Partners P and Q each hold a profit‑sharing ratio of 1:1 with capitals ₹200,000 and ₹300,000 respectively. Before admitting partner R, the firm revalues its building, increasing its value by ₹120,000. The revaluation surplus is to be shared in the old profit‑sharing ratio. R is admitted with ₹100,000 capital and will receive interest at 8% per annum for 9 months before admission. After admission the profit‑sharing ratio becomes P:Q:R = 3:2:1. The partnership earns a profit of ₹150,000 during the year of admission. Compute (i) the amount of revaluation surplus credited to each existing partner, (ii) the interest payable to R, and (iii) the final profit share of each partner after adjusting for interest.
Answer
Revaluation surplus: P ₹60,000, Q ₹60,000; Interest to R: ₹6,000; Profit shares – P ₹72,000, Q ₹48,000, R ₹24,000
The correct answer is Revaluation surplus: P ₹60,000, Q ₹60,000; Interest to R: ₹6,000; Profit shares – P ₹72,000, Q ₹48,000, R ₹24,000 — Thus, the revaluation surplus, interest, and profit shares are as stated.
Step-by-step solution
- Revaluation surplus = ₹120,000; share it equally (1:1) so P gets ₹60,000 and Q gets ₹60,000.
- Interest on R’s capital for 9 months: ₹100,000 × 8% × (9/12) = ₹6,000.
- Deduct R’s interest from total profit: ₹150,000 – ₹6,000 = ₹144,000 available for distribution.
- New profit‑sharing ratio 3:2:1 gives total 6 parts.
- P’s share = 3/6 × ₹144,000 = ₹72,000.
- Q’s share = 2/6 × ₹144,000 = ₹48,000.
- R’s share = 1/6 × ₹144,000 = ₹24,000.
- Thus, the revaluation surplus, interest, and profit shares are as stated.
Common mistake: Forgetting to deduct interest before profit allocation
Concept tested: Revaluation surplus and profit distribution on admission
Published · How this solution was prepared and checked
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