Read the following passage and answer the questions

A Solid Partnership

A, V and T were partners of a law firm sharing profits in the ratio of 5:3:2. Their partnership deed provided the following:

(i) Interest on partners' capital @ 5% p.a.

(ii) A guaranteed that he would earn a minimum annual fee of Rs. 6,00,000 for the firm.

(iii) T was guaranteed a profit of Rs. 2,50,000 (excluding interest on capital) and any deficiency on account of this was to be borne by A and V in the ratio of 2:3.

During the year ending March 31, 2019, A earned a fee of Rs. 3,20,000 and net profits earned by the firm were Rs. 8,60,000. Partner's capital on April 01, 2018 were A - Rs. 3,00,000; V - Rs. 3,00,000 and T- Rs. 2,00,000.

Q.) What is the amount of profit to be credited to A's Capital account?

The correct option is Rs. 5,38,000.

Here is the detailed step-by-step calculation and explanation of the profit to be credited to A's Capital Account:

Step 1: Calculate the Deficiency in Fee Guaranteed by A
Partner A guaranteed a minimum annual fee of Rs. 6,00,000 to the firm, but earned only Rs. 3,20,000 during the year.
Deficiency in fee to be contributed by A = Guaranteed Fee - Actual Fee Earned
Deficiency = Rs. 6,00,000 - Rs. 3,20,000 = Rs. 2,80,000
This deficiency of Rs. 2,80,000 will be debited to A's Capital Account and credited to the Profit and Loss Appropriation Account, increasing the firm's profits available for distribution.

Step 2: Calculate the Adjusted Net Profit Before Interest on Capital
Adjusted Net Profit = Net Profit earned by the firm + Deficiency in fee brought in by A
Adjusted Net Profit = Rs. 8,60,000 + Rs. 2,80,000 = Rs. 11,40,000

Step 3: Calculate the Interest on Partners' Capital @ 5% p.a.
Interest on Capital for A = Rs. 3,00,000 × 5% = Rs. 15,000
Interest on Capital for V = Rs. 3,00,000 × 5% = Rs. 15,000
Interest on Capital for T = Rs. 2,00,000 × 5% = Rs. 10,000
Total Interest on Capital = Rs. 15,000 + Rs. 15,000 + Rs. 10,000 = Rs. 40,000

Step 4: Calculate the Total Distributable Profit
Distributable Profit = Adjusted Net Profit - Total Interest on Capital
Distributable Profit = Rs. 11,40,000 - Rs. 40,000 = Rs. 11,00,000

Step 5: Distribute the Profit in the Profit-Sharing Ratio (5:3:2)
The partners share profits in the ratio of 5:3:2. The initial shares are calculated as follows:

A's initial share = $\text{Rs. 11,00,000}\times \frac{5}{10}=\text{Rs. 5,50,000}$

V's initial share = $\text{Rs. 11,00,000}\times \frac{3}{10}=\text{Rs. 3,30,000}$

T's initial share = $\text{Rs. 11,00,000}\times \frac{2}{10}=\text{Rs. 2,20,000}$

Step 6: Adjust for T's Guaranteed Profit
T was guaranteed a minimum profit of Rs. 2,50,000 (excluding interest on capital).
T's actual share of profit is Rs. 2,20,000.
Deficiency in T's profit = Rs. 2,50,000 - Rs. 2,20,000 = Rs. 30,000
This deficiency of Rs. 30,000 is to be shared by A and V in the ratio of 2:3.

Deficiency to be borne by A = $\text{Rs. 30,000}\times \frac{2}{5}=\text{Rs. 12,00,000}=\text{Rs. 12,000}$

Step 7: Calculate the Net Profit Credited to A's Capital Account
A's net share of profit = A's initial share - Share of deficiency borne for T
A's net share of profit = Rs. 5,50,000 - Rs. 12,000 = Rs. 5,38,000

Therefore, the final amount of profit credited to A's Capital account (excluding interest on capital) is Rs. 5,38,000.