Fundamentals of partnership Firms

CBSE Test Paper 01

Below are listed Content of partnership Deed except:
1. Ratio in which profit or losses shall be share
2. Interest on Partners capital and drawings
3. Interest on Debentures
4. Name of the firm.
Which Section of the Partnership Act defines Partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all?
1. Section 61
2. Section 48
3. Section 13
4. Section 4
From the following, what is important for a partnership?
1. More than 10 Persons
2. Registration
3. Sharing of Profits
4. Capital more than 15 Crore
Interest on capital as a charge against profits in case of insufficient profit is
1. Not allowed
2. All of these
3. Allowed in full irrespective of profit
4. Allowed to the extent of profit
From the following, identify a situation when fixed capitals of the partners may change?
1. When drawings are made by the partners
2. When current accounts are opened
3. When there is loss in the business
4. When additional capital is introduced
Fill in the blanks:
Manager's commission is a ________ against profits.
The net profit of X, Y and Z for the year ended March 31, 2016, was Rs 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the undermentioned transactions were not recorded in the books :
(i) Interest on Capital @ 5% p.a.
(ii) Interest on drawings amounting to X Rs 700, Y Rs 500 and Z Rs 300.
(iii) Partner’s Salary : X Rs 1000, Y Rs 1500 p.a.
The capital accounts of partners were fixed as : X Rs 1,00,000, Y Rs 80,000 and Z Rs 60,000. Record the adjustment entry.
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, 2016, and December 31, 2017, were Rs 40,000 and Rs 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.
Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3: 2: 1, subject to the following:
1. Sona’s share in the profits, guaranteed to be not less than Rs 15,000 in any year.
2. Babita gives guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is Rs 25,000). The net profit for the year ended March 31, 2017, is Rs 75,000. The gross fee earned by Babita for the firm was Rs 16,000.
You are required to show Profit and Loss Appropriation Account (after giving effect to the alone)
P and Q are partners with capitals of Rs.6,00,000 and Rs.4,00,000 respectively. The profit and Loss Account of the firm showed a net Profit of Rs.4,26,800 for the year.
Prepare Profit and Loss Appropriation account after taking the following into consideration:-
1. Interest on P's Loan of Rs. 2,00,000 to the firm
2. Interest on capital to be allowed @ 6% p.a.
3. Interest on Drawings @ 8% p.a. Drawings were ; P Rs 80,000 and Q Rs. 50,000.
4. Q is to be allowed a commission on sales @ 3%. Sales for the year was Rs. 10,00,000
5. 10% of the divisible profits is to be kept in a Reserve Account.
Mohan, Neeraj and Peeyush are partners in a firm. They contributed Rs 75,000 each as capital three years ago. At that time, Peeyush agreed to look after the business as Mohan and Neeraj were busy. The profits for the past three years were Rs 45,000, Rs 30,000 and Rs 60,000 respectively. While going through the books of accounts, Mohan noticed that profit had been distributed in 1: 1: 2 ratio. When he enquired from Peeyush about this, Peeyush answered that since he looked after the business he should get more profit. Mohan disagreed and it was decided to distribute profits equally retrospectively for the last three years.
1. You are required to make necessary corrections in the books of accounts of Mohan, Neeraj and Peeyush by passing an adjustment entry.
2. Identify the value which is being ignored by Peeyush.
Mona, Nisha and Priyanka are partners in a firm. They contributed Rs 50,000 each as capital three years ago. At that time, Priyanka agreed to look after the business as Mona and Nisha were busy. The profits for the past three years were Rs 15,000, Rs 25,000 and Rs 50,000 respectively. While going through the books of accounts, Mona noticed that the profit had been distributed in the ratio of 1: 1: 2. When she enquired from Priyanka about this, Priyanka answered that since she looked after the business she should get more profit. Mona disagreed and it was decided to distribute profit equally retrospectively for the last three years.
1. You are required to make necessary correction in the books of accounts of Mona, Nisha and Priyanka by passing an adjustment entry.
2. Identify the value which was not practised by Priyanka while distributing profits.
S and P are partners in a firm sharing profits and losses equally. On 1st April, 2011, the capital of the partners were, S Rs 20,000 and P Rs 16,000. The profit and loss account of the firm showed a net profit of 37,500 (before interest on P’s loan) for the year ended 31st March, 2012. Considering the following information, prepare the profit and loss appropriation account of the firm and the partners’ capital account.
1. Interest on capital to be allowed @ 6% p.a.
2. Interest on P’s loan account of Rs 10,000 for the whole year.
3. Interest on drawings of partners @ 6% p.a. Drawings being S Rs 4,000 and P Rs 3,000.
4. Transfer 10% of the distributable profits of the reserve.

