23 November 2013
Nile, Indus and Ganges are partners in a public accounting and consulting firm called NIG. They started the firm back in 1998 and their current capital balances are 40 million, 30 million and 30 million respectively. Nile is the senior partner and gets the 50% share in the profit or loss and the rest is shared between Indus and Ganges in equal proportion. Indus is technically the most knowledgeable of them and is considered the ultimate authority on complex transactions. He works more hours than Nile and Ganges for which it is compensated in the form of an annual salary of 3 million. Each partner is entitled to interest on capital at the rate of 6% per annum. NIG's profit for the year before any distribution to the partners amounts to 20 million. Distribute the partnership income according to the arrangement explained above.
Solution
The first distribution would be of salary of 3 million to be paid to Indus. This is recorded by the following entry:
Net income 3,000,000 Indus Capital Account 3,000,000 Second distribution is the interest paid on opening capital balance. At the rate of 6%, annual interest to be credited to Nile, Indus and Ganges' capital accounts comes out to be 2.4 million, 1.8 million and 1.8 million respectively. It is recorded by the following journal entry
Net income 6,000,000 Nile Capital Account 2,400,000 Indus Capital Account 1,800,000 Ganges Capital Account 1,800,000 After charging 3 on account of partner salary and 6 million on account of interest on partner's capital accounts we are left of remaining net income of 11 million (20 million minus 3 million minus 6 million).
This 11 million is distributed in the ratio of 40%, 30% and 30% for Nile, Indus and Ganges respectively. The journal entry for this distribution would be:
Net income 11,000,000 Nile Capital Account 5,500,000 Indus Capital Account 2,750,000 Ganges Capital Account 2,750,000
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