Read the following passage and answer the following question.
A, B and C are partners in a firm sharing profits and losses in ratio of 2:2:1. Their capital accounts stood at ₹30,000, ₹15,000 and ₹15,000 respectively at the starting of business on 1st April,2021. As per the oral agreement between partners, C was allowed salary of ₹250 per month and interest on capitals of all partners was allowed at the rate of 5% p.a. Net profit earned for the year is ₹18,000 which was distributed between partners equally, ignoring the interest and salary clause.
Pass the adjustment entry to rectify the error?
Answer & explanation
Correct answer: option 1
The correct answer is option 1-
B's Capital A/c Dr.. ₹450
To A's Capital A/c ₹300
To C's Capital A/c ₹150
SALARY:
C's salary = 250 x 12
= 3,000
C got credit of ₹3000 as salary.
INTEREST ON CAPITAL:
A's interest = 30,000 x 5/100
= 1,500
B's interest = 15,000 x 5/100
= 750
C's interest = 15,000 x 5/100
= 750
A, B & C got credit of ₹1,500, ₹750 & ₹750 as interest on capital. Total interest is ₹3,000.
TAKING BACK PROFIT FROM PARTNERS:
Profit already distributed equally should be taken back. So, each partner will be debited with ₹6,000. This profit share is debited to partners capital account.
NEW PROFIT OF FIRM:
Firm profit before interest and salary = 18,000.So, after adjusting salary and interest, firm's profit should be (18,000- ₹3,000 - 3,000) = 12,000. New net profit of ₹12,000 is distributed in partners in ratio of 2:2:1.
A's new profit share = 12,000 x 2/5
= ₹4,800
B's new profit share = 12,000 x 2/5
= ₹4,800
C's new profit share = 12,000 x 1/5
= ₹2,400
This new profit share is credited to partners capital account.
NET EFFECT:
A should be credited with ₹300 (6,000 debit- 1,500 credit- 4,800 credit)
B should be debited with ₹450 (6,000 debit- 750 credit- 4,800 credit)
C should be credited with ₹150 (6,000 debit- 3,000 credit- 7,50 credit- 2,400 credit)
Adjustment entry is:
B's Capital A/c Dr.. ₹450
To A's Capital A/c ₹300
To C's Capital A/c ₹150