NCERT Solution - Accounting for Partnership: Basic Concepts | Accountancy Class 12 - Commerce PDF Download

Short Answers:
Question 1: Define Partnership Deed.
Answer: Partnership Deed is a written agreement among the partners of a partnership firm. It includes agreement on profit sharing ratio, salaries, commission of partners, interest provided on partner's capital and drawings and interest on loan given or taken by the partners, etc. Generally following details are included in a partnership deed.
1. Objective of business of the firm
2. Name and address of the firm
3. Name and address of all partners
4. Profit and loss sharing ratio
5. Contribution to capital by each partner
6. Rights, types of roles and duties of partners
7. Duration of partnership
8. Rate of interest on capital, drawings and loans
9. Salaries, commission, if payable to partners.
10. Rules regarding admission, retirement, death and dissolution of the firm, etc.

Question 2: Why is it desirable to make the partnership agreement in writing.
Explain in 50 words.
Answer: Partnership agreement may be oral or written. It is not compulsory to form partnership agreement in writing under the Partnership Act, 1932. However, written partnership deed is desirable than oral agreement as it helps in avoiding disputes and misunderstandings among the partners. Also, it helps in settling disputes (as the case may be) among the partners, as written partnership deed can be referred to anytime. If written partnership deed is duly signed and registered under Partnership Act, then it can be used as evidence in the court of law.

Question 3: List the items which may be debited or credited in the capital accounts of the partners when:
 (i) Capitals are fixed
 (ii) Capitals are fluctuating
Answer:
(i) When Capitals are fixed
The following items are credited in the Partner's Capital Account when capital accounts are fixed.
(a) Opening balance of capital
(b) Additional capital introduced during an accounting year
The following items are debited in the Partner's Capital Account when capital accounts are fixed.
(a) Part of capital withdrawn
(b) Closing balance of capital
(ii) When Capitals are fluctuating
The following items are credited in the Partner's Capital Account when capital accounts are fluctuating.
(a) Opening balance of capital.
(b) Additional capital introduced during an accounting year
(c) Salaries to the partners
(d) Interest on capital
(e) Share of profit
(f) Commission and bonus to the partners
The following items are debited in the Partner's Capital Account when capital accounts are fluctuating.
(a) Drawings made during the accounting period
(b) Interest on drawings.
(c) Share of loss.
(d) Closing balance of capital.

Question 4: Why is Profit and Loss Adjustment Account prepared? Explain.
Answer: The Profit and Loss Adjustment Account is prepared because of the following two reasons.
1. To record omitted items and rectify errors if any- After the preparation of Profit and Loss Account and Balance Sheet, if any error or omission is noticed, then these errors or omissions are adjusted by opening Profit and Loss Adjustment Account in the subsequent accounting period without altering old Profit and Loss Account.
2. To distribute profit or loss between the partners- Sometimes, besides adjusting the items and rectifying errors, this account is also used for distribution of profit (or loss) among the partners. In this situation, this account acts as a substitute for Profit and Loss Appropriation Account. The main rationale to prepare the Profit and Loss Adjustment Account is to ascertain true profit or loss.

Question 5: Give two circumstances under which the fixed capitals of partners may change.
Answer:
The following are the two circumstances under which the fixed capitals of partner may change.
(i) If any additional capital is introduced by the partner during the year.
(ii) If any part of capital is permanently withdrawn by the partner from the firm.

Question 6: If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Answer: If a fixed amount is withdrawn on the first day of every quarter, then the interest is calculated on the amount withdrawn for a period of seven and half months.

Example: If a partner withdraws Rs 5,000 in the beginning of each quarter and the interest is charged @ 10% on the drawings, then interest on drawings is calculated as:
Total drawings made by the partner during the whole year are Rs 20,000, i.e. Rs 5000× 4.
Interest on drawings =  

Question 7: In the absence of partnership deed, specify the rules relating to the following:
(i) Sharing of profits and losses.
(ii) Interest on partner’s capital.
(iii) Interest on Partner’s drawings.
(iv) Interest on Partner’s loan
(v) Salary to a partner.
Answer: 
(i) Sharing of profits and losses: If the partnership deed is silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act of 1932, profits and losses are to be shared equally by all the partners of the firm.

