Capital = $\textsf{₹ } \ 1,68,000$

Here, the total amount of appropriation (Interest on Capital) is more than the available profit. In such a situation of insufficient profits, the available profit is distributed among the partners in the ratio of their appropriations (i.e., in the ratio of their interest on capital), and not in their profit-sharing ratio.

Ratio of Interest on Capital:

$\text{Priya's Interest} : \text{Kajal's Interest}$

$\textsf{₹ } \ 72,000 : \textsf{₹ } \ 96,000$

Simplifying the ratio: $72:96$, which is $3:4$.

Now, the available profit of $\textsf{₹ } \ 1,26,000$ will be distributed in the ratio of 3:4.

Distribution of Profit (as Interest on Capital):

Priya's Share = $\textsf{₹ } \ 1,26,000 \ \times \ \frac{3}{7} = \textbf{\textsf{₹ } \ 54,000}$

Kajal's Share = $\textsf{₹ } \ 1,26,000 \ \times \ \frac{4}{7} = \textbf{\textsf{₹ } \ 72,000}$

In this case, no further profit is left to be distributed, and the amount received by each partner is considered as their interest on capital, limited by the available profits.

When drawings of unequal amounts are made at irregular intervals, the interest on drawings is calculated using the Product Method. This method simplifies the calculation by finding a total product and then calculating interest on that product for one month.

Calculation of Interest on Govind's Drawings by Product Method

Now, we will calculate the interest on the total product for one month.

The formula is:

$\text{Interest on Drawings} = \text{Total Product} \ \times \ \frac{\text{Rate of Interest}}{100} \ \times \ \frac{1}{12}$

Substituting the values:

$\text{Interest on Drawings} = \textsf{₹ } \ 1,69,000 \ \times \ \frac{6}{100} \ \times \ \frac{1}{12}$

$\text{Interest on Drawings} = \textsf{₹ } \ 1,690 \ \times \ \frac{6}{12} = \textsf{₹ } \ 1,690 \ \times \ 0.5$

Interest on Drawings = $\textsf{₹ } \ 845$

When a partner withdraws a fixed amount at regular intervals, interest on drawings can be calculated using the Average Period Method. This shortcut method simplifies the calculation.

Step 1: Calculate Total Drawings

Ram withdrew $\textsf{₹ } \ 1,000$ per month for the entire year.

$\text{Total Drawings} = \textsf{₹ } \ 1,000 \ \times \ 12 = \textsf{₹ } \ 12,000$

Step 2: Calculate Average Period

Since the drawings are made on the first day of every month, the average period is calculated as follows:

$\text{Average Period} = \frac{\text{Months left after first drawing} \ + \ \text{Months left after last drawing}}{2}$

Months left after first drawing (April 01) = 12 months

Months left after last drawing (March 01) = 1 month

$\text{Average Period} = \frac{12 \ + \ 1}{2} = \frac{13}{2} = 6.5 \ \text{months}$

Step 3: Calculate Interest on Drawings

The formula for calculating interest is:

$\text{Interest on Drawings} = \text{Total Drawings} \ \times \ \frac{\text{Rate of Interest}}{100} \ \times \ \frac{\text{Average Period}}{12}$

Substituting the values:

$\text{Interest on Drawings} = \textsf{₹ } \ 12,000 \ \times \ \frac{5}{100} \ \times \ \frac{6.5}{12}$

$\text{Interest on Drawings} = \textsf{₹ } \ 600 \ \times \ \frac{6.5}{12} = \textsf{₹ } \ 50 \ \times \ 6.5$

Interest on Ram's Drawings = $\textsf{₹ } \ 325$

We will calculate the interest on drawings for both partners using the Average Period Method based on their respective withdrawal patterns.

Assumption for Verma's Drawings: Since the specific date of withdrawal for Verma is not mentioned, it is assumed that the drawings are made uniformly in the middle of every month.

Calculation of Interest on Verma's Drawings

1. Total Drawings:

$\textsf{₹ } \ 2,000 \ \text{per month} \ \times \ 12 \ \text{months} = \textsf{₹ } \ 24,000$

2. Average Period (middle of every month):

$\text{Average Period} = \frac{\text{Months left after first drawing} \ + \ \text{Months left after last drawing}}{2} = \frac{11.5 \ + \ 0.5}{2} = 6 \ \text{months}$

3. Interest Calculation:

$\text{Interest} = \textsf{₹ } \ 24,000 \ \times \ \frac{6}{100} \ \times \ \frac{6}{12} = \textsf{₹ } \ 1,440 \ \times \ \frac{1}{2}$

Interest on Verma's Drawings = $\textsf{₹ } \ 720$

Calculation of Interest on Kaul's Drawings

Kaul withdrew at the beginning of each quarter.

1. Total Drawings:

$\textsf{₹ } \ 3,000 \ \text{per quarter} \ \times \ 4 \ \text{quarters} = \textsf{₹ } \ 12,000$

2. Average Period (beginning of each quarter):

$\text{Average Period} = \frac{\text{Months left after first drawing} \ + \ \text{Months left after last drawing}}{2} = \frac{12 \ + \ 3}{2} = 7.5 \ \text{months}$

3. Interest Calculation:

$\text{Interest} = \textsf{₹ } \ 12,000 \ \times \ \frac{6}{100} \ \times \ \frac{7.5}{12} = \textsf{₹ } \ 720 \ \times \ \frac{7.5}{12} = \textsf{₹ } \ 60 \ \times \ 7.5$

Interest on Kaul's Drawings = $\textsf{₹ } \ 450$

This problem deals with the Guarantee of Profit to a new partner. The distribution of profit involves calculating each partner's initial share and then adjusting for any deficiency in the guaranteed partner's share.

Assumption: Mohan's share of profit is not explicitly stated. It is a common practice in such problems to assume a reasonable share. Let us assume Mohan is admitted for a 1/4th share of the profits.

Working Notes:

1. Calculation of New Profit Sharing Ratio:

Mohan's Share = $\frac{1}{4}$

Remaining Share for Kavita and Lalit = $1 \ - \ \frac{1}{4} = \frac{3}{4}$

This remaining share will be divided between Kavita and Lalit in their old ratio of 2:1.

Kavita's New Share = $\frac{3}{4} \ \times \ \frac{2}{3} = \frac{6}{12}$

Lalit's New Share = $\frac{3}{4} \ \times \ \frac{1}{3} = \frac{3}{12}$

Mohan's New Share = $\frac{1}{4} = \frac{3}{12}$

The New Profit Sharing Ratio is 6:3:3, which simplifies to 2:1:1.

2. Initial Distribution of Profit:

Total Firm Profit = $\textsf{₹ } \ 76,000$. This will be distributed in the new ratio of 2:1:1.

Kavita's Share = $\textsf{₹ } \ 76,000 \ \times \ \frac{2}{4} = \textsf{₹ } \ 38,000$

Lalit's Share = $\textsf{₹ } \ 76,000 \ \times \ \frac{1}{4} = \textsf{₹ } \ 19,000$

Mohan's Share = $\textsf{₹ } \ 76,000 \ \times \ \frac{1}{4} = \textsf{₹ } \ 19,000$

3. Calculation and Adjustment of Deficiency:

Mohan's Guaranteed Profit = $\textsf{₹ } \ 25,000$

Mohan's Actual Share of Profit = $\textsf{₹ } \ 19,000$

Deficiency = Guaranteed Amount - Actual Share

Deficiency = $\textsf{₹ } \ 25,000 \ - \ \textsf{₹ } \ 19,000 = \textsf{₹ } \ 6,000$

This deficiency of $\textsf{₹ } \ 6,000$ will be borne by Kavita and Lalit in their profit-sharing ratio of 2:1.

Deficiency borne by Kavita = $\textsf{₹ } \ 6,000 \ \times \ \frac{2}{3} = \textsf{₹ } \ 4,000$

Deficiency borne by Lalit = $\textsf{₹ } \ 6,000 \ \times \ \frac{1}{3} = \textsf{₹ } \ 2,000$

Final Distribution of Profit

The final profit distribution is shown below through the Profit and Loss Appropriation Account.

Profit and Loss Appropriation Account

For the year ended March 31, 2007

Dr.Cr.

The final profit distribution is:

• Kavita: $\textsf{₹ } \ 34,000$

• Lalit: $\textsf{₹ } \ 17,000$

• Mohan: $\textsf{₹ } \ 25,000$

This is a case of omission of interest on capital. The rectification will be made by passing a single adjustment entry. Since the capitals are fixed, all adjustments will be made through the partners' Current Accounts.

