Greenlight query for APII...

tillyjbc

Why am I still awake? Have to get this out there... Would anyone care to have a go at this appropriation question. I have the correct answer and explanation from Greenlight, but just would like to see if anyone gets the same answer as me! (not one of the options!)..

Roy and Sue have been in partnership for many years, sharing profits in the ratio 2:1 after taking annual salaries of £12,000 and £10,000 respectively, and allowing interest on capital at the rate of 5% per annum. With effect from 1 October 20X2, they decided to stop taking salaries and allowing interest, and to share all profits equally. The profit for the year ended 31 December 20X2 is £60,000 before appropriations, and their capital account balances at 1 January 20X2 were Roy - £80,000 and Sue - £50,000. What is Roy's total share of profit for the year, including appropriations?

omega man

I get £23,250 for Roy as his share of profit for year including appropriations.
Have i got the right answer and if so what is my prize!!!

tillyjbc

YAY! Same as me omega man. Now take a look at the Greenlight explanation and answer:-

The net profit up to 30 September 20X2 is 9/12 x £60,000 = £45,000.
Total salaries are 9/12 x £(12,000 + 10,000) = £16,500.
Roy's salary is 9/12 x £12,000 = £9,000.

Interest on capital is 9/12 x 5% x £(80,000 + 50,000) = £4,875.
Roy's interest on capital is 9/12 x 5% x £80,000 = £3,000.

The remaining profit is £(45,000 - 16,500 - 4,875) = £23,625.
Roy's share is 2/3 x £23,625 = £15,750.
For the 3 months ended 31 December 20X2 the net profit is 3/12 x £60,000 = £15,000.
Roy's share is 1/2 x £15,000 = £7,500.

Roy's total share of profit is therefore £(9,000 + 3,000 + 15,750 + 7,500) = £35,250.

They have ADDED the 9,000 and 3,000 (salary and interest on capital) at the end when they had been deducted earlier. I thought that you deducted those from profit (and added interest from drawings) in the appropriation account, before sharing out the remainder at whatever ratios the partners have?

tillyjbc

I've just found another example as follows:-

Li, Mo and Nan are in partnership. The profit sharing arrangements provide for the profits to be shared equally among the partners, after allowing for interest on capital at 5% per annum, and charging interest on drawings. The balances on Li, Mo and Nan's capital accounts at 1 July 20X1 are £70,000, £40,000 and £38,000 respectively. In the year ended 30 June 20X2 the partnership had a profit before appropriations of £160,000, which accrued evenly over the year, and they calculated that Li and Mo were both to be charged interest on drawings of £3,000 and £1,000 respectively. What is Li's total share of the profits for this year, including appropriations?

Here's the answer given:-
In total, interest on capital will be 5% x £(70,000 + 40,000 + 38,000) = £7,400. Interest received by Li will be 5% x £70,000 = £3,500. Total interest charged on drawings is £4,000, of which £3,000 is due from Li. The balance of profits to be shared in the PSR is therefore £(160,000 - 7,400 + 4,000) = £156,600. Li's share of this is 1/3 x £156,600 = £52,200. Li's total share of profits is therefore £(3,500 - 3,000 + 52,200) = £52,700.

I make the answer £52,200. Can someone please explain why they are factoring back in the interest on capital and drawings for the final part of the calculation, when they have already been accounted for, making £156,600 BEFORE sharing in the PSR???????????????

NicF

Because salary and interest on capital are paid out of the profits. You have to take them off to work out how much of the rest of the profit is allocated to each partner, but then if you want the total amount of profit they have been allocated you need to add the salary and interest on capital back in.

Hope this makes sense and helps.
Nicola

omega man

I agree with nicf,i suppose its understanding what the question is asking for.
As they are asking for profit share including appropriations their answer is correct.