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Difficulty: Very hardFixed and Fluctuating Capital Accounts

Kemi and Tunde are partners sharing profits and losses in the ratio 3:23:2. The partnership agreement specifies that capital accounts are fixed. On 1st January 2024, their capital account balances were ₦500,000\text{₦}500,000 and ₦300,000\text{₦}300,000 respectively, while Tunde's current account had a debit balance of ₦15,000\text{₦}15,000.

For the financial year ended 31st December 2024, the following figures were extracted:
- Net profit before deducting loan interest: ₦250,000\text{₦}250,000
- Tunde provided a loan of ₦100,000\text{₦}100,000 to the firm on 1st January 2024 at 10%10\% interest per annum
- Interest on capital: 10%10\% per annum
- Partners' annual salaries: Kemi ₦40,000\text{₦}40,000; Tunde ₦20,000\text{₦}20,000
- Drawings during the year: Kemi ₦30,000\text{₦}30,000; Tunde ₦25,000\text{₦}25,000
- Interest on drawings: Kemi ₦3,000\text{₦}3,000; Tunde ₦2,000\text{₦}2,000

What is the closing balance of Tunde's Current Account as at 31st December 2024?

  1. ₦60,000 CreditAnswer
  2. B
    ₦54,000 Credit
  3. C
    ₦90,000 Credit
  4. D
    ₦110,000 Credit

Answer

₦60,000 Credit
Under the fixed capital account method, capital balances remain constant while all appropriations, drawings, and interest are posted to the current accounts. Interest on partner loan of ₦10,000 is charged to the Profit and Loss Account, reducing profit to ₦240,000. Adding total interest on drawings (₦5,000) and deducting total interest on capital (₦80,000) and salaries (₦60,000) leaves ₦105,000 residual profit. Tunde's share is ₦42,000. Crediting Tunde's account with interest on capital (₦30,000), salary (₦20,000), profit share (₦42,000), and loan interest (₦10,000) gives ₦102,000 total credits. Subtracting total debits of ₦42,000 (opening debit ₦15,000 + drawings ₦25,000 + IOD ₦2,000) results in a closing balance of ₦60,000 Credit.

Step-by-Step Solution

1
Calculate interest on partner loan and net profit available for appropriation
Interest on Tunde's loan = 10% of ₦100,000 = ₦10,000. Net profit for appropriation = ₦250,000 - ₦10,000 = ��240,000.
Interest on partner loan is a charge against profit (Profit and Loss Account item), not an appropriation of profit.
2
Determine residual profit in the Profit and Loss Appropriation Account
Net profit (₦240,000) + Total interest on drawings (₦5,000) - Total interest on capital (₦80,000) - Total salaries (₦60,000) = ₦105,000 residual profit.
Interest on drawings increases profits available for sharing, while interest on capital and partner salaries reduce residual profit.
3
Calculate Tunde's share of residual profit
Tunde's share = (2 / 5) × ₦105,000 = ₦42,000.
Profits are shared in the agreed ratio of 3:2.
4
Compute closing balance of Tunde's Current Account
Total Credits = ₦30,000 (IOC) + ₦20,000 (Salary) + ₦42,000 (Profit) + ���10,000 (Loan Interest) = ₦102,000. Total Debits = ₦15,000 (Opening Debit) + ₦25,000 (Drawings) + ₦2,000 (IOD) = ₦42,000. Closing Balance = ₦102,000 - ₦42,000 = ₦60,000 Credit.
Current account credits include partner entitlements and earned loan interest, while debits include opening debit balance, drawings, and interest on drawings.

Key Concept

Fixed Capital Account System and Partner Current Account Preparation
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Topics

Fixed and Fluctuating Capital Accounts

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