Guarantee of Profits and Guarantee of Income
Concept of Guarantee in case of Partnership
A Guarantee of Profit is an assurance
given to a partner that their share of the firm's profit will not fall below a
specified minimum amount in a financial year.
If a partner's actual share of profit
is less than the guaranteed amount, the shortfall called Deficiency is made
good by the partner(s) who provided the guarantee.
Types of Guarantee Questions
1. Guarantee by a Specific Partner or
partners (Personal Guarantee)
Example: A, B and C are partners in a
firm sharing profits and losses in the ratio of 3:2:1. B is guaranteed that his
share of profits will not be less than Rs. 1,00,000 by A.
2. Guarantee by the Firm (Remaining
Partners)
Example: A, B and C are partners in a
firm sharing profits and losses in the ratio of 3:2:1. B is guaranteed that his
share of profits will not be less than Rs. 1,00,000 by A.
3. Preparation of Profit and Loss Appropriation account
4. Guarantee of Income by a partners
5. Past Adjustment/Error Rectification
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1. Abhay,
Boris and Chetan were partners in a firm sharing profits in the ratio of 5:
3:2. Boris was guaranteed a profit of Rs. 95,000. Any deficiency on account of
this was to be borne by Abhay and Chetan equally. The firm earned a profit of
Rs. 2,00,000 for the year ended 31 March, 2023. The amount given by Abhay to
Boris as guaranteed amount will be:
(A) Rs. 17,500
(B) Rs. 35,000
(C) Rs. 25,000
(D) Rs. 10.000
2. Raju,
Sohan and Tina are partners in a firm sharing profits and losses in the ratio
of 2:2:1. Tina is guaranteed a minimum amount of Rs. 40,000 as share of profit
every year. Any deficiency arising on that account shall be borne by Raju. If
profit of the firm for the year ended 31st March, 2023 is Rs. 1,60,000, Raju
will bear a deficiency of:
(A) Rs. 8,000
(B) Rs. 40,000
(C) Rs. 48,000
(D) Rs. 4,000
3. Anu,
Bindu and Siya were partners in a firm sharing profits and losses in the ratio
of 2:2:1. Siya was guaranteed that her share of profit will not be less than
Rs. 50,000. The firm’s profit for the year ended 31st March, 2022 was Rs.
2,00,000. The amount of deficiency to be borne by Anu was:
(a) Rs.
10,000
(b) Rs.
2,500
(c) Rs.
75,000
(d) Rs.
5,000
4. A, B
and C are partners sharing profits in the ratio of 5: 4: 1. C is given a
guarantee that his minimum share of profits in any given year would be Rs.
5,000. Deficiency, if any, would be borne by A and B equally. The profits for
the year 2024-25 amounted to Rs. 40,000. Pass the necessary journal entries in
the books of the firm.
5. Kavita,
Savita and Madhu were partners in a firm with capitals of Rs. 6,00,000, Rs.
4,00,000 and Rs. 2,00,000 respectively. After providing interest on capital @
10% p.a., the profits are divisible as follows:
a) Kavita
1/3, Savita1/2 and Madhu 1/6. Kavita personally guaranteed that Savita's share
of profit after charging interest on capital would not be less than Rs.
1,00,000 in any year.
b) The
profit for the year ending 31st March, 2022 amounted to Rs. 3,00,000 before
providing interest on capital.
- Savita's
share of profit is short of the guaranteed amount by:
(a) Rs.
40,000
(b) Rs.
70,000
(c) Rs.
20,000
(d) 10,000
- The
total profits of the firm after adjustment of guaranteed amount will be
distributed between the partners as:
(a) Kavita
Rs. 60,000, Savita 40,000 and Madhu Rs. 20,000
(b) Kavita
Rs. 50,000, Savita Rs. 1,00,000 and Madhu Rs. 30,000
(c) Kavita
Rs. 60,000, Savita Rs. 90,000 and Madhu Rs. 30,000
(d) Kavita
Rs. 60,000, Savita Rs. 1,00,000 and Madhu Rs. 20,000
6. Ankur,
Bhavna and Disha are partners in a firm. On 1st April 2017, the
balance in their capital accounts stood at Rs. 14,00,000, Rs. 6,00,000 and Rs.
4,00,000 respectively. They shared profits in the proportion of 7: 3: 2
respectively. Partners are entitled to interest on capital @ 6% p.a. and salary
to Bhavna @ Rs. 50,000 p.a. and a commission of Rs. 3,000 per month to Disha as
per the provisions of the Partnership Deed.
Bhavna’s
share of profit (excluding interest on capital) is guaranteed at not less than
1,70,000 p.a. Disha’s share of profit (including interest on capital but
excluding salary) is guaranteed at not less than Rs. 1,50,000 p.a. Any
deficiency arising on that account shall be met by Ankur. The profits of the
firm for the year ended 31st March, 2018 amounted to Rs. 9,50,000.
Prepare Profit and Loss Appropriation A/c for the year ended 31st
March, 2018.
7. Three
Chartered Accounts A, B and C form a partnership, profits being divisible in
the ratio of 3: 2: 1 subject to the following:
- C’s
share of profit guaranteed to be not less than Rs. 15,000 p.a.
- B given
a guarantee to the effect that gross fee earned by him for the firm shall be
equal to his average gross fee of the proceeding five years when he was
carrying on profession alone, which on an average works out a Rs. 25,000.
- The
profits for the first year of the partnership are Rs. 75,000. The gross fee
earned by B for the firm is Rs. 16,000. You are required to show Profit &
Loss Appropriation Account after giving effect to the above.
8. The partners of the firm
distributed the profits for the year ended 31st March, 2019, Rs. 1,90,000
in the ratio of 3: 2: 1 without providing for the following adjustments:
- A and B were entitled to salary of Rs.
15,000 each p.a.
- B was entitled to a Commission of
Rs. 5,000.
- B and C had guaranteed a minimum
profit of Rs. 60,000 p.a. to A.
- Profits were to be shared in the
ratio of 3: 3: 2.
Pass necessary Journal entry for the above adjustments in the books of the firm.
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