Zainab and Tariq are partners sharing profits and losses in the ratio 3:2. On 1st January … — JAMB UTME

Zainab and Tariq are partners sharing profits and losses in the ratio $3:2$ . On 1st January 2025, their fixed capital balances were $\text{₦}800,000$ and $\text{₦}500,000$ , while their current account balances were $\text{₦}45,000$ (Credit) and $\text{₦}12,000$ (Debit) respectively. Zainab had also granted a loan of $\text{₦}100,000$ to the firm on 1st January 2025 at $10\%$ interest per annum. For the year ended 31st December 2025, the net profit before charging loan interest was $\text{��}340,000$ .

Additional partnership details for the year:
- Interest on capital is allowed at $5\%$ per annum on fixed capital.
- Tariq is entitled to an annual partner salary of $\text{₦}35,000$ .
- Interest on drawings charged: Zainab $\text{₦}5,000$ , Tariq $\text{₦}3,000$ .
- Drawings made during the year: Zainab $\text{₦}50,000$ , Tariq $\text{₦}30,000$ .

If the partners decide to switch from a fixed capital system to a fluctuating capital system at year-end by amalgamating their current account balances into their capital accounts, what is the closing balance of Tariq's Capital Account as at 31st December 2025?

₦610,200Answer
B
₦614,200
C
₦634,200
D
₦670,200

Answer

The closing balance of Tariq's Capital Account as at 31st December 2025 under the fluctuating capital system is ₦610,200.

The correct answer is derived by first deducting the ₦10,000 interest on Zainab's loan from net profit to arrive at an adjusted net profit of ₦330,000. Adding total interest on drawings (₦8,000) and deducting interest on capital (₦65,000) and partner salary (₦35,000) yields a residual profit of ₦238,000, of which Tariq's 2/5 share is ₦95,200. Combining Tariq's credits (₦25,000 interest on capital + ₦35,000 salary + ₦95,200 profit share) and deducting his debits (₦12,000 opening debit balance + ₦30,000 drawings + ₦3,000 interest on drawings) gives a net current account balance of ₦110,200 (Credit). Merging this with his fixed capital of ₦500,000 yields a total fluctuating closing capital of ₦610,200.

Step-by-Step Solution

Calculate the correct Net Profit after charging interest on partner loan

Net Profit = ₦340,000 - (10% of ₦100,000) = ₦330,000

Interest on partner's loan is a charge against profit (debited to P&L account), not an appropriation of profit.

Compute total appropriations and residual profit available for sharing

Divisible Profit = ₦330,000 + ₦8,000 (Interest on Drawings) - ₦65,000 (Interest on Capital) - ₦35,000 (Tariq's Salary) = ₦238,000

Interest on drawings increases profits available for distribution, while interest on capital and salary reduce it.

Calculate Tariq's share of residual profit

Tariq's Share = (2 / 5) * ₦238,000 = ₦95,200

Profits are shared in the agreed ratio of 3:2.

Determine Tariq's ending Current Account balance

Credit items = ₦25,000 (Interest on Capital) + ₦35,000 (Salary) + ₦95,200 (Share of Profit) = ₦155,200. Debit items = ₦12,000 (Opening Dr Balance) + ₦30,000 (Drawings) + ₦3,000 (Interest on Drawings) = ₦45,000. Net Current Account Balance = ₦155,200 - ₦45,000 = ₦110,200 (Credit)

Debits (drawings, interest on drawings, opening debit balance) are subtracted from credits (salary, interest on capital, profit share).

Calculate Tariq's closing fluctuating capital account balance

Closing Capital Balance = Opening Fixed Capital (₦500,000) + Ending Current Account Balance (₦110,200) = ₦610,200

Under a fluctuating capital system, capital and current account entries are combined into a single capital account.

Key Concept

Fixed vs Fluctuating Capital Accounts in Partnership Accounting

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