NCERT Solutions for Class 12 Accountancy Accountancy Part I Chapter 1: Accounting for Partnership Firms – Fundamentals

Chapter at a glance

Topic	Key point
Partnership	Relation between persons who agree to share the profits of a business carried on by all or any of them acting for all
Partnership deed	Written agreement stating capital, profit-sharing ratio, interest, salary, drawings etc.
If there is no deed (Sec. 13, Indian Partnership Act, 1932)	Profits and losses equally; no interest on capital; no interest on drawings; no salary; 6 % p.a. interest on a partner’s loan
Profit and Loss Appropriation Account	Shows distribution of the net profit: interest on capital, salary, commission, interest on drawings, transfer to reserve, and shares of profit
Fixed capital	Balance stays fixed; other items (salary, interest, drawings, share of profit) go to the Current Account
Fluctuating capital	All items are recorded in the Capital Account
Interest on drawings	; average period 6.5 months (start of month), 6 months (middle), 5.5 months (end)
Guarantee of profit	The deficiency is met by the partner(s) named (or by the other partners in their profit-sharing ratio)
Past adjustments	Omitted items are corrected by a single adjustment entry showing only the net effect

Questions for Practice – Short Answer Questions

Question SA – Q1

Define Partnership Deed.

Answer

A partnership deed is the written agreement between the partners that contains the terms and conditions of the partnership, such as the amount of capital, the profit-sharing ratio, interest on capital and drawings, salary or commission to partners, the rights and duties of partners, and the rules for admission, retirement and settlement of accounts. It is duly stamped and signed by all the partners.

A partnership deed is the written agreement stating the terms and conditions of the partnership.

Question SA – Q2

Why is it considered desirable to make the partnership agreement in writing?

Answer

1. It provides clear evidence of the terms agreed by the partners.
2. It avoids disputes and misunderstandings about profit-sharing, interest, salary, etc.
3. If a dispute arises, the deed can be produced as proof in a court.
4. In its absence the rules of the Partnership Act apply, which may not suit the partners.
5. It remains a record, so the terms are not lost due to the memory or change of the partners.

A written agreement gives proof of the terms, prevents disputes and avoids the application of the default rules of the Act.

Question SA – Q3

List the items which may be debited or credited in capital accounts of the partners when: (i) Capitals are fixed. (ii) Capital are fluctuating.

Answer

(i) Fixed capitals (the Capital Account shows only the capital; other items go to the Current Account)

(ii) Fluctuating capitals (all adjustments are made in the Capital Account)

Fixed capital: only capital introduced or withdrawn; fluctuating capital: also drawings, interest, salary and profit or loss.

Question SA – Q4

Why is Profit and Loss Appropriation Account prepared?

Answer

The Profit and Loss Appropriation Account is prepared to show the distribution (appropriation) of the net profit of the firm among the partners. It shows the adjustments such as interest on capital, interest on drawings, salary or commission to partners and transfer to reserves, before the balance of profit is divided among the partners in their profit-sharing ratio. It is an extension of the Profit and Loss Account.

To show how the net profit of the firm is divided and appropriated among the partners.

Question SA – Q5

Give two circumstances under which the fixed capitals of partners may change.

Answer

1. When the partners agree to increase or decrease the capital of the firm (additional capital introduced or capital withdrawn), for example to meet the need for expansion or surplus funds.
2. When there is a change in the constitution of the firm, such as admission of a new partner or retirement, death of a partner, or a change in profit-sharing ratio, requiring adjustment of capitals.

By agreement to introduce or withdraw capital, and by admission, retirement or death of a partner.

Question SA – Q6

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

Withdrawals are on 1 April, 1 July, 1 October and 1 January, so the periods up to 31 March are 12, 9, 6 and 3 months.

Interest on the total amount is calculated for 7.5 months.

Question SA – Q7

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

Equal sharing; no interest on capital or drawings; 6 % interest on loan; no salary.

Questions for Practice – Long Answer Questions

Question LA – Q1

What is meant by partnership? Explain its chief characteristics.

Answer

Meaning. Partnership is 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 (Section 4, Indian Partnership Act, 1932). The persons are individually called partners and collectively a firm.

Chief characteristics

1. Two or more persons: a minimum of two; the maximum is 50 (as per the Companies Act).
2. Agreement: it arises from a contract (oral or written) and not from status.
3. Lawful business: it must be carried on for profit.
4. Sharing of profits: the partners share the profits (and losses) in the agreed ratio.
5. Mutual agency: each partner is an agent of the others and of the firm, and a principal as well.
6. Unlimited liability: partners are jointly and severally liable for the debts of the firm, even from personal property.
7. No separate legal entity: the firm and partners are one in law.
8. Utmost good faith, restrictions on transfer of interest (without consent) and unanimity for major decisions.

