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 V's Capital account?

The correct option is Rs. 3,12,000.

Let's understand why this is the correct answer by going through the step-by-step calculations and accounting principles involved in partners' profit distribution.

Step 1: Calculate the deficiency in guaranteed fee by Partner A
According to the partnership deed, Partner A guaranteed to earn a minimum annual fee of Rs. 6,00,000 for the firm. However, A earned only Rs. 3,20,000 during the year.
Deficiency in fee to be contributed by A = Guaranteed Fee − Actual Fee Earned
Deficiency in fee = Rs. 6,00,000 − Rs. 3,20,000 = Rs. 2,80,000
This deficiency of Rs. 2,80,000 will be brought into the firm by A, thereby increasing the firm's total divisible profits.

Step 2: Calculate the Total Net Profit available for distribution
The net profits earned by the firm are Rs. 8,60,000, and we add the fee deficiency brought in by A:
Total Net Profit = Net Profit from Operations + A's Fee Deficiency
Total Net Profit = Rs. 8,60,000 + Rs. 2,80,000 = Rs. 11,40,000

Step 3: Deduct Interest on Partners' Capital
Interest on capital is provided @ 5% p.a. on the opening capital balances on April 01, 2018:
• Interest on A's Capital = 5% of Rs. 3,00,000 = Rs. 15,000
• Interest on V's Capital = 5% of Rs. 3,00,000 = Rs. 15,000
• Interest on T's Capital = 5% of Rs. 2,00,000 = Rs. 10,000
Total Interest on Capital = Rs. 15,000 + Rs. 15,000 + Rs. 10,000 = Rs. 40,000

Step 4: Calculate the Divisible Profits
Divisible Profit = Total Net Profit − Total Interest on Capital
Divisible Profit = Rs. 11,40,000 − Rs. 40,000 = Rs. 11,00,000

Step 5: Share the Divisible Profit in the profit-sharing ratio (5:3:2)
The profit-sharing ratio between A, V, and T is 5:3:2. The initial share of each partner is calculated as:
• A's initial share of profit:
$$\text{Rs.}\mathrm{11,00,000}\times \frac{5}{10}=\text{Rs.}\mathrm{5,50,000}$$
• V's initial share of profit:
$$\text{Rs.}\mathrm{11,00,000}\times \frac{3}{10}=\text{Rs.}\mathrm{3,30,000}$$
• T's initial share of profit:
$$\text{Rs.}\mathrm{11,00,000}\times \frac{2}{10}=\text{Rs.}\mathrm{2,20,000}$$

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 borne by A and V in the ratio of 2:3.
V's share of T's deficiency:
$$\text{Rs.}\mathrm{30,000}\times \frac{3}{5}=\text{Rs.}\mathrm{18,000}$$

Step 7: Calculate final profit to be credited to V's Capital account
V's Final Share of Profit = V's Initial Share of Profit − V's share of T's deficiency
V's Final Share of Profit = Rs. 3,30,000 − Rs. 18,000 = Rs. 3,12,000