Question

A and B are partners sharing profits in the ratio of 2 : 1. They decided to admit C, their manager, as a partner form 1st April, 2017, giving him 1/5th share of profit. C, while a manager, was getting a salary of ₹ 50,000 p.a. plus a commission of 10% of the net profit after charging such salary and commission. It was also agreed that any excess amount which C receives as a partner (over his salary and commission) will be borne by A. Profit for the year ended 31st March, 2018 amounted to ₹ 6,44,000, before payment of salary and commission. Prepare Profit and Loss Appropriation Account.

Answer 1

Profit and Loss Appropriation Account for the year and March 31, 2018
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Profit transferred to:			Profit and Loss A/c	6,44,000
A’s Capital A/c	3,35,200
B’s Capital A/c	1,80,000
C’s Capital A/c	1,28,800	6,44,000
		6,44,000		6,44,000

Working Notes:

WN 1 Calculation of Remuneration to C as a Manager

Salary to C = Rs 50,000

Commission to C = 10% of Net Profit after Salary and Commission

Net Profit after Salary and Commission = 6,44,000 − 50,000 = Rs 5,94,000

$\mathrm{Commission}\mathrm{to}\mathrm{C}=5,94,000\times \frac{10}{110}=\mathrm{Rs}54,000$

C’s remuneration as Manager = Salary + Commission = 50,000 + 54,000 = Rs 1,04,000

WN 2 Calculation of Profit Share of C as a Partner

Profit = Rs 6,44,000
$\mathrm{C}\text{'}\mathrm{s}\mathrm{Profit}\mathrm{Share}=6,44,000\times \frac{1}{5}=1,28,800$

Part of C’s Profit Share to be borne by A = 1,28,800 − 1,04,000 = Rs 24,800

Profit available for distribution between A and B = 6,44,000 − 1,04,000 = Rs 5,40,000
$$\begin{gathered} \mathrm{A}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Profit}=5,40,000\times \frac{2}{3}=3,60,000 \\ \mathrm{B}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Profit}=5,40,000\times \frac{1}{3}=1,80,000 \end{gathered}$$

A’s Profit share after adjusting C’s deficiency = 3,60,000 − 24,800 = Rs 3,35,200