Fundamentals of Partnership PDF

 Exercise 4 Barun, Tarun, and Shivam are partners in a firm and do not have a partnership Deed. Barun introduced further capital of ₹ 5,00,000 on 1st October 2022. Whereas Shivam took a loan of ₹ 50,000 from the firm on 1st October 2022. Disputes have arisen among them on the following: a...

 Exercise 4 Barun, Tarun, and Shivam are partners in a firm and do not have a partnership Deed. Barun introduced further capital of ₹ 5,00,000 on 1st October 2022. Whereas Shivam took a loan of ₹ 50,000 from the firm on 1st October 2022. Disputes have arisen among them on the following: a) Barun demands interest @ 10% p.a. on ₹ 5,00,000 being his extra capital. b) Tarun desires that his son Deep should be admitted as a partner and he will give him half of his share. Barun and Shivam do not agree. c) Barun and Tarun are of the view that Shivam should be charged interest on loans from the firm at the lending rate of the banks, which is 12% p.a. d) Tarun has withdrawn ₹ 50,000 from the firm for his personal use. Barun and Shivam are of the view that Tarun should be charged interest @ 10% p.a. Accounting Treatment On allowing Interest Interest on Loan by partner A/c Dr. To Partners’ Loan A/c On payment of Interest Partners’ Loan A/c Dr. To Cash/Bank A/c To close the Interest on Loan by Partner Profit & Loss A/c Dr. To interest on Loan by partner A/c Interest on loan by the Firm to Partner For Charging Interest on loan to partner Partners’ capital/current A/c Dr. To Interest on Loan to partner A/c If Interest on Loan to Partner is received Cash/Bank A/c To Partners’ capital/current A/c To transfer of Interest on loan to Partner Account to Profit &Loss A/c Interest on Loan to Partners’ to Profit & Loss A/c  Profit and Loss Appropriation Account Profit and Loss Appropriation Account is an extension of the Profit and Loss Account and therefore, the credit balance of the Profit and Loss Account is transferred to Profit and Loss Appropriation Account. Such amount is then utilized for the following: i. Interest on the capitals of partners, if provided by the partnership deed ii. Salaries or commissions to partners, if provided by the partnership deed iii. Transferring part of profit to Reserve iv. Distribution of profit among the partners in their profit sharing ratio. Appropriations as per partnership deed or Agreement are more than Available Profit There may be a situation where total amount of appropriation as per the Partnership Deed or Agreement is more than the amount of profit available for appropriation. In this situation, profit available for distribution among partners is distributed in the ratio of total appropriation. Question Vinod and Mohan are partners. Vinod's Capital is Rs 1,00,000 and Mohan's Capital is Rs. 60,000. Interest on capital is payable @ 6% p.a. Bis entitled to a salary of Rs 3,000 per month. Profit for the current year before interest and salary to B isRs80,000, Prepare Profit and Loss Appropriation Account. Illustration 14 Ajay and Vijay are partner sharing profit in the ratio of 3:2. Ajay is a non - working partner and contributed 2000000 as his capital. Vijay is a working partner of the firm. The partnership deed provides for interest on capital @8% p.a and salary to workings partner @8000per month. Profit before providing for interest on capital and partners salary for the year ended 31st March 2020 was rupees 80000. Show the distribution of profit. Question X, Y and Z are partners in a firm sharing profits in 2:2:1 ratio. The fixed capitals of the partners were: X Rs. 5,00,000; Y Rs.5,00,000 and Z Rs. 2,50,000 respectively. The Partnership Deed provides that interest on capital is to be allowed @ 10% p.a. Z is to be allowed a salary of Rs. 2,000 per month. The profit of the firm for the year ended 31st March, 2018 after debiting Z's salary was Rs. 4,00,000. Prepare Profit and Loss Appropriation Account. Homework Reema and Seema are partners sharing profits equally. The Partnership Deed provides that both Reema and Seema will get monthly salary of Rs. 15,000 each, Interest on Capital will be allowed @ 5% p.a. and Interest on Drawings will be charged @ 10% p.a. Their capitals were Rs. 5,00,000 each and drawings during the year were Rs. 60,000 each. The firm incurred a loss of Rs. 1,00,000 during the year ended 31st March, 2018. