Question

Aakash and Baadal entered into partnership on 1st October, 2023 with the capitals of Rs 80,00,000 and Rs 60,00,000 respectively. They decided to share profits and losses equally. Partners were entitled to interest on capital @ 10\% per annum as per the provisions of the partnership deed. Baadal is given a guarantee that his share of profit, after charging interest on capital will not be less than Rs 7,00,000 per annum. Any deficiency arising on that account shall be met by Aakash. The profit of the firm for the year ended 31st March, 2024 amounted to Rs 13,00,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024.

Answer 1

Provided Information

• Capital balances as of 1-10-2023: Aakash - ₹80,00,000; Baadal - ₹60,00,000.
• Profit and loss are shared equally (A : B = 1 : 1).
• Interest on capital is at a rate of 10% per annum.
• Baadal is guaranteed a minimum profit share of ₹7,00,000 per annum, after accounting for interest on capital. Aakash will cover any shortfall.
• Profit for the fiscal year ending 31-03-2024 is ₹13,00,000.

Calculation of Interest on Capital

The partnership commenced on 1-10-2023 and concluded on 31-03-2024, covering a 6-month period. Therefore, interest on capital is calculated for 6 months, at a rate of 10% * (6/12) = 5%.

• Interest for Aakash: ₹80,00,000 * 5% = ₹4,00,000.
• Interest for Baadal: ₹60,00,000 * 5% = ₹3,00,000.
• Total interest on capital: ₹4,00,000 + ₹3,00,000 = ₹7,00,000.

Profit remaining for distribution after deducting interest on capital: ₹13,00,000 (Total Profit) - ₹7,00,000 (Total Interest) = ₹6,00,000.

This remaining profit of ₹6,00,000 is divided equally, resulting in ₹3,00,000 for each partner.

Baadal's total share is calculated as: Interest on capital (₹3,00,000) + Share of remaining profit (₹3,00,000) = ₹6,00,000. However, the guarantee stipulates a minimum of ₹7,00,000. Thus, there is a shortfall of ₹7,00,000 - ₹6,00,000 = ₹1,00,000, which must be provided by Aakash.

Profit & Loss Appropriation Account for the year ended 31-03-2024

Dr (Particulars)	₹	Cr (Particulars)	₹
To Interest on Aakash’s Capital	4,00,000	By Profit (Net)	13,00,000
To Interest on Baadal’s Capital	3,00,000
To Profit transferred to Aakash’s Capital (½ of ₹6,00,000)	3,00,000
To Profit transferred to Baadal’s Capital (½ of ₹6,00,000)	3,00,000
Total	13,00,000	Total	13,00,000

Guarantee Adjustment (Separate from P&L Appropriation)

Aakash compensates for Baadal's shortfall of ₹1,00,000. The corresponding journal entry is:

Aakash’s Capital A/c Dr. ₹1,00,000 To Baadal’s Capital A/c ₹1,00,000 (Being deficiency on guarantee met by Aakash)

Net Impact on Partners' Capitals

• Aakash's net change: ₹4,00,000 (Interest) + ₹3,00,000 (Share) - ₹1,00,000 (Paid to Baadal) = +₹6,00,000.
• Baadal's net change: ₹3,00,000 (Interest) + ₹3,00,000 (Share) + ₹1,00,000 (Guarantee compensation) = +₹7,00,000.

Conclusion

The Profit & Loss Appropriation Account is presented above. Additionally, a journal entry is made debiting Aakash’s Capital Account and crediting Baadal’s Capital Account by ₹1,00,000 to fulfill the guarantee.