Question

Asha and Lata are partners with Capitals of Rs 5,00,000 and Rs 4,00,000 respectively, on which they are entitled to interest at 10% p.a. They divide profits in the ratio of 2:1. They take Sudha, Manager of the business for the past 15 years, as partner in the firm with $\frac{1}{4}$th share of profits and guaranteed that her share of profits will not be less than Rs 2,00,000. Sudha brought Rs 3,00,000 as her capital. Any excess profits received by Sudha over her $\frac{1}{4}$th share will be borne by Asha and Lata in the ratio of 4:1. Profits at the end of the year before allowing interest on capitals amounted to Rs 7,20,000. Distribute the profits. What value has been fulfilled by Asha and Lata?

Answer 1

PROFIT & LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2016 Cr.
$\begin{array}{cccc}\text{Particulars}& \text{Rs}& \text{Particulars}& \text{Rs}\\ \text{Interest on Capital A/c:}& & \text{Profit \& Loss A/c}& \\ \text{Asha}50,000& & & 7,20,000\\ \text{Lata}40,000& & & \\ \text{Sudha}\underset{–}{30,000}& 1,20,000& & \\ \text{Asha's Capital A/c}& & & \\ \text{(Working Note)}& & & \\ (4,50,000\times \frac{2}{3})3,00,000& & & \\ \text{Less: Transferred to}& & & \\ \text{Sudha}\underset{–}{40,000}& 2,60,000& & \\ \text{Lata's Capital A/c}& & & \\ (4,50,000\times \frac{1}{3})1,50,000& & & \\ \text{Less: Transferred to}& & & \\ \text{Sudha}\underset{–}{10,000}& 1,40,000& & \\ \text{Sudha's Capital A/c}& & & \\ (6,00,000\times \frac{1}{4})1,50,000& & & \\ \text{Add:Transferred from}& & & \\ \text{Asha}40,000& & & \\ \text{Add:Transferred from}& & & \\ \text{Lata}\underset{–}{10,000}& 2,00,000& & \\ & \underset{–}{\overline{7,20,000}}& & \underset{–}{\overline{7,20,000}}\end{array}$

Working Note:
(i) Net Profit after Interest on Capital =7,20,000 -1,20,000 = Rs 6,00,000

Sudha's share of profit $=6,00,000\times \frac{1}{4}=Rs1,50,000$

Remaining Profit =6,00,000 -1,50,000 =Rs 4,50,000

Asha's Share $=4,50,000\times \frac{2}{3}=Rs3,00,000$

Lata's Share $=4,50,000\times \frac{1}{3}=Rs1,50,000$

(ii) Since Sudha's share amounts to Rs 1,50,000 whereas minimum guaranteed amount is Rs 2,00,000, the deficiency of Rs 50,000 will be borne by Asha and Lata in 4:1.

Deficiency borne by Asha $=50,000\times \frac{4}{5}=Rs40,000$

Deficiency borne by Lata $=50,000\times \frac{1}{5}=Rs10,000$

Value: Asha and Lata have been just and fair in recognising the service, contribution and loyalty of Sudha towards the business.