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 Rs. 7,500 per month. Z had deposited Rs. 2,00,000 on which interest was payable @ 9% pa. At the end of 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 deposits 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.
Note: Interest on capital Is to be allowed as a charge.

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Solution

Calculation of profit before Z's salary and Interest on loan
Year 2014-15 2015-16 2016-17 2017-18
profit/loss 590000 626000 (40000) 780000
Add:-Salary 90000 90000 90000 90000
Add:-Interest on Z's loan 18000 18000 18000 18000
Profit before Z's salary
and Interest on loan 698000 734000 68000 888000

Total profit for 4 years = 2388000

Calculation of interest on capital = 2000006% = 12000
Interest on capital for 4 years= 120004=48000
Profit after Z's interest on capital = 2388000-48000
= 2340000
Z's share of profit= 2340000/6=390000

Z's share as partner= 390000+48000=438000
Less Z's share as manager= salary+interest on loan=360000+72000
= (432000)
Z to get from X and Y = 6000

The following journal entries need to be passed:-
X's capital A/c Dr.(60003/5) 3600
Y's capital A/c Dr.(60002/5) 2400
To Z 's capital A/c 6000
(Being Z paid by X and Y in 3:2 ratio)

Z's loan A/c Dr. 200000
To Z's capital A/c 200000
(Being Z's loan transferred to Z' capital A/c)

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