Complete the missing amounts in the following accounts :

Profit and Loss Appropriation Account

Dr.					Cr.
Particulars		(Rs)	Particulars		(Rs)
To Partner's Salary A/c			By Net Profit as per Profit and Loss A/c		3,00,000
B's Current A/c	---		Less: Interest on B's Loan (20,000 $\times$ 6/100)	--	--
C's Current A/c	--	---	By Interest on Drawings A/c:
To Interest on Capital A/c:			A's Current A/c	--	--
A's Current A/c	11,000		B's Current A/c	--	--
B's Current A/c	8,750		C's Current A/c	--	--
C's Current A/c	4,500
To Profit transferred to A/cs
A	--
B	--
C	--	--
		3,06,500			3,06,500

Partner's Current Account

Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
To Balance c/d		4,000		By Balance b/d	10,000		5,000
To Drawings A/c	--	--	--	By Salary A/c		20,000	30,000
To Interest on Drawings A/c	3,300	2,200	2,200	By Interest on Capital A/c	---	--	--
To Balance c/d	38,600	67,450	35,750	By Profit and loss Appr. A/c	92,900	92,900	46,450
	1,13,900	1,21,650	85,950		1,13,900	1,21,650	85,950

Partner's Capital Account

Dr.							Cr.
Particulars	A	B	C	Particulars	A	B	C
To Bank A/c			10,000	By Balance b/d	1,00,000	80,000	50,000
To Balance c/d	--	--	--	By Salary A/c		20,000	30,000
	1,20,000	95,000	50,000		1,20,000	95,000	50,000

L, M, and N were partners in firm sharing profit in the ratio of 3 : 4 : 5. Their fixed capitals were L Rs 4,00,000 , M Rs 5,00,000 and N Rs 6,00,000 respectively. The partnership deed provided for the following:
1. Interest on capital @ 6% p.a.
2. Salary of Rs 30,000 p.a. to N.
3. Interest on partner’s drawings will be charged @ 12% p.a.
During the year ended 31.3.2009, the firm earned a profit of Rs 2,70,000. L withdrew Rs 10,000 on 1.4.2008. M withdrew Rs 12,000 on 30.09.2008. and N withdrew Rs 15,000 on 31.12.2008. Prepare profit and loss appropriation account for the year ended 31.3.2009.

CBSE Test Paper 01
Fundamentals of partnership Firms

Solution

(c) Interest on Debentures
Explanation: Interest paid on debentures is a charge against the profit. Partnership Deed is mainly concerned with the appropriations and some charge. Main contents of partnership deed are interest on capital, interest on drawings, name of the firm, partners, their names and address etc.
(d) Section 4
Explanation: Section 4 of the Indian Partnership Act, 1932 defines Partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
(c) Sharing of Profits
Explanation: Sharing of profits is must for a partnership business. Profits earned by a partnership firm should be divided amongst partners in the agreed profit sharing ratio. If profit sharing ratio is not mentioned in the partnership deed or partnership deed is silent on the distribution of profits, in such a case profits will be shared equally.
(c) Allowed in full irrespective of profit
Explanation: When interest on capital is treated as charge, amount of interest will be paid in full irrespective or profits/losses. In a normal situation, interest on capital is an appropriation; it means it will be paid out of profits and up to the profits only. But in some cases it is paid as a charge, it means whether there is profit or loss, it will be paid. Only in such cases interest on capital is treated as a charge.
(d) When additional capital is introduced
Explanation: Fixed capitals of the partners will remain fixed but there are two situations when fixed capitals of the partners may change:
1. When additional capital is introduced by the partners
2. When capital is withdrawn permanently under an agreement.
Charge

