question_answer

Amit, Sumit and Ramit formed a partnership on the following terms:

(a) Profit shall be divided in the ratio of 2 : 2 : 1.

(b) Amit's share of profit guaranteed to be not less than Rs. 1,25,000 in any year.

(c) Ramit gives guarantee to the effect that the gross fee earned by him for the firm shall not be less than average fees of preceding four years when he was carrying on the profession alone.

(d) Their capital accounts shall be fixed.

The profits for the first year of partnership are Rs. 2,51,250. The gross fees earned by Ramit for the firm is Rs. 40,000. Gross fees earned by Ramit during last four years were Rs. 40,000, Rs. 60,000, Rs. 30,000 and Rs. 35,000 respectively. Prepare profit and loss appropriation account after giving effect to the above.

Answer:

                                                Profit and Loss Appropriation Account Dr                                                         for the year ended...                                                                    Cr

Particulars		Amt (Rs.)	Particulars	Amt (Rs.)
To Profit Transferred to			By Net Profit as per Profit and Loss A/c	2,51,250
Amit's Current A/c	1,01,000		By Ramit?s Current A/c	1,250
\[\left( 2,52,500\times 2/5 \right)\]			(Shortage of Guarantee fees)
(+) Deficiency from Sumit	16,000
Deficiency from Ramit	8,000	1,25,000
Sumit's Current A/c	1,01,000
\[\left( 2,52,500\times 2/5 \right)\]
(-) Guarantee to Amit	(16,000)	85,000
Ramit's Current A/c	50,500
\[\left( 2,52,500\times 1/5 \right)\]
(-) Guarantee to Amit	(8,000)	42,500
		2,52,500		2,52,500

                        Working Notes (i) Calculation of Shortage of Guarantee Fees by Ramit Average fees of last four years = \[\frac{40,000+60,000+30,000+35,000}{4}=\frac{1,65,000}{4}=Rs.\,41,250\] Shortage of fees = 41,250 - 40,000 = Rs. 1,250 (ii) Deficiency in Amit's guaranteed amount Rs. 24,000 shall be borne by Sumit and Ramit in their profit sharing ratio, i.e. 2:1.