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Difficulty: MediumProfit and Loss Appropriation Account

Kemi and Funmi are partners sharing profits and losses in the ratio 3:2. For the year ended 31 December 2025, the firm reported a net profit of ₦150,000 before adjusting for interest on Kemi's loan. The following information is also available:
- Interest on Kemi's loan to the firm: ₦10,000
- Interest on drawings: Kemi ₦2,000; Funmi ₦3,000
- Partner's salary: Funmi ₦15,000
- Interest on capital: Kemi ₦10,000; Funmi ₦10,000

What is the net divisible profit to be shared between the partners in the Profit and Loss Appropriation Account?

  1. A
    ₦120,000
  2. ₦110,000Answer
  3. C
    ₦100,000
  4. D
    ₦130,000

Answer

The net divisible profit to be shared between Kemi and Funmi is ₦110,000.
Interest on partner's loan (₦10,000) is an expense charged in the Profit and Loss Account, reducing the net profit to ₦140,000. In the Profit and Loss Appropriation Account, interest on drawings (₦5,000) is added to net profit to yield ₦145,000. Deducting partner appropriations—Funmi's salary (₦15,000) and total interest on capital (₦20,000)—leaves a net divisible profit of ₦110,000.

Step-by-Step Solution

1
Calculate net profit after interest on loan
₦150,000 - ₦10,000 = ₦140,000
Interest on a partner's loan is a charge against profit (debited to P&L Account), not an appropriation of profit.
2
Add total interest on drawings to net profit
₦140,000 + (₦2,000 + ₦3,000) = ₦145,000
Interest on drawings is income to the partnership firm credited in the Appropriation Account.
3
Deduct total appropriations (partner salary and interest on capital)
₦145,000 - ₦15,000 (Salary) - ₦20,000 (Interest on Capital) = ₦110,000
Partner salaries and interest on capital are appropriations of profit distributed to partners.

Key Concept

Profit and Loss Appropriation Account Distinctions
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Topics

Profit and Loss Appropriation Account

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