Question

Three Chartered Accountants A, B and C form a partnership, profits being shared in the ratio of 3 : 2 : 1 subject to the following:
(a) C's share of profit guaranteed to be not less than ₹ 15,000 p.a.
(b) B gives a guarantee to the effect that gross fee earned by him for the firm shall be equal to his average gross fee of the preceeding five years when he was carrying on profession alone, which on an average works out at ₹ 25,000.
The profit for the first year of the partnership are ₹ 75,000. The gross fee earned by B for the firm is ₹ 16,000. You are required to show Profit and Loss Appropriation Account after giving effect to the above.

Answer 1

Profit and Loss Appropriation Account
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Profit transferred to:			Profit and Loss A/c (Net Profit)	75,000
A’s Capital A/c	41,400		B’s Capital A/c
B’s Capital A/c	27,600		(Deficiency in Revenue)	9,000
C’s Capital A/c	15,000	84,000
		84,000		84,000

Working Notes:

Deficiency in revenue guaranteed by B = 25,000 − 16,000 = Rs 9,000

∴Profit to be distributed among Partners = 75,000 + B’s deficiency in guaranteed interest

= 75,000 + 9,000 = Rs 84,000

Profit sharing ratio = 3 : 2 : 1

C is given a guarantee of minimum profit of Rs 15,000

Deficiency in C’s Profit Share = 15,000 − 14,000 = Rs 1,000

Therefore, Final Profit Share of A = 42,000 − 600 = Rs 41,400

Final Profit Share of B = 28,000 − 400 = Rs 27,600**

Final Profit Share of C =14,000 + 1,000 = Rs 15,000

** In the book, the final profit to B is given as Rs 18,600, however, as per the solution it should be Rs 27,600. The deficiency of Rs 9,000 that was guaranteed by B to the firm would not be deducted from his share as he is bearing it in form of profit.