Examkin

Question

Difficulty: HardProfit and Loss Appropriation Account

Tariq and Amaka are partners sharing profits and losses in the ratio 3:23:2. For the year ended 31 December 2025, the firm recorded a net profit of ₦680,000\text{₦}680,000 before taking the following items into account:
- Interest on capital: Tariq ₦40,000\text{₦}40,000; Amaka ₦30,000\text{₦}30,000
- Annual salary payable to Amaka: ₦50,000\text{₦}50,000
- Interest on drawings: Tariq ₦10,000\text{₦}10,000; Amaka ₦10,000\text{₦}10,000
- Tariq provided a loan of ₦100,000\text{₦}100,000 to the partnership on 1 January 2025 at an interest rate of 10%10\% per annum, which has not yet been recorded in the Profit and Loss Account.

What is Tariq's share of the net divisible profit for the year?

  1. ₦342,000Answer
  2. B
    ₦348,000
  3. C
    ₦318,000
  4. D
    ₦330,000

Answer

Tariq's share of the net divisible profit is ₦342,000.
Interest on Tariq's loan of ₦10,000\text{₦}10,000 (10%×₦100,00010\% \times \text{₦}100,000) must be charged to the Profit and Loss Account, reducing the net profit to ₦670,000\text{₦}670,000. Adding total interest on drawings (₦20,000\text{₦}20,000) yields ₦690,000\text{₦}690,000. Deducting interest on capital (₦70,000\text{₦}70,000) and Amaka's salary (₦50,000\text{₦}50,000) gives a net divisible profit of ₦570,000\text{₦}570,000. Tariq's 3/53/5 share is 35×₦570,000=₦342,000\frac{3}{5} \times \text{₦}570,000 = \text{₦}342,000.

Step-by-Step Solution

1
Calculate interest on Tariq's loan and determine adjusted net profit
Interest on loan = 10% of ₦100,000 = ₦10,000. Adjusted net profit = ₦680,000 - ₦10,000 = ₦670,000.
Interest on a partner's loan is a charge against profit (debited to Profit and Loss Account), not an appropriation of profit.
2
Add total interest on drawings to the adjusted net profit
Total interest on drawings = ₦10,000 + ₦10,000 = ₦20,000. Profit available = ₦670,000 + ₦20,000 = ₦690,000.
Interest on drawings is income credited to the Profit and Loss Appropriation Account.
3
Deduct total appropriations (interest on capital and partner salary)
Total interest on capital = ₦40,000 + ₦30,000 = ₦70,000. Total salary = ₦50,000. Total appropriations = ₦70,000 + ₦50,000 = ₦120,000. Divisible profit = ₦690,000 - ₦120,000 = ₦570,000.
Interest on capital and partner salaries represent appropriations of profit.
4
Calculate Tariq's share of net divisible profit
Tariq's share = 3/5 × ₦570,000 = ₦342,000.
Profits are shared in the agreed ratio of 3:2.

Key Concept

Distinguishing charges against profit (such as interest on partner loan) from appropriations of profit (interest on capital, partner salary, interest on drawings).
Estimated Time:2m 0s
Rate this question

Topics

Profit and Loss Appropriation Account

More questions from this topic