Understanding Partner Profit Distribution with Guarantee

This question involves the distribution of firm profits among partners, including a new partner who has been guaranteed a minimum amount of profit. When a partner is guaranteed a minimum profit and their share of the actual profit is less than the guaranteed amount, the deficiency is usually borne by the existing partners according to a pre-agreed ratio or their existing profit-sharing ratio.

Calculating Mohan's Profit Share

The firm earned a profit of ₹ 76,000 for the year. Mohan is admitted for a 1/4th share in future profits.

Mohan's share of profit = Firm's Profit × Mohan's Share Ratio

Using the given values:

Mohan's share of profit $$ = \text{₹ } 76,000 \times \frac{1}{4} = \text{₹ } 19,000 $$

Identifying the Deficiency in Mohan's Profit

Mohan was guaranteed a minimum amount of ₹ 25,000. His calculated share of profit is ₹ 19,000.

Since Mohan's calculated share (₹ 19,000) is less than his guaranteed amount (₹ 25,000), there is a deficiency.

Deficiency in Mohan's profit = Guaranteed Amount - Mohan's Share of Profit

Deficiency $$ = \text{₹ } 25,000 - \text{₹ } 19,000 = \text{₹ } 6,000 $$

Distributing the Deficiency Between Kavita and Lalita

The question states that both Kavita and Lalita undertake to meet the liability arising due to the guaranteed amount to Mohan in their respective profit-sharing ratio. Their profit-sharing ratio is 2 : 1.

The total deficiency to be borne by Kavita and Lalita is ₹ 6,000. This deficiency will be shared between Kavita and Lalita in their ratio of 2 : 1.

Kavita's share in deficiency $$ = \text{Deficiency } \times \frac{\text{Kavita's Ratio}}{\text{Total Ratio}} $$

Kavita's share in deficiency $$ = \text{₹ } 6,000 \times \frac{2}{2+1} = \text{₹ } 6,000 \times \frac{2}{3} $$

Kavita's share in deficiency $$ = \text{₹ } 4,000 $$

Lalita's share in deficiency $$ = \text{Deficiency } \times \frac{\text{Lalita's Ratio}}{\text{Total Ratio}} $$

Lalita's share in deficiency $$ = \text{₹ } 6,000 \times \frac{1}{2+1} = \text{₹ } 6,000 \times \frac{1}{3} $$

Lalita's share in deficiency $$ = \text{₹ } 2,000 $$

The total deficiency borne by Kavita and Lalita (₹ 4,000 + ₹ 2,000) equals the total deficiency (₹ 6,000).

Calculating Final Profit Distribution (For understanding)

While the question only asks for the deficiency borne by Kavita, let's see the final distribution for clarity:

Mohan's final profit share = Mohan's calculated share + Deficiency borne by Kavita and Lalita

Mohan's final profit share = ₹ 19,000 + ₹ 6,000 = ₹ 25,000 (This matches the guaranteed amount)

Kavita's share before deficiency = Remaining profit for Kavita and Lalita × Kavita's Ratio

Remaining profit for Kavita and Lalita $$ = \text{Total Profit - Mohan's Share of Profit before guarantee adjustment} $$

Remaining profit $$ = \text{₹ } 76,000 - \text{₹ } 19,000 = \text{₹ } 57,000 $$

Kavita's share before deficiency $$ = \text{₹ } 57,000 \times \frac{2}{3} = \text{₹ } 38,000 $$

Lalita's share before deficiency $$ = \text{₹ } 57,000 \times \frac{1}{3} = \text{₹ } 19,000 $$

Kavita's final profit share = Kavita's share before deficiency - Deficiency borne by Kavita

Kavita's final profit share = ₹ 38,000 - ₹ 4,000 = ₹ 34,000

Lalita's final profit share = Lalita's share before deficiency - Deficiency borne by Lalita

Lalita's final profit share = ₹ 19,000 - ₹ 2,000 = ₹ 17,000

Total Profit distributed = Kavita's share + Lalita's share + Mohan's share

Total Profit distributed = ₹ 34,000 + ₹ 17,000 + ₹ 25,000 = ₹ 76,000 (Matches firm's profit)

Summary of Calculation Steps

• Calculate the new partner's (Mohan's) share of profit based on the firm's total profit.
• Compare Mohan's calculated share with the guaranteed amount.
• If the calculated share is less than the guaranteed amount, find the deficiency.
• Distribute the deficiency among the partners who have guaranteed the amount, in their agreed ratio (or old ratio if not specified otherwise).

Conclusion

The deficiency arising from Mohan's guarantee amounts to ₹ 6,000. This deficiency is borne by Kavita and Lalita in their profit-sharing ratio of 2:1. Therefore, Kavita bears $$2/3$$ of the deficiency, which is ₹ 4,000.

Revision Table: Partnership Profit Guarantee

Additional Information: Profit and Loss Appropriation Account

The distribution of profits, including adjustments for guaranteed amounts, is typically shown in the Profit and Loss Appropriation Account. This account is an extension of the Profit and Loss Account and shows how the net profit for the year is distributed among the partners.

• The net profit from the Profit and Loss Account is transferred to the credit side of the P&L Appropriation Account.
• Items like interest on capital, partner salaries, and commission are debited.
• Interest on drawings is credited.
• The remaining profit is distributed among partners in their profit-sharing ratio.
• If a partner has a guaranteed profit, their share is adjusted to meet the minimum guaranteed amount. The amount of deficiency is then debited from the accounts of the partners who gave the guarantee and credited to the guaranteed partner's account.
• The final profit shares are then transferred to the partners' Capital or Current Accounts.

In this specific case, after crediting the ₹ 19,000 calculated profit share to Mohan, a further ₹ 6,000 would be credited to his account to meet the guarantee. This ₹ 6,000 would be debited from Kavita's share (₹ 4,000) and Lalita's share (₹ 2,000) in the P&L Appropriation Account before final profit distribution.