Partnership is an agreement to share the profits of a business carried on by all or any acting for all; its features include two or more persons, mutual agency and unlimited liability.

Question LA – Q2

Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

Answer

If there is no deed, Section 13 and other provisions apply:

1. Profit sharing: profits and losses are shared equally, whatever the capitals may be.
2. Interest on capital: no interest is allowed to the partners on their capital.
3. Interest on drawings: no interest is charged.
4. Interest on loan: a partner who advances a loan to the firm beyond his capital gets interest at 6 % per annum.
5. Salary: no partner is entitled to a salary or remuneration for taking part in the business.
6. Indemnity and rights: the firm must indemnify a partner for expenses and liabilities incurred in the ordinary course of business; every partner can take part in management and inspect the books.
7. Losses and expenses of the business must be met first out of profits, then capital, and then by the partners individually in the profit-sharing ratio.

Equal sharing, no interest on capital or drawings, 6 % interest on loans and no salary, along with the other provisions of Section 13.

Question LA – Q3

Explain why it is considered better to make a partnership agreement in writing.

Answer

1. Certainty: all the terms (capital, ratio, salary, interest, drawings, duties) are clearly recorded.
2. Proof: it can be shown in court or to tax authorities in the event of a dispute.
3. Avoids disputes: partners know their rights and obligations beforehand.
4. Better than the Act’s rules: the default rules (equal sharing, no interest or salary) may be unfair to partners who bring more capital or work harder, but the deed can fix suitable terms.
5. Continuity: the deed guides the firm in admission, retirement, death and dissolution.

A written deed gives certainty and proof, avoids disputes and allows fair terms different from the default rules of the Act.

Question LA – Q4

Illustrate how interest on drawings will be calculated under various situations.

Answer

Situation	Period for which interest is charged
Interest charged at a fixed rate on the amount drawn, irrespective of the period	Interest = drawings × rate (no time factor)
Fixed amount drawn at the beginning of every month	Average 6.5 months (12 and 1 month; )
Drawn in the middle of every month	Average 6 months
Drawn at the end of every month	Average 5.5 months
Drawn at the start of each quarter	7.5 months (12, 9, 6, 3)
Drawn in the middle of each quarter	6 months
Drawn at the end of each quarter	4.5 months
Drawn evenly throughout the year, no dates	Average 6 months
Drawn on different dates, with different amounts	Product method:

Example: ₹ 2,000 is drawn at the beginning of every month; rate 10 % p.a.:

Interest depends on the date of withdrawal: 6.5, 6 or 5.5 months on average for monthly drawings at the start, middle or end; the product method is used for irregular drawings.

Question LA – Q5

How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.

Answer

When the ratio changes, some partners gain and others sacrifice. The partners who gain compensate those who sacrifice, as the past profits, reserves and goodwill were built up in the old ratio.

Steps

1. Find the sacrifice or gain: .

   

2. Adjust accumulated profits, reserves and losses, and goodwill in the sacrificing/gaining ratio through a journal entry.

Example: A and B share profits 3 : 2 and decide to share equally (1 : 1). The General Reserve is ₹ 50,000.

Reserve shares: old ratio A ₹ 30,000, B ₹ 20,000; new ratio ₹ 25,000 each.

(Being adjustment of the general reserve on change in the profit-sharing ratio.)

Find the gain and sacrifice, and adjust reserves and goodwill between the partners through a single journal entry.

Questions for Practice – Numerical Questions

Question Num – Q1

Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were ₹ 60,000 and ₹ 40,000 as on April 01, 2019. During the year they earned a profit of ₹ 30,000. According to the partnership deed both the partners are entitled to ₹ 1,000 per month as salary and 5% p.a. interest on their capital. They are also to be charged an interest of 5% p.a. on their drawings, irrespective of the period, which is ₹ 12,000 for Tripathi, ₹ 8,000 for Chauhan. Prepare Partner’s capital/current accounts when, capitals are fixed.

Answer

Working: salary = 1,000 × 12 = ₹ 12,000 each; interest on capital = ₹ 3,000 (Tripathi), ₹ 2,000 (Chauhan); interest on drawings = ₹ 600 and ₹ 400.

Profit and Loss Appropriation Account

Current Accounts

Capital accounts (fixed): Tripathi ₹ 60,000 and Chauhan ₹ 40,000.

Current account balances: Tripathi ₹ 3,600 (Cr), Chauhan ₹ 6,400 (Cr); capitals ₹ 60,000 and ₹ 40,000.

Question Num – Q2

Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were ₹ 90,000 and ₹ 60,000. The profit during the year were ₹ 45,000. According to partnership deed, both partners are allowed salary, ₹ 700 per month to Anubha and ₹ 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings during the year were ₹ 8,500 for Anubha and ₹ 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

Working: salary ₹ 8,400 (Anubha) and ₹ 6,000 (Kajal); interest on capital ₹ 4,500 and ₹ 3,000; interest on drawings ₹ 425 and ₹ 325 (5 % of the drawings, as given).

