Question

A, B and C are partners in a firm. Their profit-sharing ratio is 2 : 2 : 1. C is guaranteed a minimum amount of ₹ 10,000 as share of profit every year. Any deficiency arising on that amount shall be met by B. The profits for the two years ended 31st March, 2017 and 2018 were ₹ 40,000 and ₹ 60,000 respectively. Prepare Profit and Loss Appropriation Account for the two years.

Answer 1

Profit and Loss Appropriation Account for the year ended 31st March, 2017
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Profit transferred to: (WN 1)			Profit and Loss A/c (Net Profit)	40,000
A’s Capital A/c	16,000
B’s Capital A/c	14,000
C’s Capital A/c	10,000	40,000
		40,000		40,000

Profit and Loss Appropriation Account for the year ended 31st March, 2018
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Profit transferred to:			Profit and Loss A/c (Net Profit)	60,000
A’s Capital A/c	24,000
B’s Capital A/c	24,000
C’s Capital A/c	12,000	60,000
		60,000		60,000

Working Notes:

WN 1 Distribution of Profit for the year 2016-17

Profit for 2015 = Rs 40,000

Profit sharing ratio = 2 : 2 : 1

C is given a guarantee of minimum profit of Rs 10,000

Deficiency in C’s Profit Share = 10,000 − 8,000 = Rs 2,000

This deficiency is to be borne by B.

Therefore,

Final Profit Share of A = 16,000

Final Profit Share of B = 16,000 − 2,000 = Rs 14,000

Final Profit Share of C = 8,000 + 2,000 = Rs 10,000

WN 2 Distribution of Profit for the year 2017-18

Profit for 2016 = Rs 60,000

Profit sharing ratio = 2 : 2 : 1

C is given a guarantee of minimum profit of Rs 10,000