Page 323 - MA-12

M.14 Management Accounting (Section B)—ISC XII

5. (a) ADJUSTMENT JOURNAL ENTRY
Date Particulars L.F. Dr. Cr.
` `
Strong’s Capital A/c ...Dr. 8,000
To Feeble’s Capital A/c 8,000
(Being the error rectified)

Working Notes:

1. STATEMENT SHOWING REQUIRED ADJUSTMENT
Particulars Strong‘s Capital A/c Weak‘s Capital A/c Feeble’s Capital A/c Firm
Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)

Salary Payable to Strong & Weak ... 6,000 ... 6,000 ... ... 12,000 ...
Commission Payable to Feeble ... ... ... ... ... 8,000 8,000 ...
Share of Profit in ` 1,20,000 (i.e.,
` 1,40,000 – ` 12,000 – ` 8,000) ... 42,000 ... 50,000 ... 28,000 1,20,000 ...
(WN 2)
Profit of ` 1,40,000 already dis-
tributed in 2 : 2 : 1, now taken back 56,000 ... 56,000 ... 28,000 ... ... 1,40,000
56,000 48,000 56,000 56,000 28,000 36,000 1,40,000 1,40,000
Net Effect 8,000 Dr. ... 8,000 Cr. ...

2. DISTRIBUTION OF PROFITS
Particulars Strong Weak Feeble
Profit of ` 1,20,000 [i.e., ` 1,40,000 – ` 12,000 ` 1,20,000 × 3/8 ` 1,20,000 × 3/8 ` 1,20,000 × 2/8
(Salary of Strong and Weak) – ` 8,000 = ` 45,000 = ` 45,000 = ` 30,000
(Commission of Feeble)] will be divided between
Strong, Weak and Feeble in the ratio of 3 : 3 : 2
However, Weak’s minimum guaranteed profit is ` 50,000. So, there is a deficiency of ` 5,000.

Deficiency to be borne by Strong and Feeble in 3 : 2 ` 5,000 × 3/5 ... ` 5,000 × 2/5
= ` 3,000 = ` 2,000
Adjusted Share of Profit ` 45,000 – ` 3,000 ` 45,000 + ` 3,000 + ` 30,000 – ` 2,000

= ` 42,000 ` 2,000 = ` 50,000 = ` 28,000
(b) (i) Goodwill at 3 years’ Purchase of Average Profit:

` 1,90,000 + ` 2,20,000 + ` 2,50,000
Average Profit = = ` 2,20,000
3
Average Profit for Goodwill = ` 2,20,000 – Remuneration of Partners
= ` 2,20,000 – ` 1,00,000 = ` 1,20,000

Goodwill = Average Profit × Number of Years’ Purchase
= ` 1,20,000 × 3 = ` 3,60,000.