Profit and Loss Appropriation Account

Capital Accounts (fluctuating)

(The textbook key prints ₹ 1,09,860 and ₹ 70,140; the working here follows the data exactly as stated, and the total ₹ 1,80,000 is the same.)

Closing capitals: Anubha ₹ 1,09,875 and Kajal ₹ 70,125.

Question Num – Q3

Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed ₹ 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of ₹ 1,00,000 to the firm, on October 01, 2019. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2020 amounted to ₹ 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 ₹ 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

Since there is no agreement, the Partnership Act applies:

Interest on Harshad’s loan: (1 October to 31 March).

Profit and Loss Appropriation Account

Interest on loan ₹ 3,000; Harshad’s share ₹ 88,500 and Dhiman’s share ₹ 88,500.

Question Num – Q4

Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of ₹ 5,00,000 and ₹ 3,00,000 respectively on October 01, 2019. Aakriti Advanced ₹ 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31 2020 showed profit of ₹ 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 by preparing Profit and Loss Appropriation Account. Also give reasons in Support of your answer.

Answer

Under the Partnership Act (no deed): no interest on capital; profits equally; interest on the loan at 6 % p.a., here for the 6 months from 1 October 2019 (when the capital and loan came in).

Profit and Loss Appropriation Account

Reasons: (i) in the absence of agreement, profits are shared equally; (ii) no interest is payable on capital; (iii) the loan from a partner earns 6 % interest.

Each partner gets ₹ 21,200 (after ₹ 600 interest on Aakriti’s loan).

Question Num – Q5

Rakhi and Shikha are partners in a firm, with capitals of ₹ 2,00,000 and ₹ 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is ₹ 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of ₹ 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew ₹ 7,000 and Shikha ₹ 10,000 for their personal use. As per partnership deed, salary and interest on capital appropriation treated as charge on profit. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

Answer

Working: salary of Shikha = 5,000 × 12 = ₹ 60,000; interest on capital: Rakhi ₹ 20,000, Shikha ₹ 30,000. Since salary and interest are charges on profit, they are allowed even if the firm has a loss. Profit-sharing ratio = capital ratio = 2 : 3.

Profit and Loss Appropriation Account

(Total deficiency = 1,10,000 − 23,200 = ₹ 86,800, shared 2 : 3.)

Capital Accounts

Loss transferred: Rakhi ₹ 34,720 and Shikha ₹ 52,080; closing capitals ₹ 1,78,280 and ₹ 3,27,920.

Question Num – Q6

Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of ₹ 50,000 and 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of ₹ 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to ₹ 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare partner’s capital accounts and profit and loss Appropriation Account.

Answer

Working

• Interest on capital: Lokesh ₹ 3,000; Azad ₹ 1,800.
• Profit before Azad’s salary = 12,500 + 2,500 = ₹ 15,000 (the salary is already charged). Manager’s commission = 5 % of ₹ 15,000 = ₹ 750 (as per the textbook key).

Profit and Loss Appropriation Account

Capital Accounts

Profit transferred: Lokesh ₹ 4,170 and Azad ₹ 2,780; closing capitals ₹ 57,170 and ₹ 37,080.

Question Num – Q7

The partnership agreement between Maneesh and Girish provides that: (i) Profits will be shared equally; (ii) Maneesh will be allowed a salary of ₹ 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% p.a. interest will be allowed on partner’s fixed capital; (v) 5% p.a. interest will be charged on partner’s annual drawings; (vi) The fixed capitals of Maneesh and Girish are ₹ 1,00,000 and ₹ 80,000, respectively. Their annual drawings were ₹ 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2019 amounted to ₹ 40,000; Prepare firm’s Profit and Loss Appropriation Account.

Answer

Working: salary = 400 × 12 = ₹ 4,800. Interest on capital: ₹ 7,000 and ₹ 5,600 (total ₹ 12,600). Interest on drawings: ₹ 800 and ₹ 700 (total ₹ 1,500). Commission = 10 % × (40,000 − 4,800) = ₹ 3,520.

Profit and Loss Appropriation Account

Profit transferred to each partner = ₹ 10,290.

Question Num – Q8

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 ₹ 10,000 as his share of profits every year. The net profit for the year 2013 amounted to ₹ 40,000. Prepare the Profit and Loss Appropriation Account.

Answer

George’s normal share = 40,000 × 2/10 = ₹ 8,000, less than the guaranteed ₹ 10,000. Deficiency = ₹ 2,000, borne by Ram and Raj in their ratio 5 : 3.

Profit and Loss Appropriation Account

Ram ₹ 18,750, Raj ₹ 11,250, George ₹ 10,000.