	X	Y	Z		Total
Interest on Capital should be credited	5,000	4,000	3,000	=	12,000
Less: Interest on Drawings should be debited	(700)	(500)	(300)	=	(1,500)
Add: Partner’s Salaries should be credited	1,000	1,500	NIL	=	2,500
Net effect of the above adjustments of Rs 13,000 which should finally be credited to partners' capital accounts	5,300	5,000	2,700	=	13,000
Less: Wrong distribution of profit earlier Rs 13,000 (3:1:1) which should be debited now	(7,800)	(2,600)	(2,600)	=	(13,000)
Journal entry so derived from the above calculations	(2,500) Dr.	2,400 Cr	100 Cr	=	NIL

Explanation:

Take Partners' Capital Accounts as base:

Step 1: See the impact of mistakes over capital accounts e.g. Interest on Capital should be credited; Interest on Drawings should be debited; Partner’s Salaries should be credited and then find out the net effect of all these mistakes viz. Rs. 13,000 should be credited.

Step 2: All mistakes have inverse relationship with profit. So, Profit to the extent of Rs. 13,000 should be debited in 3:1:1 as it must have been credited earlier in this ratio.

Step 3: Now, form Journal entry from the above calculations

Alternatively,

Capital have credit balance if it deducted will be debited and if it is added it will be credited.

Here X wrongly taken excess Rs 2,500 hence Rs 2,500 will be deducted from X capital Account on the other hand Y and Z taken less amount as they should have been taken, hence capital account of Y and Z will be added.

Date	Particulars		L.F	Debit Amount Rs	Credit Amount Rs
	X’s Capital A/c	Dr.		2,500
	To Y’s Capital A/c				2,400
	To Z’s Capital A/c				100
	(Profit adjusted among partners)

Profit and Loss Appropriation Account for the year 2016
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
To Profit transferred to		By Net Profit and Loss A/c	40,000
Amann’s Capital 16,000	16,000	.	.
Babita’s Capital (16,000 – 2,000)	14,000	.	.
Suresh’s Capital (8,000 + 2,000)	10,000	.	.
	40,000	.	40,000

Profit and Loss Appropriation Account for the year 2017
Dr.			Cr.
Particulars	Amount Rs	Particulars	Amount Rs
To Profit transferred to		By Net Profit and Loss A/c	60,000
Amann’s Capital	24,000
Babita’s Capital	24,000
Suresh’s Capital	12,000
	60,000		60,000

Note: While making Profit and loss appropriation for 2017, Suresh has received the share of profit more than the guaranteed amount so there is no need for any adjustment..

Profit and Loss Appropriation Account as on March 31, 2017
Dr.			Cr.
Particulars	Amount	Particulars	Amount
To Profit Transferred to partners capital account:		By Profit and Loss for the year	75000
Amit’s Capital {84000 × (3/6)}		By Babita’s Capital (Deficiency of Fees 25000 – 16000)	9000
Less: Sona’s share of deficiency {1000 × (3/5)}	41400
Babita’s Capital {84000 × (2/6)}
Less: Sona’s share of deficiency {1000 × (2/5)}	27600
Sona’s Capital {84000 × (1/6)}
Add: Deficiency received from:
Amit
Babita	15000
	84000		84000

Profit and Loss Appropriation Account

for the year ended.