(ii) Interest on partner’s capital: If the partnership deed is silent on interest on partner’s capital, then according to the Partnership Act of 1932, no interest on capital should be given to the partners of the firm.

(iii) Interest on partner’s drawings: If the partnership deed is silent on interest on partner’s drawings, then according to the Partnership Act of 1932, no interest on drawing should be charged from the partners of the firm for the amount of capital withdrawn in form of drawings.

(iv) Interest on partner’s loan: If the partnership deed is silent on interest on partner’s loan, then according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest on the loan forwarded by them to the firm.

(v) Salary to a partner: If the partnership deed is silent on salary to a partner, then according to the Partnership Act of 1932, no salary should be given to any partner.

Page No 101:
Numerical Question:
Question 1: Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs 60,000 and Rs 40,000 as on January 01, 2005. During the year they earned a profit of Rs 30,000. According to the partnership deed both the partners are entitled to Rs 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an interest of 5% on their drawings, irrespective of the period, which is Rs 12,000 for Tripathi, Rs 8,000 for Chauhan. Prepare Partner’s Accounts when, capitals are fixed.
Answer: a) If interest on Capital and Partners’ salaries and interest on drawings is charged against profit, the solution will be as: 

b) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of  profit, the solution will be as:

As the question is silent about the treatment of Interest on Capitals, Salary, Interest on Drawings, so we have prepared the solution by following two methods, namely:

1. Charge against Profits
2. Out of Profits

This was done deliberately so as to make students aware-off the two above mentioned methods and also to match the answer with that of given in the NCERT. The appropriate answer to the question following Out of Profit Method should be as:
Tripathi's Current A/c balance Rs 3,600 and
Chauhan's Current A/c balance Rs 6,400.
In case no information regarding the treatment of above items is mentioned in the question, then we usually follow the Out of Profits Method.

Question 2: Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were Rs 90,000 and Rs 60,000. The profit during the year were Rs 45,000. According to partnership deed, both partners are allowed salary, Rs 700 per month to Anubha and Rs 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings at the end of the period were Rs 8,500 for Anubha and Rs 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.
Answer:
a) Note: If Partners’ Salaries, Interest on capital and Interest on Drawing are treated as these have already adjusted in Profit and Loss Account. The Solution will be as

b) Alternative
Note: If Partners’ salaries, interest on capital and interest on drawings adjusted in Profit and Loss Appropriation Account. The solution will be as.

 Page No 101:
Long Answer: 
Question 1: What is partnership? What are its chief characteristics? Explain.
Answer: According to the Section 4 of the Partnership Act, 1932, partnership is an agreement between two or more persons who have agreed to share profits or losses of a business that will be carried by all or any one of them acting for all.
Person who joined their hands to set up the business are called ‘partners’ individually and ‘firm’ collectively and the name under which they carry out their business is termed as ‘firm name’.

