question_answer

(i) R Q and R are partners. Their fixed capitals as on 31st March, 2017 were: P ? Rs. 5,000, Q ? Rs. 1,00,000 and R ? Rs. 1,50,000. Profits for the year 2016 - 17 amounting to Rs. 60,000 were distributed. Interest on capital was credited @ 10% p.a. instead of 12% p.a. Pass the necessary adjusting entry. (ii) Ajit and Baljit were sharing profits in the ratio of 3 : 2. They decided to admit Chaman into the partnership for l/6th share in the future profits. Goodwill, valued at 3 times the average super profits of the firm, was Rs. 18,000, the firm had assets worth Rs. 15 lakhs and liabilities of Rs. 12 lakhs. The normal earning capacity of such firm is expected to be 10% p.a. Find the average profits and actual profits earned by the firm during the last 3 years.

Answer:

(i)                                                         Adjusting Journal Entry

Date	Particulars		LF	Amt (Dr)	Amt (Cr)
	P's Current A/c	Dr		1,000
	To R's Current A/c				1,000
	(Being the interest on capital wrongly provided, now adjusted)

Walking Note Adjustment Table

	Particulars	P (Rs.)	Q (Rs.)	R (Rs.)	Total
A.	Amount already Recorded
	Interest on Capital @ 10%	5,000	10,000	15,000	30,000
	Share of Profit (36,000 - 30.000) in Ratio of 1 : 1 : 1	2,000	2,000	2,000	6,000
		7,000	12,000	17,000	36,000
B.	Amount which should have been Recorded
	Interest on Capital @ 12%	6,000	12,000	18,000	36,000
	Net Effect (A - B)	1,000 (Dr)	Nil	1,000 (Cr)	Nil

(ii) Goodwill is 3 times average super profit. \[3\times \text{Average super profit}\,\text{= }Rs.\,18,000\] \[\therefore \] Average super profit = Rs. 6,000 Capital Invested = Total Assets - Outside Liabilities Capital Invested = 15,00,000 - 12,00,000 = Rs. 3,00,000 Normal Profit \[=\text{Capital invested}\times \frac{\text{Rate}}{100}\] Normal Profit \[=30,00,000\times \frac{10}{100}=Rs.\,30,000\] Super profit = Average Profit - Normal Profit 6,000 = Average Profit - 30,000 \[\therefore \] Average Profit = Rs. 36,000 Average Profit \[=\frac{\text{Actual}\,\,\text{Profit}\,\,\text{in}\,\,\text{last}\,\,\text{3}\,\,\text{year}}{\text{Number}\,\text{of}\,\text{Years}}\] \[36,000=\frac{\text{Actural}\,\,\text{Profits}\,\,\text{in}\,\,\text{last}\,\,\text{3}\,\text{year}}{\text{3}}=Rs.\,1,08,000\] \[\therefore \] Actual Profit in last 3 years = Rs. 1,08,000