Question

X and Y are partners in a firm sharing profits in the ratio of 3 : 2. The have a manager, Z, who gets ₹ 10,000 p.m. salary plus commission of 5% of the profit after charging his salary and commission, Now, they decide to admit Z as a partner, giving him 1/5th share in the profits of the firm. Any excess amount which Z receives as a partner (over his salary and commission) will be borne by X. The profit for the year ended 31st March, 2018 amounted to ₹ 8,40,000 after charging Z's salary. Prepare Profit and Loss Appropriation Account showing the division of profit for the year.

Answer 1

Profit and Loss Appropriation Account for the year and March 31, 2018
Dr.				Cr.
Particulars		Amount Rs	Particulars	Amount Rs
Profit transferred to:			Profit and Loss A/c	9,60,000
X’s Capital A/c	4,48,000		(before Z's salary)
Y’s Capital A/c	3,20,000
Z’s Capital A/c	1,92,000	9,60,000
		9,60,000		9,60,000

Working Notes:

WN 1 Calculation of Remuneration to Z as a Manager

Salary to Z = Rs 1,20,000

Commission to Z = 5% of Net Profit after Salary and Commission

Net Profit after Salary and Commission = 8,40,000

$\mathrm{Commission}\mathrm{to}\mathrm{Z}=8,40,000\times \frac{5}{105}=\mathrm{Rs}40,000$

Z’s remuneration as Manager = Salary + Commission = 1,20,000 + 40,000 = Rs 1,60,000

WN 2 Calculation of Profit Share of Z as a Partner

Profit = Rs 9,60,000
$\mathrm{Z}\text{'}\mathrm{s}\mathrm{Profit}\mathrm{Share}=9,60,000\times \frac{1}{5}=1,92,000$

Part of Z’s Profit Share to be borne by X = 1,92,000 − 1,60,000 = Rs 32,000

Profit available for distribution between X and Y = 9,60,000 − 1,60,000 = Rs 8,00,000
$$\begin{gathered} \mathrm{X}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Profit}=8,00,000\times \frac{3}{5}=4,80,000 \\ \mathrm{Y}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Profit}=8,00,000\times \frac{2}{5}=3,20,000 \end{gathered}$$

X’s Profit share after adjusting Z’s deficiency = 4,80,000 − 32,000 = Rs 4,48,000