Important Characteristics of Partnership
The following are the important characteristics of partnership.
1.Two or more persons: Partnership is an agreement between two or more persons coming together for a common goal. There should be at least two persons to form a partnership. Although as per the Partnership Act of 1932, there is no maximum limit on the number of partners in a partnership firm, but as per the Rule (10) of the Companies (Miscellaneous) Rules Act 2014, the maximum number of partners permissible is 50. Therefore, in case the number of partners exceeds the aforesaid limit, then the concerned partnership is considered to be illegal. In this regards it must be noted that Section 464 of Companies Act 2013, the maximum number of partners permissible is one humdred. However, it must be noted that the maximum number of partners is not limited in case an association or partnership is formed by professionals such as chartered accountants, lawyers, company secretaries, etc. These professionals are governed by their the special laws as formed by their respective professional institutions. Prior to the enforcement of Companies Act of 2013, the earlier act of 1956, imposed restrictions on the maximum number of partners to 10 in case of banking business and 20 in case of any other kind of business. However, with effect from April 01, 2014, Companies Act of 1956 has been replaced by Companies Act of 2013.
2.Partnership Deed: The partnership among the partners should be backed up by a partnership deed. A partnership deed is an agreement among the partners governing them in carrying out the proposed business. The deed may be oral or written.
3.Business: A partnership is formed to carry out a legal business. Partnerships in smuggling, black marketing etc. are illegal business activities and hence, the partnership is also illegal.
4. Sharing of profit: The profit or loss earned by a partnership firm must be distributed as per the partnership deed or equally among the partners (in absence of partnership deed). It is a very important feature of partnership. If a group is formed for charitable purpose, not to earn profit then this group will not be regarded as a partnership.
5.Liability: Liability of a partnership firm is unlimited and each partner is liable for firm’s liabilities whether individually and jointly with other partners to the third party. Moreover, each partner along with his/her co-partners is responsible for all the acts of the partnership firm.
6. Mutual agency: Partnership may be carried on by all or any one of them acting on behalf of all. It means all the partners of a firm are equally entitled to participate in the activities of the business or any one of them who is acting on behalf of all. Every partner acts as an agent for others and binds others by his/her act and in turn is bound by others by their act.
Note: In case of any question regarding the permissible limit on the maximum number of partners in a partnership firm, the students shall take the limit as 50.

Question 2: Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
Answer: The following are the main provisions of the Indian partnership Act, 1932 that are relevant to the partnership accounts in absence of partnership deed.
1. Profit Sharing Ratio: If the partnership deed is silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act of 1932, profits and losses are to be shared equally by all the partners of the firm.
2. Interest on Capital: If the partnership deed is silent on interest on partner’s capital, then according to the Partnership Act of 1932, no interest on capital should be given to the partners of the firm. However, interest on capital is given only out of the profits, if mutually agreed by all the partners.
3. Interest on Drawings: If the partnership deed is silent on interest on partner’s drawings, then according to the Partnership Act of 1932, no interest on drawing should be charged from the partners of the firm for the amount of capital withdrawn in the form of drawings.
4. Interest on Partner’s Loan: If the partnership deed is silent on interest on partner’s loan, then according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest on the loan forwarded by them to the firm.
5. Salary to Partner: If the partnership deed is silent on salary to a partner, then according to the Partnership Act of 1932, no salary should be given to any partner.

Question 3: Explain why it is considered better to make a partnership agreement in writing.
Answer: A partnership deed forms the basis of a partnership firm. A partnership deed consists of all the pre-determined terms and conditions that are agreed to by all the partners while forming the partnership. Generally the following details are included in a partnership deed.
1. Objective of business of the firm
2. Name and address of the firm
3. Name and address of all partners
4. Profit and loss sharing ratio
5. Contribution to capital by each partner
6. Rights, types of roles and duties of partners
7. Duration of partnership
8. Rate of interest on capital, drawings and loans
9. Salaries, commission, if payable to partners.
10. Rules regarding admission, retiring, death and dissolution of the firm, etc. It ensures the
A partnership deed can both be oral or written. Although, it is not compulsory to form partnership agreement in writing under the Partnership Act of 1932, however, written partnership deed is more desirable than the oral agreements. This is because it ensures the smooth functioning of the business of the partnership firm. It helps in avoiding disputes and misunderstandings among the partners. Also, it helps in settling t the disputes (as the case may be) among the partners, as written partnership deed can be referred to anytime. If written partnership deed is duly signed and registered under Partnership Act, then it can be used as evidence in the court of law. Moreover, any changes (if needed) in the partnership deed cannot be made without the consent of all the partners of the firm. Therefore, it is desirable to form partnership deed in writing because of the merits associated with written documents over its oral counterparts.

