Question

Kavita and Pradeep are partners, sharing profits in the ratio of 3 : 2. They employed Chandan as their manager, to whom they paid a salary of Rs 750 p.m. Chandan deposited Rs 20,000 on which interest is payable @ 9% p.a. At the end of 2017 (after the division of profit), it was decided that Chandan should be treated as partner w.e.f. Jan. 1, 2014 with 1/6 th share in profits. His deposit being considered as capital carrying interest @ 6% p.a. like capital of other partners. Firm’s profits after allowing interest on capital were as follows: 

		Rs
2014	Profit	59000
2015	Profit	62000
2016	Loss	(4000)
2017	Profit	78000

Record the necessary journal entries to give effect to the above.

Answer 1

			Interest on Loan	+	Salary	=	Total
2014	59,000	+	1,800	+	9,000	=	69,800
2015	62,000	+	1,800	+	9,000	=	72,800
2016	(4,000)	+	1,800	+	9,000	=	6,800
2017	78,000	+	1,800	+	9,000	=	88,800
	1,95,000	+	7,200	+	36,000	=	2,38,200

Chandan received as Manager = Interest on Loan + Salary = 7,200 + 36,000 = Rs 43,200

Total Profit of 4 years before interest on Chandan’s Loan and Salary = 2,38,200
Interest on Chandan’s Caiptal for 4 years 
={20,000 × (6/100) = 1,200}
= 1,200 × 4 = Rs 4,800

Profit after interest on all partners Capital

= Total Profit of four years before interest on Chandan’s loan and Salary – Interest on Chandan’s Capital for four years

= 2,38,200 – 4,800

= Rs 2,33,400

Wrong Distribution – Distribution of 4 years
Profit when Chandan as a Manager

Kavita `{1,95,000 × (3/5)}`                  = 117000
Pradeep `{1,95,000 × (2/5)}`              = 78000

Chandan received as manager
= Interest on Loan + Salary
= 7200 + 36000                                     = 43200
                                                               238200

Right Distribution – Division of Profit when Chandan as Partner

Chandan Share of Profit `{2,33,400 × (1/6)}`	38,900
Interest on Capital	4,800
	43,700

Kavita’s Share of Profit `{(2,33,400 – 38,900) ×(3/5)}` =

1,16,700

Pradeep’s share of Profit `{(2,33,400 – 38,900) × (2/5)}` =

77,800

Adjustment of Profit

	Kavita	Pradeep	Chandan	=	Total
Distribution of profit when Chandan as partner	1,16,700	77,800	43,700	=	2,38,200
Less: Distribution of profit when Chandan as manager	(1,17,000)	(78,000)	(43,200)	=	(2,38,200)
Right distribution of Rs 4,140	(300)	(200)	(500)	=	NIL

 

Date	Particulars		L.F.	Debit Amount Rs	Credit Amount Rs
	Kavita's Capital A/c     Dr. Pradeep's Capital A/c  Dr.  To Chandan's Capital A/c (Adjustment of profit made)			300 200	500