Working Notes:

1. Calculation of Interest on Capital (to be credited):

• Gupta's Interest = $10\% \ \text{of} \ \textsf{₹ } \ 2,00,000 = \textsf{₹ } \ 20,000$

• Sarin's Interest = $10\% \ \text{of} \ \textsf{₹ } \ 3,00,000 = \textsf{₹ } \ 30,000$

• Total Interest omitted = $\textsf{₹ } \ 50,000$

2. Impact on Profit:

Due to the omission of interest on capital (an expense), the profit of $\textsf{₹ } \ 50,000$ was wrongly distributed among the partners in their profit-sharing ratio of 3:2. This needs to be reversed.

• Profit wrongly credited to Gupta = $\textsf{₹ } \ 50,000 \ \times \ \frac{3}{5} = \textsf{₹ } \ 30,000$

• Profit wrongly credited to Sarin = $\textsf{₹ } \ 50,000 \ \times \ \frac{2}{5} = \textsf{₹ } \ 20,000$

3. Adjustment Table to find the Net Effect:

Journal Entry

This is a case where interest on capital was provided at a higher rate than was allowed. The adjustment involves reversing the excess interest credited and distributing the resulting profit. Since capitals are fixed, adjustments will be made through the partners' Current Accounts.

Working Notes:

1. Calculation of Excess Interest Credited:

The total excess interest of $\textsf{₹ } \ 2,700$ previously treated as an expense, resulted in an understatement of profit. This amount should now be distributed among the partners in their profit-sharing ratio of 3:2:1.

• Krishna's share of profit = $\textsf{₹ } \ 2,700 \times 3/6 = \textsf{₹ } \ 1,350$
• Sandeep's share of profit = $\textsf{₹ } \ 2,700 \times 2/6 = \textsf{₹ } \ 900$
• Karim's share of profit = $\textsf{₹ } \ 2,700 \times 1/6 = \textsf{₹ } \ 450$

2. Adjustment Table to find the Net Effect:

Journal Entry

Note: The years mentioned in the table (2015-16, etc.) seem inconsistent with the "three years ended March 31, 2013". We will assume the years are 2013-14, 2014-15, and 2015-16 for the purpose of this solution.

This is a case of omission of interest on capital for multiple years with varying profit-sharing ratios. An adjustment table is essential to determine the net effect. Since capitals are fixed, the final entry will be through the partners' Current Accounts.

Working Notes: Calculation of Net Adjustment

1. Total Interest on Capital Omitted (Credit):

• Interest per year = @9% on Capital
• Leela: $\textsf{₹ } \ 80,000 \times 9\% = \textsf{₹ } \ 7,200$ p.a. (Total for 3 years = $\textsf{₹ } \ 21,600$)
• Meera: $\textsf{₹ } \ 60,000 \times 9\% = \textsf{₹ } \ 5,400$ p.a. (Total for 3 years = $\textsf{₹ } \ 16,200$)
• Neha: $\textsf{₹ } \ 1,00,000 \times 9\% = \textsf{₹ } \ 9,000$ p.a. (Total for 3 years = $\textsf{₹ } \ 27,000$)
• Total Interest omitted per year = $\textsf{₹ } \ 21,600$

2. Reversal of Profit Wrongly Distributed (Debit):

The omission of interest ($\textsf{₹ } \ 21,600$ each year) meant profit was overstated by this amount. This will be debited from partners in their respective ratios for each year.

Journal Entry

A Partnership Deed, also known as the Articles of Partnership, is a written legal document that contains the terms and conditions of the partnership agreement. It is signed by all the partners and governs their mutual rights, duties, and liabilities.

It specifies all the details related to the partnership, such as the profit and loss sharing ratio, interest on capital and drawings, salaries or commissions payable to partners, and the procedures for admission, retirement, and dissolution of the firm. While not legally mandatory, it is highly desirable to have a written deed to avoid future disputes and misunderstandings among the partners.

Although an oral agreement is legally valid to form a partnership, it is highly desirable to have a written partnership agreement (Partnership Deed) for the following reasons:

• Avoids Disputes and Misunderstandings: A written deed provides clear, unambiguous terms agreed upon by all partners, which helps in preventing future conflicts regarding profit sharing, interest rates, salaries, etc.

• Serves as Legal Evidence: The Partnership Deed is a legal document and can be produced as concrete evidence in a court of law to settle any dispute among the partners.

• Governs Rights and Duties: It clearly defines the rights, duties, powers, and obligations of each partner, ensuring clarity and smooth functioning of the business.

• Provides Clarity: It provides certainty on matters where the Indian Partnership Act, 1932, would otherwise impose its default rules (like equal profit sharing). Partners can mutually agree to different terms through the deed.

• Facilitates Settlement of Accounts: It helps in the easy settlement of accounts at the time of a partner's retirement, death, or the dissolution of the firm.

(i) When Capitals are Fixed:

Under this method, two accounts are maintained for each partner: a Capital Account and a Current Account.

Partner's Capital Account

• Credited with: Initial capital introduced and any additional capital brought in.

• Debited with: Permanent withdrawal of capital.

Partner's Current Account

• Credited with: Interest on capital, salary, commission, and share of profit.

• Debited with: Drawings against profit, interest on drawings, and share of loss.

(ii) When Capitals are Fluctuating:

Under this method, only one account, the Capital Account, is maintained for each partner. All transactions related to the partner are recorded in this single account.

Partner's Capital Account

• Credited with: Opening capital, additional capital, interest on capital, salary, commission, and share of profit.

• Debited with: Drawings (against both capital and profit), interest on drawings, and share of loss.

A Profit and Loss Appropriation Account is an extension of the Profit and Loss Account and is prepared specifically by partnership firms. Its primary purpose is to show how the net profit for an accounting period is distributed or 'appropriated' among the partners according to the terms of the partnership deed.

It is prepared for the following reasons:

• To record transactions that are appropriations of profit, not charges against profit. These include interest on capital, partners' salaries, and partners' commissions.

• To record interest on partners' drawings, which is an income for the firm from the partners.

• To set aside a portion of the profits to a reserve fund.

• To ascertain the final divisible profit or loss that is to be distributed among the partners in their agreed profit-sharing ratio.

In essence, it acts as a bridge between the firm's net profit and the individual profit shares that are ultimately credited to the partners' capital or current accounts.

Under the Fixed Capital method, the capital account of a partner remains unchanged except in the following two circumstances:

1. Introduction of Additional Capital: When a partner brings in an additional amount of capital into the firm permanently, their fixed capital account is credited, thus increasing its balance.

2. Permanent Withdrawal of Capital: When a partner withdraws a part of their capital from the firm on a permanent basis (as per the agreement), their fixed capital account is debited, which reduces its balance. This is distinct from regular drawings made against anticipated profits.

When a fixed amount is withdrawn on the first day of every quarter, the interest on the total amount withdrawn is calculated for an average period of 7.5 months.

This is calculated using the formula for the average period:

$\text{Average Period} = \frac{\text{Months remaining after first drawing} \ + \ \text{Months remaining after last drawing}}{2}$

Assuming the financial year is from April 1 to March 31:

• First drawing is on April 1. Months remaining = 12

• Last drawing is on January 1. Months remaining = 3

$\text{Average Period} = \frac{12 \ + \ 3}{2} = \frac{15}{2} = 7.5 \ \text{months}$

In the absence of a Partnership Deed, or if the deed is silent on certain matters, the provisions of the Indian Partnership Act, 1932 apply. The rules are as follows:

(i) Sharing of profits and losses:

Profits and losses are to be shared equally by all partners, irrespective of their capital contribution.

(ii) Interest on partner’s capital:

No interest is to be allowed on the capital contributed by the partners.

(iii) Interest on Partner’s drawings:

No interest is to be charged on the drawings made by the partners.

(iv) Interest on Partner’s loan:

If a partner has advanced a loan to the firm, they are entitled to receive interest on it at the rate of 6% per annum.

(v) Salary to a partner:

No salary, commission, or any other remuneration is payable to any partner for taking part in the conduct of the business.

Meaning of Partnership

According to Section 4 of the Indian Partnership Act, 1932, a partnership is defined as "the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all."

In simple terms, a partnership is a form of business organisation where two or more individuals come together, contribute capital and skills, and agree to share the profits and losses of a legal business. The persons who have entered into partnership with one another are individually called ‘partners’ and collectively a ‘firm’.

Chief Characteristics of a Partnership

The essential characteristics of a partnership are derived from its definition and are as follows:

1. Two or More Persons: There must be at least two persons to form a partnership. The maximum number of partners in a firm is restricted to 50 as per Rule 10 of the Companies (Miscellaneous) Rules, 2014.

2. Agreement: A partnership is the result of an agreement (either written or oral) between two or more persons. The written agreement, known as the Partnership Deed, is always preferred as it serves as legal evidence of the terms and conditions agreed upon.

