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Kavita and Pradeep are partners, sharing profits in the ratio of 3 : 2. They employed Chandan as their manager, to whom they paid a salary of Rs 750 p.m. Chandan deposited Rs. 20,000 on which interest is payable @ 9% p.a. At the end of 2001 (after the division of profit), it was decided that Chandan should be treated as partner w.e.f. Jan. 1., 1998 with 1/6 th share in profits. His deposit being considered as capital carrying interest @ 6% p.a. like capital of other partners. Firm’s profits after allowing interest on capital were as follows:

Record the necessary journal entries to give effect to the above.

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Chandan received as Manager = Interest on Loan + Salary 

= 7,200 T 36,000 = 43,200

Total Profit of 4 years before interest on Chandan’s Loan an d Salary 

= 2,38,200 Interest on Chandan’s Capital for 4 years 

= {20,000 x (6/100) = 1,200}

= 1,200 x 4 = 4,800

Profit after interest on all partners Capital

= Total Profit of four years before interest on Chandan’s loan and Salary – Interest on Chandans capital for four years. 

= 2,38,200 – 4,800 = 2,33,400 

Wrong Distribution – Distribution of 4 years 

Profit when Chandan as a Manager

kavita (1,95,000 x (3/5) = 1,17,000

Pradeep (1,95,000 x (2/5) = 78,000

Chandan received as manager = Interest on Loan + Salary

Right distribution – Division of Profit when Chandan as Partner

Kavita’s share of profit (2,33,400 – 38,900) x (3/5) = 1,16,700

Pradeep’s share of Profit (2,33,400 – 38,900) x (2/5) = 77,800

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