Question 4: Illustrate how interest on drawings will be calculated under various situations.
Answer: When a partner withdraws any amount, either in cash or in any other form, from the firm for his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of drawings is termed as interest on drawings. The method of calculating interest on drawings depends on the information available for time and frequency of the drawings made by the partner. The following different situations of drawings made illustrate the calculation of interest charged on drawings.
Situation 1: When information regarding Amount, Date and Rate of Interest on drawings are given.
If a partner withdrew Rs 10,000 on May 01 and interest on drawing is charged at 10% p.a. and the firm closes its books on December 31 every year then interest of drawings amounts to Rs 667.

Interest on drawings =  

Interest on drawings =  

Situation 2: When information regarding Amount, Rate of Interest on drawings is given
Case I: If the Amount and Rate of Interest on drawings (per annumn) is given but date is not mentioned
If the details regarding the amount of drawings and rate of interest of drawings (p.a.) is given but the date of drawings is not mentioned then interest is charged on average basis and the period of drawings is taken as 6 months.

Example- If a partner withdrew Rs 10,000 and rate of interest on drawings is 10% p.a. then the interest of drawings amounts to Rs 500
Interest on drawings =  

Case II: If the Amount and Rate of Interest on drawings is given but the date and per annumn rate of interest is not mentioned
If the date and the rate of interest are given but per annum is not specified, then annual interest is charged.

Example- If a partner withdrew Rs 20,000 and interest rate is 10% , then the interest on drawings amounts to Rs 2,000.

Interest on drawings =  

Situation 3: When a fixed amount is withdrawn at regular interval
Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is calculated for 6.5 months.
Example- If a partner withdraws Rs 1,000 in the beginning of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 650.
Interest on drawings =  
Case II: If a fixed amount is withdrawn at the end of each month, then the interest is calculated for 5.5 months
Example- If a partner withdraws Rs 1,000 at the end of each month and rate of interest is 10% p.a., then the interest on drawings amount to Rs 550.

Interest on drawings =  

Case III: If a fixed amount is withdrawn in the middle of every month then assuming that the drawings are made on15^th of every month then interest on drawings is calculated for 6 months
Example- If a partner withdraws Rs 1,000 on 15^th of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 600.
Interest on drawings =  
Case IV: If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated for 7.5 months
Example- If a partner withdraws Rs 3,000 in the beginning of every quarter and the rate of interest is 10% p.a. then the interest on drawings amount to Rs 750
Interest on drawings =  
Case V: If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5 months
Example- If a partner withdraws Rs 3,000 at the end of every quarter and the rate of interest is 10% p.a., then the interest on drawings amounts to Rs 450.

Interest on drawings =  

Situation 4: When different amount is at different intervals
If different amount is withdrawn by a partner at different points of time then the interest is calculated by Product Method. The period of drawings is calculated from the date of withdrawal to the last date of the accounting year.
Example- A partner withdraws Rs 5,000 on Feb 01, Rs 3000 on May 01, Rs 5,000 on Sep. 30 and Rs 1000 on Dec. 31 and the rate of interest on drawings is 10% p.a. The firm closes its book on December 31.
Calculation of Interest on Drawings by Product Method

Q5:

How will you deal with a change in the profit sharing ratio among existing partners?

Take imaginary figures to illustrate your answer?

Answer :

Usually due to the admission, retirement or death of a partner or sometimes due to the general agreement among the partners, they may decide to change the profit sharing ratio. Various adjustments that should be considered during the change in the profit sharing ratio are , goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capitals, etc. The general reserves and accumulated profits (if any) and profit (or loss) on revaluation on assets and liabilities should be credited (debited) in the Partner's Capital Account in their old profit sharing ratio.

But if the existing partners decide to change the profit sharing ratio then some partners gain (gaining partners) at the cost of other partners (sacrificing partners). Thus, the former should compensate the latter. Therefore, the gaining Partners’ Capital Account s are debited to the extent of their gain and sacrificing Partners' Capital Accounts are credited to extent of their sacrifice. The following Journal entry is passed.

Example:

A, B, C are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm shows Rs 1,20,000 as general reserve, profit due to revaluation of building Rs 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

Hence, in this example, C gains at the cost of A, so the partner A needs to be compensated by C with the amount of Rs 25,000. The following adjustment entry is passed.

