Question

60,000 respectively in their Capital Accounts as on 1st January, 2016.

A introduced a further capital of Rs. 10,000 on 1st April, 2016 and another Rs. 5,000 on 1st July, 2016. On 30th September, 2016 A withdrew Rs. 40,000.
On 1st July, 2016, B introduced further capital of Rs. 30,000.
The partners drew the following amounts in anticipation of profit.
A drew Rs. 1,000 per month at the end of each month beginning from January, 2016. B drew Rs. 1,000 on 30th June, and Rs. 5,000 on 30th September, 2016.
% p.a. interest on capital is allowable and 10% p.a. interest on drawings is chargeable. Date of closing 31.12.2016. Calculate: (a) Profit-sharing ratio; (b) Interest on capital; and (c) Interest on drawings

Answer 1

Answer:

(a) Profit-sharing ratio:

To calculate the profit-sharing ratio, we need to know the total interest on capital and the total interest on drawings for both partners.

Total interest on capital for A = Rs. 37.50 (25 + 12.50)

Total interest on capital for B = Rs. 625

Total interest on drawings for A = Rs. 33.33

Total interest on drawings for B = Rs. 48.34 (6.67 + 41.67)

Total profit for the year = Rs. (1175 + 90625) - (385 + 54993.33) - (37.50 + 625 + 33.33 + 48.34) = Rs. 811.50

Profit-sharing ratio for A = (1175 - 385 - 37.50 - 33.33) / 811.50 = 0.476 = 47.6%

Profit-sharing ratio for B = (90625 - 54993.33 - 625 - 48.34) / 811.50 = 0.524 = 52.4%

Then the profit-sharing ratio is 47.6:52.4.

(b) Interest on capital:

Interest on capital for A = Rs. 37.50

Interest on capital for B = Rs. 625
(c) Calculation of interest on drawings:

A has drawn a total of Rs. 8,000 (Rs. 1,000 x 8 months) and B has drawn a total of Rs. 6,000 (Rs. 1,000 + Rs. 5,000) during the year. The interest on drawings will be calculated as follows:

A: 8,000 x 10% x 12/12 = Rs. 800

B: 6,000 x 10% x 6/12 = Rs. 300

then, the total interest on drawings is Rs. 1,100.

(d) Calculation of net profit:

The net profit for the year is calculated as follows:

Net profit = Gross profit - Interest on capital - Interest on drawings

Net profit = Rs. 55,000 - Rs. 4,500 - Rs. 1,100 = Rs. 49,400

(e) Calculation of profit-sharing ratio:

Since the interest on capital and drawings has been accounted for, the remaining profit of Rs. 49,400 will be shared between the partners in their profit-sharing ratio. The total capital of the partners as on 31st December, 2016 is Rs. 1,00,000 (Rs. 60,000 + Rs. 40,000 for A, and Rs. 60,000 for B) plus the additional capital introduced during the year.

A has introduced additional capital of Rs. 15,000 (Rs. 10,000 on 1st April and Rs. 5,000 on 1st July) and has withdrawn Rs. 40,000 during the year. Therefore, A's total capital at the end of the year is:

60,000 + 15,000 - 40,000 = Rs. 35,000

B has introduced additional capital of Rs. 30,000 during the year. Therefore, B's total capital at the end of the year is:

60,000 + 30,000 = Rs. 90,000

The profit-sharing ratio is:

A:B = 35,000:90,000 = 7:18

Then, A's share of the profit is:

7/25 x 49,400 = Rs. 13,888

And B's share of the profit is:

18/25 x 49,400 = Rs. 35,512

Therefore, the profit-sharing ratio between A and B is 7:18 and their respective shares of the profit are Rs. 13,888 and Rs. 35,512, respectively.