3. Existence of a Business: The agreement must be to carry on a lawful business. Co-ownership of a property does not in itself constitute a partnership. The activities must be of a business nature.

4. Profit Motive and Sharing of Profit: The fundamental objective of the business must be to earn and share profits. An agreement to share profits is essential. The sharing of losses is implied, but it is not a conclusive test of partnership, as a partner may be guaranteed against losses.

5. Mutual Agency (Business Carried on by All or Any of them Acting for All): This is the cardinal principle of partnership law. It means that each partner is both an agent and a principal. As an agent, a partner can bind the firm and all other partners by their acts done in the ordinary course of business. As a principal, each partner is bound by the acts of the other partners.

6. Unlimited Liability: The liability of each partner for the debts of the firm is unlimited. This means that if the firm's assets are insufficient to pay its liabilities, the partners' private assets can be used to settle the firm's debts. Partners are liable both jointly and severally.

If a partnership is formed without a written Partnership Deed, or if the existing deed is silent on certain matters, the provisions of the Indian Partnership Act, 1932 automatically apply. The main provisions relevant to partnership accounts are as follows:

• Sharing of Profits and Losses: Profits and losses of the firm are to be shared equally by all partners, irrespective of their capital contribution or their level of participation in the business.

• Interest on Capital: No interest on capital is payable to any partner. If a partner has contributed more capital than others, they cannot claim interest on it unless explicitly agreed upon.

• Interest on Drawings: No interest is to be charged on the amounts withdrawn by the partners from the firm for their personal use (drawings).

• Interest on Partner's Loan or Advance: If a partner has provided a loan or advance to the firm, they are entitled to receive interest at the rate of 6% per annum. It is important to note that this interest is a charge against profit, not an appropriation, and will be paid even if the firm incurs a loss.

• Remuneration to Partners: No salary, commission, or any other form of remuneration is to be given to any partner for taking part in the management or conduct of the firm’s business.

• Admission of a New Partner: A new partner cannot be admitted into the firm without the unanimous consent of all existing partners.

While an oral agreement is sufficient to create a legally valid partnership, it is always considered better and more prudent to have a written partnership agreement, known as a Partnership Deed. A written agreement is desirable for the following reasons:

• Avoids Misunderstandings and Disputes: Human memory is fallible. A written document provides a clear and unambiguous record of the terms agreed upon by all partners. This helps prevent future conflicts regarding crucial matters like profit sharing, interest rates, salaries, and the roles of each partner.

• Serves as Legal Evidence: In case of a dispute among partners that cannot be resolved amicably, the Partnership Deed serves as a legally enforceable document. It can be produced as evidence in a court of law, making the resolution process simpler and based on the agreed terms.

• Governs Rights, Duties, and Liabilities: A written deed clearly defines the rights, duties, powers, and obligations of each partner. This ensures that every partner is aware of their responsibilities and the extent of their authority, which promotes smooth business operations.

• Provides Clarity on Financial Matters: It specifies important accounting policies, such as the profit-sharing ratio, rates of interest on capital and drawings, and the method of valuation of goodwill. This avoids reliance on the default provisions of the Indian Partnership Act, 1932, allowing partners to set terms that suit their specific business needs.

• Facilitates Business Operations: Financial institutions like banks often require a copy of the Partnership Deed when the firm applies for loans or opens a bank account. A written agreement adds credibility and simplifies such official procedures.

Interest on drawings is charged by the firm only if it is explicitly provided for in the Partnership Deed. The calculation depends on whether the drawings are made at regular or irregular intervals.

Case 1: When drawings are made at Irregular Intervals (Product Method)

When partners withdraw different amounts at different dates, the Product Method is used. The interest is calculated on the total product for one month.

Steps:

1. For each withdrawal, calculate the period (in months) from the date of withdrawal to the end of the accounting year.

2. Calculate the product for each withdrawal by multiplying the amount by its respective period.

3. Sum up all the products to get the 'Total Product'.

4. Calculate interest on the Total Product for one month using the formula:

$\text{Interest on Drawings} = \text{Total Product} \ \times \ \frac{\text{Rate}}{100} \ \times \ \frac{1}{12}$

Illustration: A partner withdraws $\textsf{₹ } \ 10,000$ on June 30 and $\textsf{₹ } \ 5,000$ on Nov 30. Interest is @6% p.a. Year ends on March 31.

Interest = $\textsf{₹ } \ 1,10,000 \ \times \ \frac{6}{100} \ \times \ \frac{1}{12} = \textsf{₹ } \ 550$

Case 2: When drawings are made at Regular Intervals (Average Period Method)

When a partner withdraws a fixed amount at fixed intervals, the Average Period Method is used.

$\text{Interest on Drawings} = \text{Total Drawings} \ \times \ \frac{\text{Rate}}{100} \ \times \ \frac{\text{Average Period}}{12}$

The Average Period depends on the timing of withdrawal:

(a) Fixed amount withdrawn monthly for 12 months:

• Beginning of every month: Average Period = 6.5 months

• Middle of every month: Average Period = 6 months

• End of every month: Average Period = 5.5 months

Illustration: A partner withdraws $\textsf{₹ } \ 2,000$ at the beginning of every month. Interest is @6% p.a.

Total Drawings = $\textsf{₹ } \ 2,000 \ \times \ 12 = \textsf{₹ } \ 24,000$

Interest = $\textsf{₹ } \ 24,000 \ \times \ \frac{6}{100} \ \times \ \frac{6.5}{12} = \textsf{₹ } \ 780$

(b) Fixed amount withdrawn quarterly:

• Beginning of every quarter: Average Period = 7.5 months

• Middle of every quarter: Average Period = 6 months

• End of every quarter: Average Period = 4.5 months

Illustration: A partner withdraws $\textsf{₹ } \ 5,000$ at the end of every quarter. Interest is @6% p.a.

Total Drawings = $\textsf{₹ } \ 5,000 \ \times \ 4 = \textsf{₹ } \ 20,000$

Interest = $\textsf{₹ } \ 20,000 \ \times \ \frac{6}{100} \ \times \ \frac{4.5}{12} = \textsf{₹ } \ 450$

A change in the profit-sharing ratio among existing partners is a form of reconstitution of the partnership firm. It requires certain accounting adjustments to ensure that no partner gains or loses unfairly due to the change. The key adjustments are related to goodwill, accumulated profits/reserves, and the revaluation of assets and liabilities.

Let's illustrate with an example: A and B are partners sharing profits in the ratio 3:2. They decide to share future profits equally (1:1).

Step 1: Calculate Sacrificing and Gaining Ratio

This is the first and most crucial step to determine which partner is giving up a share (sacrificing) and which one is gaining.

Formula: $\text{Sacrifice/(Gain)} = \text{Old Ratio} - \text{New Ratio}$

A's Sacrifice = $\frac{3}{5} - \frac{1}{2} = \frac{6 - 5}{10} = \frac{1}{10}$ (Sacrifice)

B's Gain = $\frac{2}{5} - \frac{1}{2} = \frac{4 - 5}{10} = -\frac{1}{10}$ (Gain)

Here, A is the sacrificing partner and B is the gaining partner.

Step 2: Accounting for Goodwill

The gaining partner must compensate the sacrificing partner for the share of goodwill acquired. The adjustment is made through the partners' capital accounts.

Illustration: Assume the firm's goodwill is valued at $\textsf{₹ } \ 50,000$.

Amount to be compensated = Goodwill $\times$ Gaining/Sacrificing Share = $\textsf{₹ } \ 50,000 \times \frac{1}{10} = \textsf{₹ } \ 5,000$.

B (gaining partner) will pay $\textsf{₹ } \ 5,000$ to A (sacrificing partner).

Journal Entry

Step 3: Accounting for Accumulated Profits, Reserves, and Losses

These items belong to the partners in their old profit-sharing ratio. They should be distributed before the new ratio becomes effective.

Illustration: The Balance Sheet has a General Reserve of $\textsf{₹ } \ 20,000$.

A's Share = $\textsf{₹ } \ 20,000 \times \frac{3}{5} = \textsf{₹ } \ 12,000$

B's Share = $\textsf{₹ } \ 20,000 \times \frac{2}{5} = \textsf{₹ } \ 8,000$

Journal Entry

Step 4: Revaluation of Assets and Reassessment of Liabilities

A Revaluation Account is prepared to record the increase or decrease in the value of assets and liabilities. The resulting profit or loss is distributed among the partners in their old profit-sharing ratio.

Illustration: Land (Book Value $\textsf{₹ } \ 1,00,000$) is revalued at $\textsf{₹ } \ 1,50,000$. This results in a revaluation profit of $\textsf{₹ } \ 50,000$.