Question Num – Q9

Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed an amount of ₹ 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2019 and March 31, 2020 were ₹ 40,000 and ₹ 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

Answer

2019: Amann ₹ 16,000, Babita ₹ 14,000, Suresh ₹ 10,000. 2020: Amann ₹ 24,000, Babita ₹ 24,000, Suresh ₹ 12,000.

Question Num – Q10

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, 2020 shows a net profit of ₹ 1,50,050. Prepare the Profit and Loss Appropriation Account and partners current account by taking into consideration the following information: (i) Partners capital on April 1, 2019; Simmi, ₹ 30,000; Sonu, ₹ 60,000; (ii) Current accounts balances on April 1, 2019; Simmi, ₹ 30,000 (cr.); Sonu, ₹ 15,000 (cr.); (iii) Partners drawings during the year amounted to Simmi, ₹ 20,000; Sonu, ₹ 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 ₹ 12,000 and Sonu ₹ 9,000.

Answer

Working: interest on capital: Simmi ₹ 1,500; Sonu ₹ 3,000. Interest on drawings (6 % for 6 months): Simmi ; Sonu .

Profit and Loss Appropriation Account

Current Accounts

(The textbook key prints profit shares of ₹ 94,162 and ₹ 31,388, which correspond to a slightly different interest on drawings; the working above follows the data as stated.)

Profit transferred: Simmi ₹ 94,200 and Sonu ₹ 31,400; current account balances ₹ 1,17,100 and ₹ 42,950.

Question Num – Q11

Arvind and Anand are partners sharing profits and losses in the ratio 8:3:1 [3 : 1]. Balances in their capital accounts on April 01, 2019 were, Arvind – ₹ 4,40,000 and Anand ₹ 2,60,000. As per their agreement, partners were entitled to interest on capital @ 5% p.a., and interest on drawings was to be charged @ 6% p.a. Arvind was allowed an annual salary of ₹ 35,000/- for the additional responsibilities taken up by him. Partners drawings for the year were, Arvind ₹ 40,000 and Anand ₹ 28,000. Profit and loss account of the firm for the year ending March 31, 2020 showed a Net Loss of ₹ 32,400. Prepare Profit and Loss Appropriation Account.

Answer

The ratio is printed as 8 : 3 : 1, which is a misprint; the key shows a loss share of ₹ 22,770 : ₹ 7,590, which is 3 : 1.

Since the firm has a loss, interest on capital and salary are not allowed (they can be paid only out of profits), but interest on drawings is charged:

Profit and Loss Appropriation Account

Interest on drawings: Arvind ₹ 1,200, Anand ₹ 840; share of loss: Arvind ₹ 22,770, Anand ₹ 7,590.

Question Num – Q12

Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were ₹ 80,000 and ₹ 60,000 respectively. The firm started business on April 1, 2019. 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 ₹ 2,000 and ₹ 3,000, respectively. The profits for year ended March 31, 2017 before making above appropriations was ₹ 1,00,300. The drawings of Ramesh and Suresh were ₹ 40,000 and ₹ 50,000, respectively. Interest on drawings amounted to ₹ 2,000 for Ramesh and ₹ 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.

Answer

Ratio = capitals = 80,000 : 60,000 = 4 : 3. Salaries: ₹ 24,000 and ₹ 36,000. Interest on capital: ₹ 9,600 and ₹ 7,200.

Profit and Loss Appropriation Account

Capital Accounts

Profit transferred: Ramesh ₹ 16,000, Suresh ₹ 12,000; closing capitals ₹ 87,600 and ₹ 62,700.

Question Num – Q13

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 ₹ 600. The following balances are extracted from the books of the firm, on March 31, 2017: Capital Accounts: Sukesh ₹ 40,000, Vanita ₹ 40,000; Current Accounts: (Cr.) Sukesh ₹ 7,200, Vanita ₹ 2,800; Drawings: Sukesh ₹ 10,850, Vanita ₹ 8,150. Net profit for the year, before charging interest on capital and after charging Sukesh’s salary was ₹ 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

Answer

Only Vanita is entitled to a salary (₹ 600 × 12 = ₹ 7,200), so the “salary” already charged against the net profit of ₹ 9,500 is taken as Vanita’s (the key confirms this). Capitals are fixed, so the items go to the current accounts.

Interest on capital: ₹ 2,000 each.

Profit and Loss Appropriation Account

Current Accounts

Profit transferred: Sukesh ₹ 3,300, Vanita ₹ 2,200; current accounts (Cr) ₹ 1,650 and ₹ 6,050.

Question Num – Q14

Rahul, Rohit and Karan started partnership business on April 1, 2019 with capitals of ₹ 20,00,000, ₹ 18,00,000 and ₹ 16,00,000, respectively. The profit for the year ended March 2020 amounted to ₹ 1,35,000 and the partner’s drawings had been Rahul ₹ 50,000, Rohit ₹ 50,000 and Karan ₹ 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

Note: the total interest (₹ 2,70,000) exceeds the available profit of ₹ 1,35,000. Interest on capital is payable only out of profits, so if the deed does not say otherwise, the profit would be applied to the interest in the ratio 10 : 9 : 8 (₹ 50,000, ₹ 45,000, ₹ 40,000), leaving nothing to share.

