$A$ and $B$ are partners sharing profits and losses in the ratio of $3 : 2$ . At the end of the year, i.e., on 31st March, 2018,(after division of the year's profit), they decided to take $C$ into partnership with effect from 1st April, 2015. As $C$ was getting annual salary of $R s . 45, 000$ , he had also advanced $R s . 3, 00, 000$ to the firm by way of a loan on which he is getting interest @ $10 %$ ,p.a. During the three financial years, firm's profits after adjusting salary to $C$ , interest on loan and interest on the capital of the partners were:
Year Ended
31st March, 2016 Profit Rs. 4,00,000
31st March, 2017 Loss Rs. 2,00,000
31st March, 2018 Profit Rs. 6,00,000
According to the new agreement, $C$ is to be given annual salary of $R s . 35, 000$ and $\frac{1}{5} t h$ share in the profits of the firm. $C^{'} s$ loan shall be treated as his capital from the beginning and similar to other partners, his capital will carry interest @ $6 %$ p.a.
Record necessary entries to give effect to the above arrangement.

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Solution

Year 2016 2017 2018
Profit/Loss 4,00,000 (2,00,000) 6,00,000
Interest on Loan 30,000 30,000 30,000
as manager
Salary as manager 45,000 45,000 45,000
Profit before 4,75,000 (1,25,000) 6,75,000
loan and salary as manager
Less:-Interest on capital
@6% (18,000) Nil (18,000)
Less:-Salary as partner (35,000) Nil (35,000)
Adjusted Profit 4,22,000 (1,25,000) 6,22,000

Notes:- Interest on capital and salary to partners are not allowed in case of loss.
Total Adjusted Profit= (4,22,000+(1,25,000)+6,22,000)
= 9,19,000
C's Total Share as a partner
Share of profit(1/5*9,19,000) = 1,83,800
Interest on capital = 36,000
Salary = 70,000
Total = 2,89,800

C's share as manager
salary = 1,35,000
Interest = 90,000
Total = 2,25,000

Credit to C to be borne by A and B in the ratio of 3:2 is (2,89,800-2,25,000)= 64,800.

Journal entry is :
C's Loan A/c Dr. 3,00,000
To C's capital A/c 3,00,000
(Being C's loan converted to Capital)

A's capital A/c Dr. 38,800
B's capital A/c Dr. 25,920
To C's capital A/c 64,800
(Being credit given to C on conversion to partner)

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Year Ended
31st March, 2016	Profit	Rs. 4,00,000
31st March, 2017	Loss	Rs. 2,00,000
31st March, 2018	Profit	Rs. 6,00,000