Revaluation Account

Dr.Cr.

These adjustments ensure that any past efforts reflected in goodwill, reserves, or asset values are fairly settled before the partners begin sharing profits in their new ratio.

When the capitals of partners are fixed, it means that the original capital contributions remain unchanged unless additional capital is introduced or capital is withdrawn permanently as per the agreement. All adjustments related to salary, interest on capital, drawings, interest on drawings, and share of profit/loss are recorded in a separate account called the Partner's Current Account.

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

Partners’ Current Accounts

Dr.Cr.

When the capitals of partners are fluctuating, it implies that all adjustments such as interest on capital, salary, drawings, interest on drawings, and share of profits/losses are recorded directly in the Partners' Capital Accounts. This causes the capital account balance to change or 'fluctuate' from year to year.

Profit and Loss Appropriation Account

For the year ended ...

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

In the absence of a partnership deed, the provisions of the Indian Partnership Act, 1932 are applicable to settle the dispute. The provisions are as follows:

• Profit Sharing Ratio: Profits and losses are to be shared equally among partners, irrespective of their capital contribution.
• Interest on Capital: No interest on capital is payable to any partner.
• Interest on Drawings: No interest is to be charged on the drawings made by the partners.
• Salary or Remuneration: No partner is entitled to any salary or remuneration for taking part in the business operations.
• Interest on Loan by a Partner: If a partner has provided a loan to the firm, they are entitled to receive interest on it @ 6% per annum. This interest is a charge against profit and must be paid even if the firm incurs a loss.

Settlement of the Dispute:

Based on the above provisions:

Claims of Harshad:

(i) His claim for 10% interest on capital and loan is not accepted. He is entitled to interest on his loan of $\textsf{₹ }$ 1,00,000 only at the rate of 6% p.a., not 10%. No interest on capital will be allowed.

(ii) His claim for profit distribution in the capital ratio is not accepted. The profit will be distributed equally.

Claims of Dhiman:

(i) His claim for equal distribution of profit is accepted.

(ii) His claim for remuneration of $\textsf{₹ }$ 2,000 p.m. is not accepted.

(iii) His claim for 6% interest on loan is accepted, but the claim for 6% interest on capital is not accepted.

Calculation of Net Profit for Distribution:

Interest on Harshad's Loan is a charge against profit. It should be debited to the Profit and Loss Account.

Interest on Loan = $\textsf{₹ } 1,00,000 \times \frac{6}{100} \times \frac{6}{12} \text{ (from Oct 01, 2019 to Mar 31, 2020)} = \textsf{₹ } 3,000$

Net Profit available for distribution = Total Profit - Interest on Loan

$= \textsf{₹ } 1,80,000 - \textsf{₹ } 3,000 = \textsf{₹ } 1,77,000$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Since Aakriti and Bindu do not have a Partnership Agreement, the provisions of the Indian Partnership Act, 1932 will apply to determine the distribution of profits. The key provisions applicable here are:

• Interest on Partner's Loan: A partner is entitled to interest @ 6% per annum on the loan advanced to the firm. This is treated as a charge against profits.
• Interest on Capital: No partner is entitled to any interest on their capital contribution.
• Profit Sharing: Profits must be shared equally between the partners.

Application to the current problem:

1. Aakriti will receive interest on her loan of $\textsf{₹ }$ 20,000 at 6% p.a. from the date the loan was given (October 01, 2019).

2. No interest will be provided on the capitals of $\textsf{₹ }$ 5,00,000 and $\textsf{₹ }$ 3,00,000.

3. The remaining profit, after paying interest on Aakriti's loan, will be divided equally between Aakriti and Bindu.

Calculation of Profit for Distribution:

Interest on Aakriti's Loan = $\textsf{₹ } 20,000 \times \frac{6}{100} \times \frac{6}{12} \text{ (for 6 months)} = \textsf{₹ } 600$

Profit available for appropriation = Profit as per P&L A/c - Interest on Loan

$= \textsf{₹ } 43,000 - \textsf{₹ } 600 = \textsf{₹ } 42,400$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

A key point in this question is that salary and interest on capital are to be treated as a 'charge on profit'. This means these items must be paid to the partners regardless of whether the firm has earned sufficient profit or has incurred a loss. They are treated similar to expenses like rent or interest on loan and are debited to the Profit and Loss Account (or P&L Appropriation Account, showing a loss if appropriations exceed profit).

Calculations for Appropriations:

1. Salary to Shikha: $ \textsf{₹ } 5,000 \text{ per month} \times 12 = \textsf{₹ } 60,000$

2. Interest on Capital:

- Rakhi: $10\% \text{ of } \textsf{₹ } 2,00,000 = \textsf{₹ } 20,000$

- Shikha: $10\% \text{ of } \textsf{₹ } 3,00,000 = \textsf{₹ } 30,000$

- Total Interest = $ \textsf{₹ } 50,000$

3. Total Appropriations (treated as charge): $ \textsf{₹ } 60,000 + \textsf{₹ } 50,000 = \textsf{₹ } 1,10,000$

4. Net Loss Calculation: Total Appropriations - Available Profit = $\textsf{₹ } 1,10,000 - \textsf{₹ } 23,200 = \textsf{₹ } 86,800$ (Loss)

5. Profit Sharing Ratio (Capital Ratio): $\textsf{₹ } 2,00,000 : \textsf{₹ } 3,00,000 \implies 2:3$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

Manager's commission is a charge against profit and should be calculated on the net profit before any appropriations to partners (like salary or interest on capital).

Calculation of Profit and Commission:

1. Profit before Azad's Salary: The given profit of $\textsf{₹ }$ 12,500 is after deducting Azad's salary. To find the profit before any appropriations, we must add back the salary.

Profit before Salary = $\textsf{₹ } 12,500 + \textsf{₹ } 2,500 = \textsf{₹ } 15,000$

2. Manager's Commission: This is calculated on the profit of $\textsf{₹ }$ 15,000.

Commission = $5\% \text{ of } \textsf{₹ } 15,000 = \textsf{₹ } 750$

3. Net Profit for Appropriation: This is the profit remaining after deducting the manager's commission.

Net Profit = $\textsf{₹ } 15,000 - \textsf{₹ } 750 = \textsf{₹ } 14,250$

Profit and Loss Appropriation Account

For the year ended ...

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

The Profit and Loss Appropriation Account is prepared to show the distribution of net profit among the partners as per the partnership deed. All calculations for salary, commission, interest on capital, and interest on drawings will be performed as per the agreement.

Working Notes for Calculations:

1. Maneesh's Salary: $ \textsf{₹ } 400 \times 12 = \textsf{₹ } 4,800$

2. Girish's Commission: It is 10% of net profit *after* Maneesh's salary.

Profit for commission = Net Profit - Maneesh's Salary = $ \textsf{₹ } 40,000 - \textsf{₹ } 4,800 = \textsf{₹ } 35,200$

Commission = $10\% \text{ of } \textsf{₹ } 35,200 = \textsf{₹ } 3,520$

3. Interest on Capital:

- Maneesh: $7\% \text{ of } \textsf{₹ } 1,00,000 = \textsf{₹ } 7,000$

- Girish: $7\% \text{ of } \textsf{₹ } 80,000 = \textsf{₹ } 5,600$

4. Interest on Drawings:

- Maneesh: $5\% \text{ of } \textsf{₹ } 16,000 = \textsf{₹ } 800$

- Girish: $5\% \text{ of } \textsf{₹ } 14,000 = \textsf{₹ } 700$

Profit and Loss Appropriation Account

For the year ended March 31, 2019

Dr.Cr.

This problem involves a Guarantee of Profit to a partner. Here, George is guaranteed a minimum profit of $\textsf{₹ }$ 10,000. First, we will calculate his actual share of profit. If it is less than the guaranteed amount, the deficiency will be borne by the other partners, Ram and Raj, in their mutual profit-sharing ratio, which is 5:3.

Working Notes:

1. Calculation of Initial Profit Shares (Ratio 5:3:2):

- Ram's Share: $ \textsf{₹ } 40,000 \times \frac{5}{10} = \textsf{₹ } 20,000$

- Raj's Share: $ \textsf{₹ } 40,000 \times \frac{3}{10} = \textsf{₹ } 12,000$

- George's Share: $ \textsf{₹ } 40,000 \times \frac{2}{10} = \textsf{₹ } 8,000$

2. Calculation of Deficiency in George's Share:

- Guaranteed Profit: $\textsf{₹ }$ 10,000

- Actual Profit: $\textsf{₹ }$ 8,000

- Deficiency: $\textsf{₹ } 10,000 - \textsf{₹ } 8,000 = \textsf{₹ } 2,000$

3. Distribution of Deficiency (borne by Ram and Raj in 5:3 ratio):

- Borne by Ram: $ \textsf{₹ } 2,000 \times \frac{5}{8} = \textsf{₹ } 1,250$

- Borne by Raj: $ \textsf{₹ } 2,000 \times \frac{3}{8} = \textsf{₹ } 750$

Profit and Loss Appropriation Account

For the year ended ... 2013

Dr.Cr.