Interest on capital: Rahul ₹ 1,00,000, Rohit ₹ 90,000, Karan ₹ 80,000.

Question Num – Q15

Sunflower and Pink Rose started partnership business on April 01, 2019 with capitals of ₹ 2,50,000 and ₹ 1,50,000, respectively. On October 01, 2019, they decided that their capitals should be ₹ 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, 2020.

Answer

Sunflower

Pink Rose

Interest on capital: Sunflower ₹ 22,500; Pink Rose ₹ 17,500.

Question Num – Q16

On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at ₹ 4,00,000, ₹ 3,00,000 and ₹ 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 ₹ 1,50,000 and the partner’s drawings had been Mountain: ₹ 20,000, Hill ₹ 15,000 and Rock ₹ 10,000. Calculate interest on capital.

Answer

Interest is on the opening capital:

Profit is shared equally (no ratio given), so each partner’s share = ₹ 50,000.

Interest on capital: Mountain ₹ 37,000, Hill ₹ 26,500, Rock ₹ 16,000.

Question Num – Q17

Following is the extract of the Balance Sheet of Neelkant and Mahadev as on March 31, 2020: Liabilities: Neelkant’s Capital ₹ 10,00,000; Mahadev’s Capital ₹ 10,00,000; Assets: Sundry Assets ₹ 30,00,000; Neelkant’s Current Account ₹ 1,00,000; Mahadev’s Current Account ₹ 1,00,000; Profit and Loss Appropriation (March 2017) ₹ 8,00,000; Total ₹ 30,00,000 each side. During the year Mahadev’s drawings were ₹ 30,000. Profits during 2019-20 is ₹ 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2020.

Answer

The partners have fixed capitals (₹ 10,00,000 each) with separate current accounts. Interest on capital is therefore calculated on the capital balances only, and drawings (which go through the current account) do not affect it.

Interest on capital: Neelkant ₹ 50,000 and Mahadev ₹ 50,000.

Question Num – Q18

Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2020: May 01, 2019 ₹ 12,000; July 31, 2019 ₹ 6,000; September 30, 2019 ₹ 9,000; November 30, 2019 ₹ 12,000; January 01, 2020 ₹ 8,000; March 31, 2020 ₹ 7,000. Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.

Answer

Product method: multiply each amount by the months from the date of withdrawal to 31 March 2020.

Interest on drawings = ₹ 2,295

Question Num – Q19

The capital accounts of Moli and Golu showed balances of ₹ 40,000 and ₹ 20,000 as on April 01, 2019. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12% p.a. Golu advanced a loan of ₹ 10,000 to the firm on August 01, 2019. During the year, Moli withdrew ₹ 1,000 per month at the beginning of every month whereas Golu withdrew ₹ 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was ₹ 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.

Answer

Interest on drawings (total ₹ 12,000 each):

Interest on capital: Moli ₹ 4,000; Golu ₹ 2,000. Interest on Golu’s loan (6 % for 8 months): , a charge against profit.

Profit and Loss Appropriation Account

Capital Accounts

(Interest on Golu’s loan, ₹ 400, is credited to Golu’s loan account.)

Interest on drawings: Moli ₹ 780, Golu ₹ 660; profit: Moli ₹ 9,594, Golu ₹ 6,396.

Question Num – Q20

Rakesh and Roshan [Rohan] are partners, sharing profits in the ratio of 3:2 with capitals of ₹ 40,000 and ₹ 30,000, respectively. They withdrew from the firm the following amounts, for their personal use: Rakesh – May 31, 2019 ₹ 600; June 30, 2019 ₹ 500; August 31, 2019 ₹ 1,000; November 1, 2019 ₹ 400; December 31, 2019 ₹ 1,500; January 31, 2020 ₹ 300; March 01, 2020 ₹ 700. Rohan – ₹ 400 at the beginning of each month. Interest on drawings is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of accounts are closed on March 31, 2020, every year.

Answer

Rakesh (product method)

Rohan: total = 400 × 12 = ₹ 4,800, drawn at the start of every month (average 6.5 months):

Interest on drawings: Rakesh ₹ 126.50, Rohan ₹ 156

Question Num – Q21

Himanshu withdrew ₹ 2,500 at the end of each month. The Partnership deed provides for charging interest on drawings @ 12% p.a. Calculate interest on Himanshu’s drawings for the year ending March 31, 2017.

Answer

Interest on drawings = ₹ 1,650

Question Num – Q22

Bharam is a partner in a firm. He withdraws ₹ 3,000 at the starting of each month for 12 months. The books of the firm are closed on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.

