Question

X and Y are partners sharing profits and losses in the ratio of 3 : 2. They employed Z as their Manager to whom they paid a salary of ₹ 7,500 per month. Z had deposited ₹ 2,00,000 on which interest was payable ₹ 9% p.a. At the end off the accounting year (i.e., 31st March, 2018) 2017-18 (after division of the year's profits), it was decided that Z should be treated as a partner with effect from 1st April, 2014 with 1/6th share of profits, his deposit being considered as capital carrying interest @ 6% p.a. like capitals of other partners. The firm's profits and losses after allowing interest on capitals were – 2014-15:
Profit ₹ 5,90,000; 2015-16: Profit ₹ 6,26,000; 2016-17: Loss ₹ 40,000 and 2017-18: Profit ₹ 7,80,000.
Record necessary Journal entries to give effect to the above.

Answer 1

Journal
Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
Z’s Loan A/c	Dr.		2,00,000
To Z’s Capital A/c				2,00,000
(Z’s Loan transferred to his Capital Account)
X’s Capital A/c	Dr.		3,600
Y’s Capital A/c	Dr.		2,400
To Z’s Capital A/c				6,000
(Z's excess credit balance paid to him by X and Y in the ratio of 3:2)

Working Notes:

WN 1 Profit before Z’s Salary and Interest on Loan.

Year	Profit/ Loss	+	Salary	+	Interest on Z’s loan	=	Profit before Z’s Salary and Interest on Loan
2012-2013	5,90,000	+	90,000	+	18,000	=	6,98,000
2013-2014	6,26,000	+	90,000	+	18,000	=	7,34,000
2014-2015	(40,000)	+	90,000	+	18,000	=	68,000
2015-2016	7,80,000	+	90,000	+	18,000	=	8,88,000
Profit before Interest on Z’s Capital (for 4 years)							23,88,000

WN 2 Calculation of Interest on Capital

Interest on Z’s Capital for 4 years = 12,000 × 4 = Rs 48,000

WN 3 Calculation of Z’s Share of Profit as a Partner

Profit after Interest on Z’s Capital = Profit before Interest on Z’s Capital − Interest on Z’s Capital

= 23,88,000 − 48,000 = Rs 23,40,000

Z’s Profit Share as a Partner for 4 years

∴ Z’s Share of Interest on Capital and Profit Share as a Partner = 48,000 + 3,90,000 = Rs 4,38,000

Z’s Salary and Interest on Loan as Manager = 72,000 + 3,60,000 = Rs 4,32,000

Adjustment of Z's share of Profit

Z’s Share as a Partner Less: Z’s Share as a Manager Z will get from X and Y in their profit sharing ratio	4,38,000
	(4,32,000)
	6,000

Profit to be transferred by X and Y in favour of Z