This problem deals with a Guarantee of Profit where the deficiency is borne by a specific partner (Babita). We need to prepare the Profit and Loss Appropriation Account for two separate years.

Case 1: For the year ended March 31, 2016 (Profit = $\textsf{₹ }$ 40,000)

1. Initial Profit Shares (Ratio 2:2:1):

- Amann's Share: $ \textsf{₹ } 40,000 \times \frac{2}{5} = \textsf{₹ } 16,000$

- Babita's Share: $ \textsf{₹ } 40,000 \times \frac{2}{5} = \textsf{₹ } 16,000$

- Suresh's Share: $ \textsf{₹ } 40,000 \times \frac{1}{5} = \textsf{₹ } 8,000$

2. Deficiency in Suresh's Share: $ \textsf{₹ } 10,000 \text{ (Guaranteed)} - \textsf{₹ } 8,000 \text{ (Actual)} = \textsf{₹ } 2,000$. This will be borne by Babita.

Profit and Loss Appropriation Account

For the year ended March 31, 2016

Dr.Cr.

Case 2: For the year ended March 31, 2017 (Profit = $\textsf{₹ }$ 60,000)

1. Initial Profit Shares (Ratio 2:2:1):

- Amann's Share: $ \textsf{₹ } 60,000 \times \frac{2}{5} = \textsf{₹ } 24,000$

- Babita's Share: $ \textsf{₹ } 60,000 \times \frac{2}{5} = \textsf{₹ } 24,000$

- Suresh's Share: $ \textsf{₹ } 60,000 \times \frac{1}{5} = \textsf{₹ } 12,000$

2. Deficiency in Suresh's Share: Since Suresh's actual share ($\textsf{₹ }$ 12,000) is more than his guaranteed share ($\textsf{₹ }$ 10,000), there is no deficiency. The profit will be distributed in the normal ratio.

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

Since the firm maintains both Capital and Current accounts, it follows the Fixed Capital Method. All appropriations of profit will be recorded through the Partners' Current Accounts.

Working Notes for Calculations:

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Partners’ Current Accounts

Dr.Cr.

In a partnership, when the firm incurs a net loss, appropriations such as Interest on Capital and Salary to partners are generally not provided. This is because appropriations are distributions of profit, and there is no profit to distribute. These items are provided only if the partnership deed explicitly states that they are to be treated as a 'charge' against profit.

However, Interest on Drawings is an income for the firm and must still be charged from the partners. This reduces the total loss to be distributed.

Calculations:

1. Interest on Drawings (assuming average period of 6 months):

- Arvind: $\textsf{₹ } 40,000 \times 6\% \times 6/12 = \textsf{₹ } 1,200$

- Anand: $\textsf{₹ } 28,000 \times 6\% \times 6/12 = \textsf{₹ } 840$

2. Total Loss for Distribution:

Total Loss = Net Loss - Interest on Drawings = $\textsf{₹ } 32,400 - (\textsf{₹ } 1,200 + \textsf{₹ } 840) = \textsf{₹ } 32,400 - \textsf{₹ } 2,040 = \textsf{₹ } 30,360$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

First, we determine the profit-sharing ratio based on the partners' capital contributions. Then, we prepare the Profit and Loss Appropriation Account to distribute the profit as per the partnership deed. Finally, the fluctuating Capital Accounts will be prepared by posting all transactions to a single capital account for each partner.

Working Notes:

1. Profit Sharing Ratio: Capital Ratio = $\textsf{₹ }80,000 : \textsf{₹ }60,000 \implies 8:6 \implies 4:3$

2. Interest on Capital:

- Ramesh: $12\% \text{ of } \textsf{₹ } 80,000 = \textsf{₹ } 9,600$

- Suresh: $12\% \text{ of } \textsf{₹ } 60,000 = \textsf{₹ } 7,200$

3. Partners' Salaries:

- Ramesh: $\textsf{₹ } 2,000 \times 12 = \textsf{₹ } 24,000$

- Suresh: $\textsf{₹ } 3,000 \times 12 = \textsf{₹ } 36,000$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

First, we need to determine the correct net profit to be shown in the P&L Appropriation Account. The given profit of $\textsf{₹ }$ 9,500 is after deducting Vanita's salary. For the appropriation account, we need the profit before this salary.

Working Notes:

1. Vanita's Salary: $\textsf{₹ } 600 \times 12 = \textsf{₹ } 7,200$

2. Net Profit before Salary: $\textsf{₹ } 9,500 \text{ (Profit after salary)} + \textsf{₹ } 7,200 \text{ (Vanita's salary)} = \textsf{₹ } 16,700$

3. Interest on Capital (5%):

- Sukesh: $5\% \text{ of } \textsf{₹ } 40,000 = \textsf{₹ } 2,000$

- Vanita: $5\% \text{ of } \textsf{₹ } 40,000 = \textsf{₹ } 2,000$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

Partners’ Current Accounts

Dr.Cr.

The question specifically asks only for the calculation of interest on capital for each partner. The information about profits, drawings, and the profit-sharing ratio is not required for this particular calculation.

The interest on capital is calculated by applying the given interest rate (5% p.a.) to the opening capital of each partner for the full year, as there are no additions or withdrawals of capital during the year.

Computation of Interest on Capital

To calculate the interest on capital, we need to consider the amount of capital and the period for which it was used in the business. Since the capital changed during the year, we will calculate interest on the opening capital for the first 6 months (April to September) and on the revised capital for the next 6 months (October to March).

Computation of Interest on Capital

1. For Sunflower:

• Interest for the first 6 months (Apr 01 to Sep 30, 2019) on $\textsf{₹ }$ 2,50,000:

$= \textsf{₹ } 2,50,000 \times 10\% \times \frac{6}{12} = \textsf{₹ } 12,500$

• Interest for the next 6 months (Oct 01, 2019 to Mar 31, 2020) on $\textsf{₹ }$ 2,00,000:

$= \textsf{₹ } 2,00,000 \times 10\% \times \frac{6}{12} = \textsf{₹ } 10,000$

• Total Interest for Sunflower = $\textsf{₹ } 12,500 + \textsf{₹ } 10,000 = \textsf{₹ } 22,500$

2. For Pink Rose:

• Interest for the first 6 months (Apr 01 to Sep 30, 2019) on $\textsf{₹ }$ 1,50,000:

$= \textsf{₹ } 1,50,000 \times 10\% \times \frac{6}{12} = \textsf{₹ } 7,500$

• Interest for the next 6 months (Oct 01, 2019 to Mar 31, 2020) on $\textsf{₹ }$ 2,00,000:

$= \textsf{₹ } 2,00,000 \times 10\% \times \frac{6}{12} = \textsf{₹ } 10,000$

• Total Interest for Pink Rose = $\textsf{₹ } 7,500 + \textsf{₹ } 10,000 = \textsf{₹ } 17,500$

The final calculation can be presented in a table as follows:

Interest on capital is always calculated on the opening capital of the partners. In this problem, we are given the closing capitals. Therefore, we must first calculate the opening capitals by reversing the adjustments made during the year.

Since the profit sharing ratio is not given, it is assumed to be equal (1:1:1) as per the Indian Partnership Act, 1932.

Step 1: Distribution of Profit

Profit of $\textsf{₹ }$ 1,50,000 would have been distributed equally:

Share of Profit for each partner = $\textsf{₹ } 1,50,000 \div 3 = \textsf{₹ } 50,000$

Step 2: Calculation of Opening Capital

The formula to find opening capital from closing capital is:

Opening Capital = Closing Capital + Drawings - Share of Profit

Step 3: Calculation of Interest on Capital

Now, we can calculate the interest on the opening capitals @ 10% p.a.

• Mountain: $10\% \text{ of } \textsf{₹ } 3,70,000 = \textsf{₹ } 37,000$
• Hill: $10\% \text{ of } \textsf{₹ } 2,65,000 = \textsf{₹ } 26,500$
• Rock: $10\% \text{ of } \textsf{₹ } 1,60,000 = \textsf{₹ } 16,000$

This firm maintains the Fixed Capital Method, which is evident from the presence of both Capital and Current accounts in the Balance Sheet. Under the fixed capital method, the capital of the partners remains constant throughout the year unless there is a permanent addition or withdrawal of capital.