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2018. Special Aspects of Partnership Accounts 1. Partners’ Capital Account 2. Remuneration to Partners 3. Interest on Partners’ Capital 4. Interest on Partners’ Drawings 5. Past Adjustments 6. Guarantee of profit Partner’s Capital Account Fixed Capital Accounts Method In this method, the capital amount invested by each of the partner in the firm remains fixed or unaltered, unless a partner introduces additional capital or withdraws out of his or her capital. Such fixed capital is recorded in the Capital Account and for recording all transactions other than transactions related to capital such as drawings, interest on capital, interest on drawings, salary, commission, share of profit/losses, etc. Current Accounts are maintained. Fluctuating Capital Accounts Method In this method, only one account is maintained which is the Capital Account. All the transactions related to the addition or withdrawal of capital, salary, commission, interest on capital, interest on drawings, share of profits or losses, etc. are recorded in this Capital Account only. Question Mudit and Sudhir are partners with capitals of 6,00,000 and 2,00,000 respectively on 1st April, 2022. Net profit (before giving effect to the Partnership Deed) for the year ended 31st March, 2023 was 2,40,000. The Partnership Deed provides salary to Sudhir of 60,000 p.a. Interest allowed on capitals of Mudit and Sudhir were 36,000 and 12,000 respectively. Drawings of the partners of Mudit and Sudhir were t 60,000 and 40,000 respectively and interest charged on drawings were 2,000 and 1,000 respectively. Show how profit will be distributed between Mudit and Sudhir and also it will be distribute prepare the Capital Accounts of the partners: (i) if the capitals are fixed, and (ii) if the capitals are fluctuating.​ Interest on Partners’ Capitals In order to compensate a partner for contributing capital to the firm in excess of the profit sharing ratio, firm pays such interest on partner’s capital. In case any amount is contributed by the partner to the firm in the form of additional capital during the year, interest on such additional capital is allowed for the period it has remained in business. In case if any amount of capital is withdrawn by the partner during the year, no interest is allowed on the capital amount withdrawn.  Important provisions relating to Interest on Capital: i. If there is no Partnership Deed or there is no clause in the deed as to interest on capital: Interest on Capital is not allowed. ii. If the Partnership Deed provides for interest on capital but is silent as to the treatment of interest as a charge or appropriation: a. In case of loss: No interest is allowed. b. In case of profit, where profit before interest is equal to or more than the interest: Interest is allowed at the agreed rate. c. In case of profit, where profit before interest is less than the interest: Interest is allowed only to the extent of profit in the ratio of interest on capital of each partner. iii. If the Partnership Deed provides for interest as a charge (i.e., to be allowed whether there are profits or loss): Interest on capital is allowed whether there is profit or loss. Journal Entries for recording Interest on Capital: i. In case of Fixed Capital Accounts: ii. In case of Fluctuating Capital Accounts: Question A and B are partners sharing Profit and Loss in the ratio 3 : 2 having Capital Account balances of ₹ 50,000 and ₹ 40,000 on 1st April, 2024. On 1st July, 2024, A introduced ₹ 10,000 as his additional capital whereas B introduced only ₹ 1,000. Interest on capital is allowed to partners @ 10% p.a. Calculate interest on capital for the financial year ended 31st March, 2025.  Answer Calculation of Interest on Capital A= Interest on 50,000@10% = 5,000 Interest on 10,000@10% for 9 months i.e 10000 * 10% * (9/12) = 750 Total Interest on A's Capital = 5750 B= Interest on 40,000@10% = 4000 Interest on 1000@10%for 9 months = 75 Total Interest on capital = 4075 Calculation of Interest on Opening Capital In case where the partner has not withdrawn capital or has not introduced additional capital during the year, closing balance of Capital Account of the previous year is the opening balance in the Capital Account. Interest on Capital is allowed on the Opening Capital of the partner. If the opening capital is not given, it can be determined by preparing Capital Accounts or with the help of following tables: Calculation of Opening Capital Question Solution  Question X and Y are partners sharing profits and Losses in the ratio 7:3 their capital Accounts As at 1st April 2023 Stood at X - Rs. 5.00.000 ,Y - Rs. 4,00,000 Partners are allowed interest on capitals @5% p.a Drawing of X and Y During the year ended 31 st March ,2024 were Rs. 72,000 and Rs, 50.000 respectively. Profit for the year before allowing interest on capital and Salary to Y @ Rs. 5,000 Per month amounted To Rs. 8,00,000. 