Answer

Interest on drawings = ₹ 1,950

Question Num – Q23

Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2019 were ₹ 2,50,000 and ₹ 1,50,000, respectively. They share profits equally. On July 01, 2019, they decided that their capitals should be ₹ 1,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2020.

Answer

Raj: 3 months (April–June) on ₹ 2,50,000 and 9 months on ₹ 1,00,000.

Neeraj

Interest on capital: Raj ₹ 11,000; Neeraj ₹ 9,000

Question Num – Q24

Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings during 2019 were ₹ 24,000 and ₹ 16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.

Answer

Drawn evenly throughout the year, the average period = 6 months.

Interest on drawings: Amit ₹ 1,200; Bhola ₹ 800

Question Num – Q25

Harish is a partner in a firm. He withdrew the following amounts during the year 2019: May 2019 ₹ 4,000; August 2019 ₹ 12,000; September 2019 ₹ 4,000; December 2019 ₹ 12,000; March 2020 ₹ 4,000. Interest on drawings is to be charged @ 7½ % p.a. Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2020.

Answer

The dates and year-end in the question are not consistent (withdrawals from May 2019 to March 2020, but the year ends on 31 December 2020), so only the method can be shown. Taking the books to close on 31 March 2020 and the withdrawals on the 1st of each month:

(The textbook key prints ₹ 1,800 for this question, based on date assumptions that the question does not state.)

Interest on drawings by the product method = ₹ 1,375 (the textbook key shows ₹ 1,800).

Question Num – Q26

Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are ₹ 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming that money is withdrawn: (i) in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of every month.

Answer

Total drawings = 2,000 × 12 = ₹ 24,000.

Case	Average period	Interest (₹)
(i) Beginning of every month	6.5 months	1,300
(ii) Middle of every month	6 months	1,200
(iii) End of every month	5.5 months	1,100

1. ₹ 1,300 (ii) ₹ 1,200 (iii) ₹ 1,100

Question Num – Q27

On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of ₹ 24,000, ₹ 18,000 and ₹ 12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to ₹ 36,000 and the partner’s drawings had been Ram, ₹ 3,600; Shyam, ₹ 4,500 and Mohan, ₹ 2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.

Answer

Opening capital = Closing capital + Drawings − Share of profit. Profit shares (3 : 2 : 1): ₹ 18,000, ₹ 12,000, ₹ 6,000.

Interest on capital: Ram ₹ 480; Shyam ₹ 525; Mohan ₹ 435

Question Num – Q28

Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’s share in profit has been guaranteed by Amit and Sumit to be a minimum sum of ₹ 8,000. Profits for the year ended March 31, 2017 was ₹ 36,000. Divide profit among the partners by preparing profit and loss appropriation account.

Answer

Samiksha’s share = 36,000 × 1/6 = ₹ 6,000; deficiency = ₹ 2,000, borne by Amit and Sumit in their ratio 3 : 2: Amit ₹ 1,200 and Sumit ₹ 800.

Profit and Loss Appropriation Account

Amit ₹ 16,800; Sumit ₹ 11,200; Samiksha ₹ 8,000

Question Num – Q29

Pinki, Deepti and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than ₹ 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to ₹ 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.

Answer

Normal shares: Pinki ₹ 20,000; Deepti ₹ 16,000; Kaku ₹ 4,000. Deficiency = 5,000 − 4,000 = ₹ 1,000, borne equally: ₹ 500 each.

(Being profit distributed among the partners after the guarantee to Kaku.)

Deficiency borne by Pinki and Deepti: ₹ 500 each.

Question Num – Q30

Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed ₹ 10,000 as her share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are ₹ 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.

Answer

2016: Abhay ₹ 20,000, Siddharth ₹ 10,000, Kusum ₹ 10,000. 2017: Abhay ₹ 30,000, Siddharth ₹ 18,000, Kusum ₹ 12,000.

Question Num – Q31

Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than ₹ 5,000. The profits for the year ending March 31, 2020 amounted to ₹ 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show distribution of profit among the partner.

Answer

Normal shares: Radha ₹ 17,500; Mary ₹ 14,000; Fatima ₹ 3,500. Deficiency = ₹ 1,500, borne by Radha ₹ 900 and Mary ₹ 600 (3 : 2).

Deficiency borne by Radha ₹ 900 and Mary ₹ 600.

Question Num – Q32

X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of ₹ 8,000. The net profit for the year ended March 31, 2020 was ₹ 30,000. Prepare Profit and Loss Appropriation Account.

Answer

Z’s share = 30,000 × 1/6 = ₹ 5,000; deficiency = ₹ 3,000, borne by X and Y in 3 : 2: X ₹ 1,800; Y ₹ 1,200.

