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Question

A, B and C are partners sharing profits in the ratio of 5 : 4 : 1. C is given a guarantee that his minimum share of profit in any given year would be at least ₹ 5,000. Deficiency, if any, would be borne by A and B equally. Profit for the year ended 31st March 2019 was ₹ 40,000.
Pass necessary Journal entries in the books of the firm.

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Solution

Profit and Loss Appropriation Account

for the year ended 2018–19

Dr. Cr.

Particulars

Amount

(₹)

Particulars

Amount

(₹)

Profit transferred to:

Profit and Loss A/c (Net Profit)

40,000

A’s Capital A/c

19,500

B’s Capital A/c

15,500

C’s Capital A/c

5,000

40,000

40,000

40,000


Working Notes:

Profit for the year = Rs 40,000

Profit sharing ratio = 5 : 4 : 1

C is given a guarantee of minimum profit of Rs 5,000

Deficiency in C’s share = 5,000 − 4,000 = Rs 1,000

This deficiency is to be borne by A and B equally.

Therefore,

Final Profit Share of A = 20,000 500 = Rs 19,500

Final Profit Share of B = 16,000 500 = Rs 15,500

Final Profit Share of C = 4,000 + 1,000 = Rs 5,000


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