10 % of the divisible profit is to be set aside as General Reserve. Prepare Profit and Loss Appropriation A/c. Solution  Interest on Partners’ Drawings Drawings are the amounts that are withdrawn, in cash or in kind, by partners for their personal use. These drawings can be out of capital or profits. When the amount withdrawn is a part of capital, it is referred to as drawings out of capital. While drawings out of profits are the amounts withdrawn against profit earned during the year. If the Partnership Deed provides for charging interest on such amounts withdrawn by the partners against profits, such interest is termed as interest on drawings. It is important to note that such interest is not charged on the drawings that are made against capital. Such Interest charged on Drawings is credited to the Profit and Loss Appropriation Account and debited to Partners’ Capital Accounts or Partners’ Current Accounts. Calculation of such interest is to be done taking into consideration the time from the date of withdrawal till the end of the financial year. Methods of calculating interest on drawings  Example Ram and Mohan, two partners, drew for their personal use `1,20,000 and ` 80,000. Interest is chargeable @ 6% p.a. on the drawings. What is the amount of interest chargeable from each partner? Ans: In this question, date of drawings made by the partners is not given. Therefore, interest on drawings is calculated on average basis for a period of six months. Interest on Ram’s Drawings = 1,20,000× 6/ 100×6/12=3,600 Interest on Mohan’s Drawings = 80,000× 6/ 100×6/12=2,400 Home work Brij and Mohan are partners in a firm. They withdrew ` 48,000 and ` 36,000 respectively during the year evenly in the middle of every month. According to the partnership agreement, interest on drawings is to be charged @ 10% p.a. Calculate interest on drawings of the partners using the appropriate formula Homework Calculate interest on drawings of Ashok @ 10% p.a. for the year ended 31st March, 2022, in each of the following alternative cases: Case 1. If he withdrew ` 7,500 in the beginning of each quarter. Case 2. If he withdrew ` 7,500 at the end of each quarter. Case 3. If he withdrew ` 7,500 during the middle of each quarter.  Home work The capital accounts of Tisha and Divya showed credit balances of 10,00,000 and 7,50,000 respectively after taking into account drawings and net profit of `5,00,000. The drawings of the partners during the year 2021-22 were: (i) Tisha withdrew 25,000 at the end of each quarter. (ii) Divya's drawings were: 31st May, 2021 `20,000 1st November, 2021 `17,500 1st February, 2022 `12,500 Calculate interest on partners' capitals@ 10% p.a. and interest on partners' drawings@ 6% p.a. for the year ended 31st March, 2022.  Question Mohit and Sobhit are partners sharing profits in the ratio of 3: 2. Rohit was admitted for 1/6th share of profit with a minimum guaranteed amount of ` 10,000. At the close of the first financial year the firm earned a profit of ` 54,000. Find out the share of profit which Mohit, Sobhit and Rohit will get. Question X, Y and Z entered into partnership on 1st October, 2021 to share profits in the ratio of 4 : 3 : 3. X, personally guaranteed that Z's share of profit after charging interest on capital @ 10% p.a. would not be less then ` 80,000 in any year. Capital contributions were: X – ` 3,00,000, Y – ` 2,00,000 and Z – ` 1,50,000. Profit for the year ended 31st March, 2022 was ` 1,60,000. Prepare Profit and Loss Appropriation Account. Question A, B and C are partners sharing profits in the ratio of 5 : 4 : 1. C is given a guarantee that his minimum share of profit in any given year would be at least ` 5,000. Deficiency, if any, would be borne by A and B equally. Profit for the year ended 31st March 2022 was ` 40,000. Pass necessary Journal entries in the books of the firm. Example Ram, Mohan and Sohan sharing profits and losses equally have capitals of ` 1,20,000, ` 90,000 and ` 60,000 respectively. For the year ended 31st March, 2022, interest was credited to them @ 6% instead of 5%. Give adjustment Journal entry. Example Ram, Shyam and Mohan were partners in a firm sharing profits and losses in the ratio of 2 : 1 : 2. Their capitals were fixed at ` 3,00,000, ` 1,00,000, ` 2,00,000. For the year ended 31st March, 2022, interest on capital was credited to them @ 9% instead of 10% p.a. The profit for the year before charging interest was ` 2,50,000. Show your working notes clearly and pass necessary adjustment entry. Homework Profit earned by a partnership firm for the year ended 31st March, 2022 were distributed equally between the partners – Pankaj and Anu – without allowing interest on capital. Interest due on capital was Pankaj – ` 3,000 and Anu – ` 1,000. Pass necessary adjustment entry.