Question 1 Rara and Riri are in partnership sharing profits and losses 4:2. Under the terms of the partnership agreement, the partners are entitled to interest on capital at 7 per cent per annum and Riri is entitled to a yearly salary of RM7,500. Interest is charged on drawings at 5 per cent per annum and the amounts of interest are given below. No interest is charged or allowed on current accounts. The partners’ capitals at 1 July 2021 were: Rara RM40,000 and Riri RM20,000. The net trading profit of the firm, before dealing with partners’ interest and Riri’s salary for the year ended 30 June 2022 was RM25,900. Interest on drawings for the year amounted to RM400 for Rara and RM370 for Riri. At 1 July 2020, there was a credit balance of RM1,200 on Riri’s current account, while Rara’s current account balance was a debit of RM500. Drawings for the year to 30 June 2022 amounted to RM10,000 for Rara and RM15,000 for Riri. Required: Prepare, for the year to 30 June 2022: (a)The firm’s profit and loss appropriation account
Question
Question 1 Rara and Riri are in partnership sharing profits and losses 4:2. Under the terms of the partnership agreement, the partners are entitled to interest on capital at 7 per cent per annum and Riri is entitled to a yearly salary of RM7,500. Interest is charged on drawings at 5 per cent per annum and the amounts of interest are given below. No interest is charged or allowed on current accounts. The partners’ capitals at 1 July 2021 were: Rara RM40,000 and Riri RM20,000. The net trading profit of the firm, before dealing with partners’ interest and Riri’s salary for the year ended 30 June 2022 was RM25,900. Interest on drawings for the year amounted to RM400 for Rara and RM370 for Riri. At 1 July 2020, there was a credit balance of RM1,200 on Riri’s current account, while Rara’s current account balance was a debit of RM500. Drawings for the year to 30 June 2022 amounted to RM10,000 for Rara and RM15,000 for Riri. Required: Prepare, for the year to 30 June 2022: (a)The firm’s profit and loss appropriation account
Solution
To prepare the firm's profit and loss appropriation account for the year to 30 June 2022, we need to follow these steps:
Step 1: Calculate the interest on capital for both partners. Rara's interest on capital = 7% of RM40,000 = RM2,800 Riri's interest on capital = 7% of RM20,000 = RM1,400
Step 2: Deduct the interest on capital and Riri's salary from the net trading profit. Net trading profit = RM25,900 Less: Interest on capital (Rara RM2,800 + Riri RM1,400) = RM4,200 Less: Riri's salary = RM7,500 Remaining profit = RM25,900 - RM4,200 - RM7,500 = RM14,200
Step 3: Distribute the remaining profit according to the profit sharing ratio. Rara's share of profit = 4/6 * RM14,200 = RM9,467 Riri's share of profit = 2/6 * RM14,200 = RM4,733
Step 4: Calculate the interest on drawings. Rara's interest on drawings = RM400 Riri's interest on drawings = RM370
Step 5: Prepare the profit and loss appropriation account.
- Interest on capital: Rara RM2,800, Riri RM1,400
- Salary: Riri RM7,500
- Profit share: Rara RM9,467, Riri RM4,733
- Interest on drawings: Rara RM400, Riri RM370
Step 6: Calculate the balance on each partner's current account. Rara's current account balance = (RM2,800 + RM9,467) - RM400 - RM10,000 (drawings) = RM1,867 (debit) Riri's current account balance = (RM1,400 + RM7,500 + RM4,733) - RM370 - RM15,000 (drawings) + RM1,200 (previous balance) = RM463 (credit)
So, the firm's profit and loss appropriation account for the year to 30 June 2022 would show Rara with a debit balance of RM1,867 and Riri with a credit balance of RM463.
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