Adjustment entry:

Numerical Questions : Page No 102:

Q 1:

Harshad and Dhiman are in partnership since April 01, 2013. No Partnership agreement was made. They contributed Rs 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs 1,00,000 to the firm, on October 01, 2013. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2013. The profits for the year ended March 31, 2013 amounted to Rs 1,80,000. Dispute has arisen between Harshad and Dhiman.

Harshad Claims:

(i)    He should be given interest @ 10% per annum on capital and loan;

(ii)   Profit should be distributed in proportion of capital;

Dhiman Claims:

(i)    Profits should be distributed equally;

(ii)   He should be allowed Rs 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;

(iii)  Interest on Capital and loan should be allowed @ 6% p.a.

You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

Answer :

DISTRIBUTION OF PROFITS

Harshad Claims:

Decisions

(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.

(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims:

Decisions

(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.

(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration.

(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a. 

Q 2:

Aakriti and Bindu entered into partnership for making garment on April 01, 2013 without any Partnership agreement. They introduced Capitals of Rs 5,00,000 and Rs 3,00,000 respectively on October 01, 2013. Aakriti Advanced. Rs 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 2014 showed profit of Rs 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them giving reason for your solution.

Answer : 

Reason

a) Interest on partners loan shall be allowed at 6% p.a. because there is no partnership agreement.

b) Interest on capital shall not be allowed because there is no agreement on interest on capital.

c) Profit shall be distributed equally because profit sharing ratio has not been given.

Q3:

Rakhi and Shikha are partners in a firm, with capitals of Rs 2,00,000 and Rs 3,00,000 respectively. The profit of the firm, for the year ended 2013-14 is Rs 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew Rs 7,000 and Shikha Rs 10,000 for their personal use. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

Answer :

If interest on capital and Partners’ salaries will be provided even if firm involves in loss.

If interest on capital and salaries will be provided out of profit

If profit is less than the sum of distributable items, distribution shall be in proportion of items for distribution.

Question 4:

Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of Rs 50,000 and Rs 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs 2,500 p.a. During 2013, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to Rs 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare accounts showing the allocation of profits and partner’s capital accounts.

Answer :

Q5:

The partnership agreement between Maneesh and Girish provides that: 

(i)    Profits will be shared equally;

(ii)   Maneesh will be allowed a salary of Rs 400 p.m;

(iii)  Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary;

(iv)  7% interest will be allowed on partner’s fixed capital;

(v)   5% interest will be charged on partner’s annual drawings;

(vi)  The fixed capitals of Maneesh and Girish are Rs 1,00,000 and Rs 80,000, respectively. Their annual drawings were Rs 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2013 amounted to Rs 40,000;

Prepare firm’s Profit and Loss Appropriation Account.

Answer :

Q 6:

Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of Rs 10,000 as his share of profits every year. The net profit for the year 2013 amounted to Rs 40,000. Prepare the Profit and Loss Appropriation Account.

Answer :

Q7:

Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed a minimum amount of Rs 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending December 31, 2012 and December 31, 2013 were Rs 40,000 and Rs 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

Answer : 

Question 8:

Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2013 shows a net profit of Rs 1,50,000. Prepare the Profit and Loss Appropriation Account by taking into consideration the following information:

(i)    Partners capital on April 1, 2012;

        Simmi, Rs 30,000; Sonu, Rs 60,000;

(ii)   Current accounts balances on April 1, 2012;

        Simmi, Rs 30,000 (cr.); Sonu, Rs 15,000 (cr.);

(iii)  Partners drawings during the year amounted to

        Simmi, Rs 20,000; Sonu, Rs 15,000;

(iv)  Interest on capital was allowed @ 5% p.a.;

(v)   Interest on drawing was to be charged @ 6% p.a. at an average of six months;

(vi)  Partners’ salaries : Simmi Rs 12,000 and Sonu Rs 9,000. Also show the partners’ current accounts.

