Harshad and Dhiman are in partnership since April 01, 2016. No Partnership agreement was made. They contributed Rs 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs 1,00,000 to the firm, on October 01, 2016. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2017. The profits for the year ended March 31, 2017 amounted to Rs 1,80,000. Dispute has arisen between Harshad and Dhiman.

Harshad Claims:

(i) He should be given interest @ 10% per annum on capital and loan;

(ii) Profit should be distributed in proportion of capital;

Dhiman Claims:

(i) Profits should be distributed equally;

(ii) He should be allowed Rs 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;

(iii) Interest on Capital and loan should be allowed @ 6% p.a.

You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

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Solution

DISTRIBUTION OF PROFITS

Harshad Claims:

Decisions

(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.

(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims:

Decisions

(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.

(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration.

(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a.

Profit and Loss Adjustment Account

Dr.

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Interest on Partner’s Loan

Profit and Loss

1,80,000

Harshad 1,00,000 × (6/100) × (6/12)

3,000

Profit and Loss Appropriation

1,77,000

1,80,000

1,80,000

Profit and Loss Account

Dr.

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Profit transferred to

Profit and Loss Adjustment

1,77,000

Harshad’s Capital

88,500

Sharma’s Capital

88,500

1,77,000

1,77,000

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(i) He should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in the ratio of capital;
Dhiman Claims :
(i) Profit should be distributed equally;
(ii) He should be allowed ₹ 2,000 p.m. as remuneration for the period he managed the business in the absence of Harshad;
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Profit and Loss Adjustment Account
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Interest on Partner’s Loan		Profit and Loss	1,80,000
Harshad 1,00,000 × (6/100) × (6/12)	3,000
Profit and Loss Appropriation	1,77,000
	1,80,000		1,80,000

Profit and Loss Account
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
Profit transferred to		Profit and Loss Adjustment	1,77,000
Harshad’s Capital	88,500
Sharma’s Capital	88,500

	1,77,000		1,77,000