Profit and Loss Appropriation Account

X ₹ 13,200; Y ₹ 8,800; Z ₹ 8,000

Question Num – Q33

Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of ₹ 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the Profit and loss Appropriation Account showing distribution of profits among the partners in case the profits for year 2015 are: (i) ₹ 2,50,000; (ii) 3,60,000.

Answer

1. Arun ₹ 90,000, Boby ₹ 1,00,000, Chintu ₹ 60,000. (ii) Arun ₹ 1,44,000, Boby ₹ 1,44,000, Chintu ₹ 72,000.

Question Num – Q34

Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall be ₹ 20,000. The net profit for the year ended March 31, 2017 amounted to ₹ 70,000. Prepare Profit and Loss Appropriation Account.

Answer

Cheena’s normal share = 70,000 × 1/5 = ₹ 14,000; deficiency = ₹ 6,000, borne by Ashok and Brijesh in their ratio (equal): ₹ 3,000 each.

Profit and Loss Appropriation Account

Ashok ₹ 25,000; Brijesh ₹ 25,000; Cheena ₹ 20,000

Question Num – Q35

Ram, Mohan and Sohan are partners with capitals of ₹ 5,00,000, ₹ 2,50,000 and ₹ 2,00,000 respectively. After providing interest on capital @ 10% p.a. the profits are divisible as follows: Ram 1/2, Mohan 1/3 and Sohan 1/6. Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than ₹ 25,000, in any year. The net profit for the year ended March 31, 2017 is ₹ 2,00,000, before charging interest on capital. You are required to show distribution of profit by preparing P & L Appropriation Account.

Answer

Interest on capital: Ram ₹ 50,000; Mohan ₹ 25,000; Sohan ₹ 20,000 (total ₹ 95,000). Profit left to divide = 2,00,000 − 95,000 = ₹ 1,05,000.

Normal shares (1/2, 1/3, 1/6): Ram ₹ 52,500; Mohan ₹ 35,000; Sohan ₹ 17,500. The deficiency of ₹ 7,500 (25,000 − 17,500) is borne by Ram and Mohan in their ratio 3 : 2: ₹ 4,500 and ₹ 3,000.

Profit and Loss Appropriation Account

Profit shares: Ram ₹ 48,000, Mohan ₹ 32,000, Sohan ₹ 25,000 (besides interest on capital).

Question Num – Q36

Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following: (i) Sona’s share in the profits, guaranteed to be not less than ₹ 15,000 in any year. (ii) Babita gave guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the preceding five years, when she was carrying on profession alone (which is ₹ 25,000). The net profit for the year ended March 31, 2017 is ₹ 75,000. The gross fee earned by Babita for the firm was ₹ 16,000. You are required to prepare Profit and Loss Appropriation Account.

Answer

1. Babita’s fee guarantee: shortfall = 25,000 − 16,000 = ₹ 9,000, which Babita must make good. The profit available for distribution becomes 75,000 + 9,000 = ₹ 84,000, and Babita’s capital account is debited by ₹ 9,000.
2. Normal shares of ₹ 84,000 (3 : 2 : 1): Amit ₹ 42,000; Babita ₹ 28,000; Sona ₹ 14,000.
3. Sona’s guarantee: her minimum is ₹ 15,000, so the deficiency of ₹ 1,000 is borne by Amit and Babita in their ratio 3 : 2: ₹ 600 and ₹ 400.

Profit and Loss Appropriation Account

Amit ₹ 41,400; Babita ₹ 27,600 (after ₹ 9,000 is charged to her for the fee shortfall); Sona ₹ 15,000.

Question Num – Q37

The net profit of X, Y and Z for the year ended March 31, 2020 was ₹ 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books: (i) Interest on Capital @ 5% p.a. (ii) Interest on drawings amounting to X ₹ 700, Y ₹ 500 and Z ₹ 300. (iii) Partner’s Salary: X ₹ 1,000, Y ₹ 1,500 p.a. The capital accounts of partners were fixed as: X ₹ 1,00,000, Y ₹ 80,000 and Z ₹ 60,000. Record the adjustment entry.

Answer

Interest on capital: X ₹ 5,000; Y ₹ 4,000; Z ₹ 3,000 (total ₹ 12,000).

Correct distribution

(Being adjustment for omitted interest, salary and interest on drawings.)

X Dr ₹ 2,500; Y Cr ₹ 2,400; Z Cr ₹ 100.

Question Num – Q38

The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for some years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit sharing ratio should come into effect retrospectively for the last three years. Harry and Porter have agreed on this account. The profits for the last three years were: 2014-15 ₹ 22,000; 2015-16 ₹ 24,000; 2016-17 ₹ 29,000. Show adjustment of profits by means of a single adjustment journal entry.

Answer

Total profit of three years = 22,000 + 24,000 + 29,000 = ₹ 75,000.

Harry Dr ₹ 5,000; Porter Dr ₹ 5,000; Ali Cr ₹ 10,000.