Particulars		Amount	Particulars		Amount
To Interest on Capital			By Profit and Loss A/c (Profit)	4,26,800
P	36,000		(-) Interest on P's Loan	12,000	4,14,800
Q	24,000	60,000	By Interest on Drawings
To Q's Commission		30,000	P	3,200
To Reserve A/c		30,000	Q	2,000	5,200
To profit Transferred to capital a/cs:
P	135,000
Q	135,000	270,000
		420,000			420000

Statement showing the distribution of Profit
Mohan Neeraj Peeyush
Already distributed (wrong) 33750 33750 67500
To be distributed (correct) 45000 45000 45000
Adjusted Profit (11250) (11250) 22500
Journal
Particulars Dr. Cr.
Mohan's Capital A/c....Dr. 11250
Neeraj's Capital A/c....Dr. 11250
To Peeyush's Capital A/c 22500
(Being wrong profit distributed earlier , now rectified.)
Value Ignored: Equality

In the absence of partnership deed, partners shall share profits and losses equally. Without mutual agreement, the act of Priyanka cannot be legally enforced. If Priyanka is a working partner, she must get it agreed with other partners through an agreement.

JOURNAL

Date	Particulars	L/F	Debit Amount (Rs)	Credit Amount (Rs)
	Priyanks's Capital A/c Dr.		15,000
	To Mona's Capital A/c			7,500
	To Nisha's Capital A/c			7,500
	(Being profits of last three years distributed wrongly now rectified)
	Total		15,000 =====	15,000 =====

Statement showing changes in profit allocation

Particulars	Mona Amount (Rs)	Nisha Amount (Rs)	Priyanka Amount (Rs)	Total Amount (Rs)
I. Amount already Recorded
Profit of past three years i.e, (15,000 + 25,000 + 50,000) in the Ratio 1: 1: 2	22,500	22,500	45,000	90,000
II. Amount which should have been Recorded
Profit of past three years i.e, 1: 1: 1	30,000	30,000	30,000	90,000
Net Effect[I - II]	7,500(Cr)	7,500(Cr)	15,000(Dr)	Nil

Value not practised by Priyanka while distributing profits is (anyone)
1. Honesty Priyanka has not shown honesty towards co-partners by not distributing profits as per the provision of Partnership Act.
2. Transparency Priyanka has not shown transparency while distributing profits as per her wish and not communicating the same to other partners
3. Equity Priyanka has not shown equity in profit distribution
4. Team Work Priyanka has not shown teamwork by hiding profit sharing ratio from other partners.

Profit and Loss Appropriation Account. It is a special account which a firm prepares to show the distribution of profits/losses among the partners or partner's capital.

Profit and Loss Appropriation Account
for the year ended on 31st March, 2012

Dr.					Cr.
Particulars		(Rs)	Particulars		(Rs)
To Interest on Capital A/c			By Net Profit (After Interest on P's Loan) (37,500 - 600)		36,900
S's Capital A/c	1,200		By Interest on Drawings A/c
P's Capital A/c	960	2,160	S's Capital A/c	120
To Reserve		3,495	P's Capital A/c	90	210
To Profit Transferred to
S's Capital A/c	15,727.5
P's Capital A/c	15,727.5	31,455
		37,110			37,110

The partnership capital account is an equity account in the accounting records of a partnership. It contains the following types of transactions: Initial and subsequent contributions by partners to the partnership, in the form of either cash or the market value of other types of assets.

Partner's Capital Account

Dr.					Cr.
Particulars	S(Rs)	P(Rs)	Particulars	S(Rs)	P(Rs)
To Bank A/c (Drawings)	4,000	3,000	By Balance b/d	20,000	16,000
To Interest on Drawing A/c	120	90	By Interest on Capital A/c	1,200	960
To Balance c/d	32,807.5	29,597.5	By Profit and loss Appropriation A/c(Profit)	15,727.5	15,727.5
	36,927.5	32,687.5		36,927.5	32,687.5

Working Note :

Interest on partner’s loan has been allowed @ 6% p.a., as there has been no agreement. But it will be shown on the debit side of the profit and loss account.
As the date of drawings is not mentioned, interest has been calculated for the average period, i.e., 6 months.
The reserve has been calculated @ 10% of Rs 34,950 i.e., Rs (36,900 + 120 + 90 - 2,160)