Interest on capital is calculated on the opening capital balances. Since the capitals are fixed, the closing capital balances (given in the Balance Sheet) are the same as the opening capital balances for the year, assuming no permanent additions or withdrawals occurred.

The information about drawings, profits, and current account balances is not relevant for calculating interest on fixed capitals.

Computation of Interest on Capital

When drawings of unequal amounts are made at irregular intervals, the interest on drawings is calculated using the Product Method. This method simplifies the calculation by finding the total of the products of the amount of each drawing and the period for which it was withdrawn.

Steps for Product Method:

1. For each withdrawal, calculate the number of months from the date of withdrawal to the end of the accounting year (March 31, 2020).
2. Multiply the amount of each drawing by its corresponding period (in months) to get the 'Product'.
3. Sum up all the products to get the 'Total Product'.
4. Calculate the interest for one month on the Total Product at the given rate.

Formula: Interest on Drawings = $ \text{Total Product} \times \frac{\text{Rate of Interest}}{100} \times \frac{1}{12} $

Calculation of Interest on Drawings (Product Method)

Now, we apply the formula:

Interest on Drawings = $ \textsf{₹ } 3,06,000 \times \frac{9}{100} \times \frac{1}{12} $

Interest on Drawings = $ \textsf{₹ } 2,295 $

1. Calculation of Interest on Drawings:

When a fixed amount is withdrawn every month, we use the average period method.

• Moli (Beginning of every month): Average Period = $\frac{\text{Months left after first drawing} + \text{Months left after last drawing}}{2} = \frac{12+1}{2} = 6.5$ months.

Total Drawings = $\textsf{₹ } 1,000 \times 12 = \textsf{₹ } 12,000$

Interest = $\textsf{₹ } 12,000 \times 12\% \times \frac{6.5}{12} = \textsf{₹ } 780$

• Golu (End of every month): Average Period = $\frac{11+0}{2} = 5.5$ months.

Total Drawings = $\textsf{₹ } 1,000 \times 12 = \textsf{₹ } 12,000$

Interest = $\textsf{₹ } 12,000 \times 12\% \times \frac{5.5}{12} = \textsf{₹ } 660$

2. Calculation of Profit for Appropriation:

Interest on Golu's loan is a charge against profit. As per the Partnership Act, 1932, it will be calculated @ 6% p.a. since no other rate is specified.

Interest on Loan = $\textsf{₹ } 10,000 \times 6\% \times \frac{8}{12} \text{ (from Aug 01 to Mar 31)} = \textsf{₹ } 400$

Net Profit for Appropriation = $\textsf{₹ } 20,950 - \textsf{₹ } 400 = \textsf{₹ } 20,550$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Partners’ Capital Accounts

Dr.Cr.

We need to calculate interest on drawings for both partners. Rakesh's drawings are irregular, so we will use the Product Method. Roshan's drawings are regular (fixed amount at the beginning of each month), so we will use the Average Period Method.

1. Interest on Rakesh's Drawings (Product Method):

Interest = $ \text{Total Product} \times \frac{\text{Rate}}{100} \times \frac{1}{12} = \textsf{₹ } 25,300 \times 6\% \times \frac{1}{12} = \textbf{\textsf{₹ }126.50}$

2. Interest on Roshan's Drawings (Average Period Method):

Roshan withdraws $\textsf{₹ }$ 400 at the beginning of each month.

Total Drawings = $\textsf{₹ } 400 \times 12 = \textsf{₹ } 4,800$

Average Period = $\frac{\text{Months left after first drawing} + \text{Months left after last drawing}}{2} = \frac{12+1}{2} = 6.5$ months.

Interest = $ \text{Total Drawings} \times \frac{\text{Rate}}{100} \times \frac{\text{Average Period}}{12} $

Interest = $\textsf{₹ } 4,800 \times 6\% \times \frac{6.5}{12} = \textbf{\textsf{₹ }156}$

Since Himanshu withdraws a fixed amount ($\textsf{₹ }$ 2,500) at a regular interval (end of each month), we can use the Average Period Method to calculate the interest on his drawings.

Step 1: Calculate Total Drawings

Total Drawings = Monthly Drawing Amount $\times$ 12

$= \textsf{₹ } 2,500 \times 12 = \textsf{₹ } 30,000$

Step 2: Calculate Average Period

For withdrawals at the end of every month:

Average Period = $\frac{\text{Months left after first drawing} + \text{Months left after last drawing}}{2}$

$= \frac{11 + 0}{2} = 5.5$ months

Step 3: Calculate Interest on Drawings

The formula is:

Interest on Drawings = $ \text{Total Drawings} \times \frac{\text{Rate of Interest}}{100} \times \frac{\text{Average Period}}{12} $

$= \textsf{₹ } 30,000 \times \frac{12}{100} \times \frac{5.5}{12}$

$= \textsf{₹ } 30,000 \times \frac{1}{100} \times 5.5$

$= \textsf{₹ } 1,650$

Thus, the total interest on Himanshu's drawings for the year is $\textsf{₹ }$ 1,650.

When a partner withdraws a fixed amount at regular intervals, the interest on drawings can be calculated using the Average Period Method. This simplifies the calculation by determining an average time period for which the amounts were withdrawn.

Step 1: Calculate Total Drawings

Total Drawings = Monthly Drawing Amount $\times$ 12

$= \textsf{₹ } 3,000 \times 12 = \textsf{₹ } 36,000$

Step 2: Calculate Average Period

For withdrawals made at the beginning of every month:

Average Period = $\frac{\text{Time left after first drawing (months)} + \text{Time left after last drawing (months)}}{2}$

$= \frac{12 + 1}{2} = 6.5$ months

Step 3: Calculate Interest on Drawings

The formula for interest calculation is:

Interest on Drawings = $ \text{Total Drawings} \times \frac{\text{Rate of Interest}}{100} \times \frac{\text{Average Period}}{12} $

$= \textsf{₹ } 36,000 \times \frac{10}{100} \times \frac{6.5}{12}$

$= \textsf{₹ } 3,600 \times \frac{6.5}{12}$

$= \textsf{₹ } 1,950$

Therefore, the total interest on Bharam's drawings for the year is $\textsf{₹ }$ 1,950.

When the capital of partners changes during the year, interest on capital is calculated on a pro-rata basis. We calculate the interest for the period before the change on the old capital and for the period after the change on the new capital, and then sum them up.

Computation of Interest on Capital

1. For Raj:

• Period 1 (Apr 01 to Jun 30, 2019 = 3 months) on $\textsf{₹ }$ 2,50,000:

$= \textsf{₹ } 2,50,000 \times 8\% \times \frac{3}{12} = \textsf{₹ } 5,000$

• Period 2 (Jul 01, 2019 to Mar 31, 2020 = 9 months) on $\textsf{₹ }$ 1,00,000:

$= \textsf{₹ } 1,00,000 \times 8\% \times \frac{9}{12} = \textsf{₹ } 6,000$

• Total Interest for Raj = $\textsf{₹ } 5,000 + \textsf{₹ } 6,000 = \textsf{₹ } 11,000$

2. For Neeraj:

• Period 1 (Apr 01 to Jun 30, 2019 = 3 months) on $\textsf{₹ }$ 1,50,000:

$= \textsf{₹ } 1,50,000 \times 8\% \times \frac{3}{12} = \textsf{₹ } 3,000$

• Period 2 (Jul 01, 2019 to Mar 31, 2020 = 9 months) on $\textsf{₹ }$ 1,00,000:

$= \textsf{₹ } 1,00,000 \times 8\% \times \frac{9}{12} = \textsf{₹ } 6,000$

• Total Interest for Neeraj = $\textsf{₹ } 3,000 + \textsf{₹ } 6,000 = \textsf{₹ } 9,000$

When the total amount of drawings for the year is given without the specific dates of withdrawal, and it is assumed that the drawings were made "evenly, throughout the year", interest is calculated on the total drawings for an average period of 6 months.

The formula to be used is:

Interest on Drawings = $ \text{Total Drawings} \times \frac{\text{Rate of Interest}}{100} \times \frac{6}{12} $

Calculation for each partner:

1. Interest on Amit's Drawings:

Total Drawings = $\textsf{₹ }$ 24,000

Interest = $\textsf{₹ } 24,000 \times \frac{10}{100} \times \frac{6}{12}$

$= \textsf{₹ } 2,400 \times \frac{1}{2} = \textsf{₹ } 1,200$

2. Interest on Bhola's Drawings:

Total Drawings = $\textsf{₹ }$ 16,000

Interest = $\textsf{₹ } 16,000 \times \frac{10}{100} \times \frac{6}{12}$

$= \textsf{₹ } 1,600 \times \frac{1}{2} = \textsf{₹ } 800$

The interest on drawings to be charged will be $\textsf{₹ }$ 1,200 for Amit and $\textsf{₹ }$ 800 for Bhola.