 Answer :

Note: As per solution the amount transferred to Simmi's Current Account is Rs 94,162 and Sonu's Current Account is Rs 31,388, however, the answer provided in book is profit transferred to Simmi's Account is Rs 92,587 and Sonu's Account is Rs 30,863.

Numerical Questions : Page No 104:

Question 9:

Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were Rs 80,000 and Rs 60,000 respectively. The firm started business on April 1, 2013. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of Rs 2,000 and Rs 3,000, respectively.
 The profits for year ended March 31, 2013* before making above appropriations was Rs 1,00,300. The drawings of Ramesh and Suresh were Rs 40,000 and Rs 50,000, respectively. Interest on drawings amounted to Rs 2,000 for Ramesh and Rs 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.

 *This date should be March 31, 2014

Answer :

Question 10:

Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:

(i)    Profits would be shared by Sukesh and Vanita in the ratio of 3:2;

(ii)   5% interest is to be allowed on capital;

(iii)  Vanita should be paid a monthly salary of Rs 600.

The following balances are extracted from the books of the firm, on December 31, 2013.

Net profit for the year, before charging interest on capital and after charging partner’s salary was Rs 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

*As per the question, it should be Vanita instead of Verma

Answer : 

Numerical Questions : Page No - 105 :

Q11:

Rahul, Rohit and Karan started partnership business on April 1, 2013 with capitals of Rs 20,00,000, Rs 18,00,000 and Rs 16,00,000, respectively. The profit for the year ended March 2014 amounted to Rs 1,35,000 and the partner’s drawings had been Rahul Rs 50,000, Rohit Rs 50,000 and Karan Rs 40,000. The profits are distributed among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.

Answer :

Interest on Capital

Rahul = 20,00,000 × 5/100 = Rs 1,00,000

Rohit = 18,00,000 × 5/100= Rs 90,000

Karan = 16,00,000 × 5/100 = Rs 80,000

Q12 :
 Sunflower and Pink Rose started partnership business on April 01, 2006 with capitals of Rs 2,50,000 and Rs 1,50,000, respectively. On October 01, 2006, they decided that their capitals should be Rs 2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2007.

Answer :

Product Method

Sunflower

Pink Rose

Interest on Capital =

Interest on Sunflower's Capital =

Interest on Pink Rose's Capital =

Alternative Method:

Simple Interest Method

Sunflower

April 01, 2013 to September 30, 2013		=	Rs 12,500
October 01,  2013 to March 31, 2014		=	Rs 10,000
	Interest on Sunflower’s Capital		Rs 22,500

Pink Rose

April 01, 2013 to September 30, 2013		=	Rs   7,500
October 01,  2013 to March 31, 2014		=	Rs 10,000
	Interest on Pink Rose’s Capital		Rs 17,500

Question 13:

On March 31, 2006 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at Rs 4,00,000, Rs 3,00,000 and Rs 2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to Rs 1,50,000 and the partner’s drawings had been Mountain: Rs 20,000, Hill Rs 15,000 and Rock Rs 10,000. Calculate interest on capital.

Answer :

Generally interest on Capital is calculated on opening balance of capital. If additional capital is not given.

Interest on Capital

Q14 :

Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2013:

During the year Mahadev’s drawings were Rs 30,000. Profits during 2013 is Rs 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2013.

 * As per the question, this year should be March 2013

Answer:
 

Interest on Capital

Neelkant's 10,00,000* (5/100)= Rs 50,000

Mahadev's 10,00,000 * (5/100)= Rs 50,000

Note: In this question, as the balances of both Partner's Capital Account and of Partner's Current Account are mentioned, so it has been assumed that the capital of the partners is fixed.

As we know, when the capital of the partners is fixed, drawings and interest on capital does not affect the capital balances of the partners. Rather, it would affect their current account balances. Therefore, in this case, capital at the beginning (i.e. opening capital) and capital at the end (i.e. closing capital) of the year would remain same. Thus, the interest on capital is calculated on fixed capital balances (given in the Balance Sheet of the question).