Profit and Loss Appropriation Account

Particulars		(Rs)	Particulars		(Rs)
To Salary A/c:			By Net Profit	3,00,000
B	20,000		Less: Interest on B's Loan (20,000 x 6/100)	(1,200)	2,98,800
C	30,000	50,000	By Interest on Drawings A/c:
To Interest on Capital A/c:			A	3,300
A	11,000		B	2,200
B	8,750		C	2,200	7,700
C	4,500	24,250
To Profit transferred:
A	92,900
B	92,900
C	46,450	2,32,250
		3,06,500			3,06,500

Partner's Current Account

Particulars	A	B	C	Particulars	A	B	C
	Rs.	Rs.	Rs.		Rs.	Rs.	Rs.
To Balance c/d	---	4,000	---	By Balance b/d	10,000	---	5,000
To Drawings	72,000	48,000	48,000	By Salary	---	20,000	30,000
To Interest on Drawings	3,300	2,200	2,200	By Interest on Capital	11,000	8,750	4,500
To Balance c/d	38,600	67,450	35,750	By Profit and loss Appropriation	92,900	92,900	46,450
	1,13,900	1,21,650	85,950		1,13,900	1,21,650	85,950

Partner's Capital Account

Particulars	A	B	C	Particulars	A	B	C
	Rs.	Rs.	Rs.		Rs.	Rs.	Rs.
To Bank A/c	---	---	10,000	By Balance b/d	1,00,000	80,000	50,000
To Balance c/d	1,20,000	95,000	40,000	By Salary	---	20,000	30,000
	1,20,000	95,000	50,000		1,20,000	95,000	50,000

The profit and loss appropriation account is an extension of the profit and loss account. The main intention of preparing a profit and loss appropriation account is to show the distribution of profits among the partners. So as per the particulars available in this question the Profit & Loss Appropriation A/c is prepared as follows:-

Profit and Loss Appropriation Account
for the year ended 31.3.2010

Dr.					Cr.
Particulars		(Rs)	Particulars		(Rs)
To Interest on Capital			By Net Profit		2,70,000
L's Current A/c	24,000		By Interest on Drawings:
M's Current A/c	30,000		L's Current A/c	1,200
N's Current A/c	36,000	90,000	M's Current A/c	720
To Salary			N's Current A/c	460	2,370
N's Current A/c		30,000
To Profit transferred to
L's Current A/c	38,092.50
M's Current A/c	50,790.00
N's Current A/c	63,487.50	1,52,370
		2,72,370			2,72,370

Working Notes:

As capitals are fixed, therefore interest, salary, and share of profit will be transferred to partners’ current account.
Calculation of interest on drawings
L = 10,000 $\times \frac{12}{100} \times 1$ = Rs 1,200
M = 12,000 $\times \frac{12}{100} \times \frac{6}{12}$ = Rs 720
N = 15,000 $\times \frac{12}{100} \times \frac{3}{12}$ = Rs 450
Interest on capital
L = 4,00,000 $\times \frac{6}{100}$ = Rs 24,000
M = 5,00,000 $\times \frac{6}{100}$ = Rs 30,000
N = 6,00,000 $\times \frac{6}{100}$ = Rs 36,000

(i)	Interest on Capital @ 5% p.a.
(ii)	Interest on drawings amounting to X Rs 700, Y Rs 500 and Z Rs 300.
(iii)	Partner’s Salary : X Rs 1000, Y Rs 1500 p.a.

	Mohan	Neeraj	Peeyush
Already distributed (wrong)	33750	33750	67500
To be distributed (correct)	45000	45000	45000
Adjusted Profit	(11250)	(11250)	22500

Particulars	Dr.	Cr.
Mohan's Capital A/c....Dr.	11250
Neeraj's Capital A/c....Dr.	11250
To Peeyush's Capital A/c		22500
(Being wrong profit distributed earlier , now rectified.)

Fundamentals of partnership Firms - Test Papers