When drawings of unequal amounts are made at irregular intervals, the interest is calculated using the Product Method. This involves calculating the 'product' for each withdrawal (Amount × Period) and then applying the interest rate for one month on the total product.

Formula: Interest on Drawings = $ \text{Total of Products} \times \frac{\text{Rate of Interest}}{100} \times \frac{1}{12} $

Calculation of Interest on Drawings (Product Method)

Now, we apply the formula with the rate of $7.5\%$:

Interest on Drawings = $ \textsf{₹ } 1,72,000 \times \frac{7.5}{100} \times \frac{1}{12} $

$ = \textsf{₹ } 1,075 $

The total interest to be charged on Harish's drawings is $\textsf{₹ }$ 1,075.

The interest on drawings for Menon will be calculated using the Average Period Method for all three scenarios. First, we calculate the total annual drawings.

Total Annual Drawings = $\textsf{₹ } 2,000 \times 12 = \textsf{₹ } 24,000$

The interest rate is 10% p.a. Now we calculate the interest for each case by changing the average period.

Case (i): In the beginning of every month

Average Period = $\frac{12 + 1}{2} = 6.5$ months

Interest on Drawings = $ \textsf{₹ } 24,000 \times \frac{10}{100} \times \frac{6.5}{12} = \textbf{\textsf{₹ }1,300}$

Case (ii): In the middle of every month

Average Period = $\frac{11.5 + 0.5}{2} = 6$ months

Interest on Drawings = $ \textsf{₹ } 24,000 \times \frac{10}{100} \times \frac{6}{12} = \textbf{\textsf{₹ }1,200}$

Case (iii): At the end of every month

Average Period = $\frac{11 + 0}{2} = 5.5$ months

Interest on Drawings = $ \textsf{₹ } 24,000 \times \frac{10}{100} \times \frac{5.5}{12} = \textbf{\textsf{₹ }1,100}$

To calculate the omitted interest on capital, we first need to determine the opening capital of each partner as interest is always calculated on the opening balance. We can find this by reversing the adjustments made to the capital accounts during the year from their closing balances.

Step 1: Distribution of Profit

The profit of $\textsf{₹ }$ 36,000 was distributed in the ratio 3:2:1.

• Ram's Share: $\textsf{₹ } 36,000 \times \frac{3}{6} = \textsf{₹ } 18,000$
• Shyam's Share: $\textsf{₹ } 36,000 \times \frac{2}{6} = \textsf{₹ } 12,000$
• Mohan's Share: $\textsf{₹ } 36,000 \times \frac{1}{6} = \textsf{₹ } 6,000$

Step 2: Calculation of Opening Capital

Step 3: Calculation of Interest on Capital

Now, we calculate the interest on the opening capitals @ 5% p.a.

• Ram: $5\% \text{ of } \textsf{₹ } 9,600 = \textbf{\textsf{₹ } 480}$
• Shyam: $5\% \text{ of } \textsf{₹ } 10,500 = \textbf{\textsf{₹ } 525}$
• Mohan: $5\% \text{ of } \textsf{₹ } 8,700 = \textbf{\textsf{₹ } 435}$

This problem involves a Guarantee of Minimum Profit to a partner, Samiksha. Any deficiency in her share will be borne by the other partners, Amit and Sumit, in their mutual profit-sharing ratio (3:2).

Working Notes:

1. Initial Distribution of Profit (Ratio 3:2:1):

- Amit's Share: $ \textsf{₹ } 36,000 \times \frac{3}{6} = \textsf{₹ } 18,000$

- Sumit's Share: $ \textsf{₹ } 36,000 \times \frac{2}{6} = \textsf{₹ } 12,000$

- Samiksha's Share: $ \textsf{₹ } 36,000 \times \frac{1}{6} = \textsf{₹ } 6,000$

2. Calculation of Deficiency:

Samiksha's guaranteed profit is $\textsf{₹ }$ 8,000, but her actual share is only $\textsf{₹ }$ 6,000.

Deficiency = Guaranteed Profit - Actual Profit = $\textsf{₹ } 8,000 - \textsf{₹ } 6,000 = \textsf{₹ } 2,000$

3. Deficiency Borne by Amit and Sumit (in their ratio 3:2):

- Borne by Amit: $ \textsf{₹ } 2,000 \times \frac{3}{5} = \textsf{₹ } 1,200$

- Borne by Sumit: $ \textsf{₹ } 2,000 \times \frac{2}{5} = \textsf{₹ } 800$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

The first step is to calculate the profit distribution and determine the deficiency in Kaku's guaranteed share. The deficiency will then be borne by Pinki and Deepti equally (in a 1:1 ratio).

Working Notes:

1. Initial Distribution of Profit ($\textsf{₹ }$ 40,000 in the ratio 5:4:1):

• Pinki's Share = $\textsf{₹ } 40,000 \times \frac{5}{10} = \textsf{₹ } 20,000$
• Deepti's Share = $\textsf{₹ } 40,000 \times \frac{4}{10} = \textsf{₹ } 16,000$
• Kaku's Share = $\textsf{₹ } 40,000 \times \frac{1}{10} = \textsf{₹ } 4,000$

2. Calculation of Deficiency:

Kaku's guaranteed share is $\textsf{₹ }$ 5,000, but his actual share is $\textsf{₹ }$ 4,000.

Deficiency = Guaranteed Profit - Actual Profit = $\textsf{₹ } 5,000 - \textsf{₹ } 4,000 = \textsf{₹ } 1,000$

3. Deficiency Borne by Pinki and Deepti (equally):

• Borne by Pinki = $\textsf{₹ } 1,000 \times \frac{1}{2} = \textsf{₹ } 500$
• Borne by Deepti = $\textsf{₹ } 1,000 \times \frac{1}{2} = \textsf{₹ } 500$

4. Final Profit Distribution:

• Pinki = $\textsf{₹ } 20,000 - \textsf{₹ } 500 = \textsf{₹ } 19,500$
• Deepti = $\textsf{₹ } 16,000 - \textsf{₹ } 500 = \textsf{₹ } 15,500$
• Kaku = $\textsf{₹ } 4,000 + \textsf{₹ } 1,000 = \textsf{₹ } 5,000$

Journal Entries

For the year ended March 31, 2016

Total Profit = $\textsf{₹ }$ 40,000. Kusum is guaranteed $\textsf{₹ }$ 10,000. Deficiency is borne by Siddharth only.

Initial Share of Profit: Kusum = $\textsf{₹ } 40,000 \times \frac{2}{10} = \textsf{₹ } 8,000$.

Deficiency = $\textsf{₹ } 10,000 - \textsf{₹ } 8,000 = \textsf{₹ } 2,000$. This is borne entirely by Siddharth.

Profit and Loss Appropriation Account

For the year ended March 31, 2016

Dr.Cr.

For the year ended March 31, 2017

Total Profit = $\textsf{₹ }$ 60,000. Kusum is guaranteed $\textsf{₹ }$ 10,000.

Initial Share of Profit: Kusum = $\textsf{₹ } 60,000 \times \frac{2}{10} = \textsf{₹ } 12,000$.

Since Kusum's actual share ($\textsf{₹ }$ 12,000) is more than her guaranteed amount ($\textsf{₹ }$ 10,000), there is no deficiency. The profits will be distributed in the normal ratio of 5:3:2.

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

First, we will calculate the initial profit shares and then determine the deficiency to Fatima, which will be borne by Radha and Mary in the specified ratio of 3:2.

Working Notes:

1. Initial Distribution of Profit ($\textsf{₹ }$ 35,000 in the ratio 5:4:1):

• Radha's Share = $\textsf{₹ } 35,000 \times \frac{5}{10} = \textsf{₹ } 17,500$
• Mary's Share = $\textsf{₹ } 35,000 \times \frac{4}{10} = \textsf{₹ } 14,000$
• Fatima's Share = $\textsf{₹ } 35,000 \times \frac{1}{10} = \textsf{₹ } 3,500$

2. Calculation of Deficiency:

Fatima's guaranteed share is $\textsf{₹ }$ 5,000. Her actual share is $\textsf{₹ }$ 3,500.