Question Num – Q39

Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on March 31, 2017: Liabilities: Mannu’s Capital ₹ 30,000; Shristhi’s Capital ₹ 10,000 (total ₹ 40,000). Assets: Drawings – Mannu ₹ 4,000, Shristhi ₹ 2,000 (₹ 6,000); Other Assets ₹ 34,000 (total ₹ 40,000). Profit for the year ended March 31, 2017 was ₹ 5,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and @ 6% p.a. on drawings was omitted. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry.

Answer

Omitted items (on the capital balances shown):

• Interest on capital (5 %): Mannu ₹ 1,500; Shristhi ₹ 500 (total ₹ 2,000).
• Interest on drawings (6 % for 6 months): Mannu ; Shristhi ₹ 60 (total ₹ 180).

  

Shristhi Dr ₹ 288; Mannu Cr ₹ 288.

Question Num – Q40

On March 31, 2017 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin ₹ 20,000; Monu, ₹ 15,000 and Ahmed, ₹ 9,000. Interest on drawings chargeable to partners were Eluin ₹ 500, Monu ₹ 360 and Ahmed ₹ 200. The net profit during the year amounted to ₹ 1,20,000. The profit sharing ratio was 3 : 2 : 1. Record necessary adjustment entry.

Answer

Opening capital = Closing + Drawings − Profit share (3 : 2 : 1 of ₹ 1,20,000 = ₹ 60,000, ₹ 40,000, ₹ 20,000):

Eluin Dr ₹ 570; Monu Cr ₹ 10; Ahmed Cr ₹ 560.

Question Num – Q41

Azad and Benny are equal partners. Their fixed capitals are ₹ 40,000 and ₹ 80,000, respectively. After the accounts for the year have been prepared it is discovered that interest at 5% p.a. as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the beginning of the next year. Record the necessary journal entry.

Answer

Interest on capital omitted: Azad ₹ 2,000; Benny ₹ 4,000 (total ₹ 6,000). The profit that was shared equally should have been reduced by ₹ 6,000, i.e. by ₹ 3,000 for each partner.

Azad Dr ₹ 1,000; Benny Cr ₹ 1,000.

Question Num – Q42

Mohan, Vijay and Anil are partners, the balances in their capital accounts being ₹ 30,000, ₹ 25,000 and ₹ 20,000 respectively. In arriving at these figures, the profits for the year ended March 31, 2017 amounting to ₹ 24,000 had been credited to partners in the proportion in which they shared profits. During the year the drawings of Mohan, Vijay and Anil were ₹ 5,000, ₹ 4,000 and ₹ 3,000, respectively. Subsequently, the following omissions were noticed: (a) Interest on Capital, at the rate of 10% p.a., was not charged. (b) Interest on Drawings: Mohan ₹ 250, Vijay ₹ 200, Anil ₹ 150 was not recorded in the books. Record necessary corrections through journal entries.

Answer

The profit-sharing ratio is not stated in the question; the textbook key is consistent with equal sharing (₹ 8,000 each), so this is assumed.

Opening capital = Closing + Drawings − Profit credited:

Debit Anil’s Capital A/c ₹ 550; credit Mohan’s Capital A/c ₹ 550.

Question Num – Q43

Anju, Manju and Mamta are partners whose fixed capitals were ₹ 10,000, ₹ 8,000 and ₹ 6,000, respectively. As per the partnership agreement, there is a provision for allowing interest on capitals @ 5% p.a. but entries for the same have not been made for the last three years. The profit sharing ratio during these three years remained as follows: 2016 – Anju 4, Manju 3, Mamta 5; 2017 – 3 : 2 : 1; 2018 – 1 : 1 : 1. Make necessary and adjustment entry at the beginning of the fourth year i.e. April 2019.

Answer

Interest on capital each year: Anju ₹ 500; Manju ₹ 400; Mamta ₹ 300 (total ₹ 1,200). If it had been recorded, each year the partners would have shared the extra ₹ 1,200 burden in their profit-sharing ratio.

Mamta Dr ₹ 200; Anju Cr ₹ 100; Manju Cr ₹ 100.

Topic checklist

• ☒ Partnership, deed and Act provisions (SA Q1, Q2, Q7; LA Q1 – Q3)
• ☒ Fixed and fluctuating capital accounts (SA Q3, Q5; Num Q1, Q2, Q5, Q6, Q10, Q12, Q13, Q19)
• ☒ Profit and Loss Appropriation Account (SA Q4; Num Q3 – Q13, Q19)
• ☒ Interest on capital (Num Q14 – Q17, Q23, Q27)
• ☒ Interest on drawings (SA Q6; LA Q4; Num Q18 – Q22, Q24 – Q26)
• ☒ Guarantee of profit (Num Q8, Q9, Q28 – Q36)
• ☒ Past adjustments and change in ratio (LA Q5; Num Q37 – Q43)

Total questions answered: 55 of 55