can you help me please for this solving problem below...
problem:
A, B and C shared the profit of Rs. 9,00,000 in the ratio of 2:2:1 without providing for interest on B’s loan, B granted a loan of Rs. 4,00,000 in the beginning of accounting year. Where as the partnership deed is silent on the interest on loan and the profit sharing ratio. Give adjusting entry.
To find the adjusting entry for the given problem, we will first calculate the interest on B's loan and then distribute the profit among A, B, and C according to their sharing ratio.
1. Calculate the interest on B's loan:
As the partnership agreement is silent on the interest on the loan, we will assume a reasonable interest rate. Let's assume an interest rate of 10% per annum.
Interest on B's loan = (Loan Amount × Interest Rate) = (Rs. 4,00,000 × 10%) = Rs. 40,000
2. Distribute the profit among A, B, and C:
The profit is shared in the ratio of 2:2:1. To calculate the share of each partner:
Total profit = Rs. 9,00,000
A's share = (2/5) × Total profit = (2/5) × Rs. 9,00,000 = Rs. 3,60,000
B's share = (2/5) × Total profit = (2/5) × Rs. 9,00,000 = Rs. 3,60,000
C's share = (1/5) × Total profit = (1/5) × Rs. 9,00,000 = Rs. 1,80,000
3. Calculate the adjusting entry:
Since B's loan interest is not provided for in the profit sharing ratio, we need to adjust the distribution. The adjusting entry will be:
Interest on B's loan (Rs. 40,000) will be subtracted from B's share of profit.
Adjusted share of B = B's share - Interest on B's loan = Rs. 3,60,000 - Rs. 40,000 = Rs. 3,20,000
The final adjusted profit distribution will be:
A: Rs. 3,60,000
B: Rs. 3,20,000
C: Rs. 1,80,000
Therefore, the adjusting entry will be to debit the interest expense account for Rs. 40,000 and credit B's capital account for Rs. 40,000.
I hope this helps you solve the problem.