12th | Accounting for Partnership Firms – Fundamentals| Question No. 96 And 97 | Ts Grewal Solution 2024-2025

Three Chartered Accountants Abhijit, Baljit and Charanjit form a partnership, profits being shared in the ratio of 3 : 2 : 1 subject to the following:
(a) Charanjitshare of profit guaranteed to be not less than  ` 15,000 p.a.
(b) Baljit 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 preceding 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 Baljit for the firm is  `16,000. You are required to show Profit and Loss Appropriation Account after giving effect to the above.

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

Working Notes:

Deficiency in revenue guaranteed by B = 25,000 -` 16,000 = `9,000

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

= 75,000 + 9,000 = `84,000

Profit sharing ratio = 3 : 2 : 1

Abhijits profit share=84,000×3/6=42,000

Baljit’s profit share=84,000×2/6=28,000

Charanjit’s profit share=84,000×1/6=14,000

Charanjit is given a guarantee of minimum profit of`15,000

Deficiency in C’s Profit Share = 15,000 - ` 14,000 = `1,000

Deficiency is to be borne by A= 1000×3/5=600

Deficiency is to be borne by b= 1000×2/5=400

Therefore, Final Profit Share of A = 42,000  600 = `41,400

Final Profit Share of B = 28,000  400 = `27,600*

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

* In the book, the final profit to B is given as `18,600, however, as per the solution it should be `27,600. The deficiency of  `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.

 

(i) Sam's guarantee to the firm that the firm would earn a profit of at least 1,35,000. Any shortfall in these profits would met by him.

(ii) Profits to be shared in the ratio of 2:2 :1.

You are required to pass the necessary Journal entries to rectify the error in accounting.

JOURNAL
Date	Particulars		LF	Dr. (Rs.)	Cr. (Rs.)
2023	×en's Capital A/c	Dr.		40,000
	Sam's Capital A/c	Dr.		40,000
	Tim's Capital A/c	Dr.		40,000
	To Profit & Loss Adjustment A/c				1,20,000
	(Profit wrongly distributed now reversed)
	Sam's Capital A/C	Dr.		15,000
	To Profit & Loss Adjustment A/c				15,000
	(For Shortfall in Profit)
	Profit & Loss Adjustment A/c	Dr.		1,35,000.
	To ×en's Capital				54,000
	To Sam's Capital A/c				54,000
	To Tim's Capital A/c				27,000
	(For Rectified Profit Distributed (2: 2:1): )