Fundamentals of partnership and Goodwill Test - 8

Distribution of profit in 4:3:3:2 Ratio:
A’s share of profit = 96,000 × 4/12 = 32,000-2,000= Rs. 30,000
B’s share of profit = 96,000 × 3/12 = 24,000-1,333= Rs. 22,667
C’s share of profit = 96,000 × 3/12 = 24,000-667= Rs. 23,333
D’s share of profit = 96,000 × 2/12 = 16,000+4000= Rs. 20,000
D’s Guaranteed amount is Rs.20,000 but he is getting Rs.16,000 (remaining 4,000 will be paid by A, B and C in 3:2:1 Ratio)

In this case there is no deficiency of profit to C:
1. Profit to A = 1,20,000 × 3/6 = 60,000
2. Profit to B = 1,20,000 × 2/6 = 40,000
3. Profit to A = 1,20,000 × 1/6 = 20,000
Guaranteed amount is Rs.15,000 but C is getting more than that so there is no deficiency.

Calculation of interest on drawings:
1. When drawings during the year are given but it is not mentioned that drawings are made in the beginning, middle or end, in such a case average period should be used because per annum word is given with the rate of interest.
2. Average Period = 6 Months
3. Interest on Drawings = 7,000 × 12/100 × 6/12 = Rs. 420

Instead of changing the prepared accounts, a rectified entry or adjustment entry should be done for these types of adjustments. Profit and Loss adjustment is always prepared to make such adjustments. For example, Profit and Loss Adjustment account is prepared in case of change in existing profit sharing ratio, admission of a new partner, retirement/death etc., It is also known as Revaluation Account.

Profit and loss adjustment account is also known as Revaluation Account. This account is different from profit and loss appropriation account. Revaluation account is prepared when reconstitution of partnership takes place i.e. change in existing profit sharing ratio, admission of a new partner, retirement/death of a partner etc.

The concept of errors and omissions begins with:
1.When partnership deed provides for interest on capital, drawings, salary and commission etc. but not provided for.
2.When Appropriations are provied at a higher rate than the given rate.
3.When Appropriations are provided at a lower rate than the given rate.

To calculate the interest on capital, we must find out the opening capital first. Sometimes opening capital is not given in the question but closing capital is given. In such a case following formula should be used to find out the opening capital:
Opening Capital = Closing Capital + Drawings - profit

Calculation of opening capital:
Formula : Closing Capital + Drawings – Profit
A = 20,000 + 3,600 – 12,000 = Rs.11,600
B = 18,000 + 4,500 – 12,000 = Rs.10,500
C = 12,000 + 2,700 – 12,000 = Rs. 2,700