Read the following passage and answer the questions.
A Solid Partnership
A, V and T were partners of a law firm sharing profits in the ratio of 5:3:2. Their partnership deed provided the following:
(i) Interest on partners' capital @ 5% p.a.
(ii) A guaranteed that he would earn a minimum annual fee of ₹6,00,000 for the firm.
(iii) T was guaranteed a profit of ₹2,50,000 (excluding interest on capital) and any deficiency on account of this was to be borne by A and V in the ratio of 2:3.
During the year ending March 31, 2019, A earned a fee of ₹3,20,000 and net profits earned by the firm were ₹8,60,000.
Partner's capital on April 01, 2018 were A - ₹3,00,000; V - ₹3,00,000 and T- ₹2,00,000.
What is the amount of profit to be credited to V's Capital account?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- ₹3,12,000.
A guaranteed that he would earn a minimum annual fee of ₹6,00,000 for the firm. A earned a fee of ₹3,20,000.
A's deficiency = 6,00,000 - 3,20,000
= 2,80,000
This deficiency is brought by A i.e. 2,80,000.
Net profits earned by the firm were ₹8,60,000.
PROFIT & LOSS APPROPRIATION ACCOUNT
| PARTICULARS | AMOUNT (₹) | PARTICULARS | AMOUNT (₹) |
| To Interest on Capital A's Capital A/c 15,000 V's Capital A/c 15,000 T's Capital A/c 10,000 |
40,000 | By P & L A/c (net profit) |
8,60,000 |
| To profit shared to partners A's Capital A/c 5,38,000 V's Capital A/c 3,12,000 T's Capital A/c 2,50,000 |
11,00,000 | By A's capital A/c (deficiency brought by A for annual fee) |
2,80,000 |
| 11,40,000 | 11,40,000 |
*** Partner's capital on April 01, 2018 were A - ₹3,00,000; V - ₹3,00,000 and T- ₹2,00,000. Interest on partners' capital @ 5% p.a.
Interest on Capital:
A = 3,00,000 X 5/100
= 15,000
V = 3,00,000 X 5/100
= 15,000
T = 2,00,000 X 5/100
= 10,000
*** Divisible profit = Net profit + Deficiency brought by A - Interest on capital
= 8,60,000 + 2,80,000 - 40,000
= 11,00,000
This is distributed between partners in their profit sharing ratio. A, V and T = 5:3:2.
A's share in profit = 11,00,000 x 5/10
= 5,50,000
V's share in profit = 11,00,000 x 3/10
= 3,30,000
T's share in profit = 11,00,000 x 2/10
= 2,20,000
T was guaranteed a profit of ₹2,50,000 (excluding interest on capital) and any deficiency on account of this was to be borne by A and V in the ratio of 2:3.
T's deficiency = 2,50,000 - 2,20,000
= 30,000
This 30,000 is borne by A and V in the ratio of 2:3.
A's share in deficiency = 30,000 x 2/5
= 12,000
V's share in deficiency = 30,000 x 3/5
= 18,000
So, net divisible profit is as follows-
A = 5,50,000 - 12,000
= 5,38,000
V = 3,30,000 - 18,000
= 3,12,000
T = 2,50,000
So, amount credited for profit to V's capital account is ₹3,12,000.