Deficiency = $\textsf{₹ } 5,000 - \textsf{₹ } 3,500 = \textsf{₹ } 1,500$

3. Deficiency Borne by Radha and Mary (in ratio 3:2):

• Borne by Radha = $\textsf{₹ } 1,500 \times \frac{3}{5} = \textsf{₹ } 900$
• Borne by Mary = $\textsf{₹ } 1,500 \times \frac{2}{5} = \textsf{₹ } 600$

4. Final Profit Distribution:

• Radha = $\textsf{₹ } 17,500 - \textsf{₹ } 900 = \textsf{₹ } 16,600$
• Mary = $\textsf{₹ } 14,000 - \textsf{₹ } 600 = \textsf{₹ } 13,400$
• Fatima = $\textsf{₹ } 3,500 + \textsf{₹ } 1,500 = \textsf{₹ } 5,000$

Journal Entry

First, we calculate the initial profit shares. Any deficiency in Z's guaranteed share will be borne by X and Y in their mutual profit-sharing ratio, which is 3:2.

Working Notes:

1. Initial Distribution of Profit ($\textsf{₹ }$ 30,000 in the ratio 3:2:1):

• X's Share = $\textsf{₹ } 30,000 \times \frac{3}{6} = \textsf{₹ } 15,000$
• Y's Share = $\textsf{₹ } 30,000 \times \frac{2}{6} = \textsf{₹ } 10,000$
• Z's Share = $\textsf{₹ } 30,000 \times \frac{1}{6} = \textsf{₹ } 5,000$

2. Calculation of Deficiency:

Z's guaranteed share is $\textsf{₹ }$ 8,000, but his actual share is only $\textsf{₹ }$ 5,000.

Deficiency = $\textsf{₹ } 8,000 - \textsf{₹ } 5,000 = \textsf{₹ } 3,000$

3. Deficiency Borne by X and Y (in ratio 3:2):

• Borne by X = $\textsf{₹ } 3,000 \times \frac{3}{5} = \textsf{₹ } 1,800$
• Borne by Y = $\textsf{₹ } 3,000 \times \frac{2}{5} = \textsf{₹ } 1,200$

Profit and Loss Appropriation Account

For the year ended March 31, 2020

Dr.Cr.

Case (i): When Profit is $\textsf{₹ }$ 2,50,000

1. Initial Profit Share (Ratio 2:2:1): Chintu's Share = $\textsf{₹ } 2,50,000 \times \frac{1}{5} = \textsf{₹ } 50,000$.

2. Deficiency: Guaranteed Profit ($\textsf{₹ }$ 60,000) - Actual Profit ($\textsf{₹ }$ 50,000) = $\textsf{₹ }$ 10,000. This deficiency is to be borne by Arun only.

Profit and Loss Appropriation Account

For the year ended ... 2020

Dr.Cr.

Case (ii): When Profit is $\textsf{₹ }$ 3,60,000

1. Initial Profit Share (Ratio 2:2:1): Chintu's Share = $\textsf{₹ } 3,60,000 \times \frac{1}{5} = \textsf{₹ } 72,000$.

2. Deficiency: Since Chintu's actual share ($\textsf{₹ }$ 72,000) is more than his guaranteed amount ($\textsf{₹ }$ 60,000), there is no deficiency. The profit is distributed in the normal ratio.

Profit and Loss Appropriation Account

For the year ended ... 2020

Dr.Cr.

First, we calculate Cheena's initial share of profit. Any deficiency will be borne by Ashok and Brijesh in their mutual profit-sharing ratio, which is 2:2 or 1:1 (equally).

Working Notes:

1. Initial Distribution of Profit ($\textsf{₹ }$ 70,000 in the ratio 2:2:1):

• Ashok's Share = $\textsf{₹ } 70,000 \times \frac{2}{5} = \textsf{₹ } 28,000$
• Brijesh's Share = $\textsf{₹ } 70,000 \times \frac{2}{5} = \textsf{₹ } 28,000$
• Cheena's Share = $\textsf{₹ } 70,000 \times \frac{1}{5} = \textsf{₹ } 14,000$

2. Calculation of Deficiency:

Deficiency = Guaranteed Profit ($\textsf{₹ }$ 20,000) - Actual Profit ($\textsf{₹ }$ 14,000) = $\textsf{₹ }$ 6,000

3. Deficiency Borne by Ashok and Brijesh (equally):

• Borne by Ashok = $\textsf{₹ } 6,000 \times \frac{1}{2} = \textsf{₹ } 3,000$
• Borne by Brijesh = $\textsf{₹ } 6,000 \times \frac{1}{2} = \textsf{₹ } 3,000$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

This problem requires multiple steps: first, providing for interest on capital, then distributing the remaining profit, and finally, adjusting for the guarantee given to Sohan.

Working Notes:

1. Calculation of Interest on Capital (@ 10% p.a.):

• Ram: $10\% \text{ of } \textsf{₹ } 5,00,000 = \textsf{₹ } 50,000$
• Mohan: $10\% \text{ of } \textsf{₹ } 2,50,000 = \textsf{₹ } 25,000$
• Sohan: $10\% \text{ of } \textsf{₹ } 2,00,000 = \textsf{₹ } 20,000$
• Total Interest on Capital = $\textsf{₹ } 95,000$

2. Calculation of Divisible Profit:

Divisible Profit = Net Profit - Total Interest on Capital = $\textsf{₹ } 2,00,000 - \textsf{₹ } 95,000 = \textsf{₹ } 1,05,000$

3. Initial Distribution of Divisible Profit (Ratio 1/2 : 1/3 : 1/6 or 3:2:1):

• Ram's Share: $\textsf{₹ } 1,05,000 \times \frac{1}{2} = \textsf{₹ } 52,500$
• Mohan's Share: $\textsf{₹ } 1,05,000 \times \frac{1}{3} = \textsf{₹ } 35,000$
• Sohan's Share: $\textsf{₹ } 1,05,000 \times \frac{1}{6} = \textsf{₹ } 17,500$

4. Calculation of Deficiency for Sohan:

Deficiency = Guaranteed Profit ($\textsf{₹ }$ 25,000) - Actual Profit ($\textsf{₹ }$ 17,500) = $\textsf{₹ }$ 7,500

5. Deficiency Borne by Ram and Mohan (in their mutual ratio 3:2):

• Borne by Ram = $\textsf{₹ } 7,500 \times \frac{3}{5} = \textsf{₹ } 4,500$
• Borne by Mohan = $\textsf{₹ } 7,500 \times \frac{2}{5} = \textsf{₹ } 3,000$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

This problem involves two guarantees: one given by the firm to a partner (Sona), and another given by a partner to the firm (Babita). We need to address both.

Step 1: Adjust profit for Babita's guarantee to the firm.

Babita guaranteed to earn a fee of $\textsf{₹ }$ 25,000 but only earned $\textsf{₹ }$ 16,000. The deficiency must be paid by Babita to the firm, which increases the distributable profit.

Deficiency = Guaranteed Fee - Actual Fee = $\textsf{₹ } 25,000 - \textsf{₹ } 16,000 = \textsf{₹ } 9,000$.

Adjusted Net Profit for distribution = Initial Profit + Deficiency borne by Babita = $\textsf{₹ } 75,000 + \textsf{₹ } 9,000 = \textsf{₹ } 84,000$.

Step 2: Check Sona's guarantee from the firm.

Initial distribution of the adjusted profit ($\textsf{₹ }$ 84,000) in the ratio 3:2:1.

Sona's Share = $\textsf{₹ } 84,000 \times \frac{1}{6} = \textsf{₹ } 14,000$.

Deficiency = Guaranteed Profit ($\textsf{₹ }$ 15,000) - Actual Profit ($\textsf{₹ }$ 14,000) = $\textsf{₹ }$ 1,000. This will be borne by Amit and Babita in their mutual ratio of 3:2.

• Borne by Amit: $\textsf{₹ } 1,000 \times \frac{3}{5} = \textsf{₹ } 600$
• Borne by Babita: $\textsf{₹ } 1,000 \times \frac{2}{5} = \textsf{₹ } 400$

Profit and Loss Appropriation Account

For the year ended March 31, 2017

Dr.Cr.

This is a case of Past Adjustments. The profit has already been distributed incorrectly. We need to pass a single adjustment entry to rectify the errors. We will prepare an Adjustment Table to determine the net effect on each partner's account. Since the capitals are fixed, the adjustment entry will be passed through the partners' Current Accounts.

Working Notes:

1. Calculation of Interest on Capital (@ 5% p.a.):

• X: $5\% \text{ of } \textsf{₹ } 1,00,000 = \textsf{₹ } 5,000$
• Y: $5\% \text{ of } \textsf{₹ } 80,000 = \textsf{₹ } 4,000$
• Z: $5\% \text{ of } \textsf{₹ } 60,000 = \textsf{₹ } 3,000$

2. Calculation of Correct Profit/Loss for Distribution:

Adjustment Table