Question

611
A and B contribute $400,000 and $3,00,000 respectively as their capitals. They
decide to allow interest on capital @ 8% p.a. Their respective share of profit is 3:2 and the
profit for the year is 42,000 before allowing for interest on capitals. Show the distribution
of profits (1) Where there is no agreement except for interest on capitals and (II) Where
there is a clear agreement that the interest on capitals will be allowed even if it involves the
firm in loss.​

Answer 1

Answer:

total interest = $(32,000 + 24,000) = $56,000

available profit = 42,000

the ratio of interest = 32 : 24 or we can say 4 : 3

A's share in profit = 4/7×42,000 = 24,000

B's share in profit = 3/7×42,000 = 18,000

here we distributed whole profit it is because the situation is interest on capital to be allowed when profit is inadequate.

case - 2 total interest = $56,000

available profit = $42,000

now it lead to loss because a clear Aggrement is there at any cost interest should be allowed

share of loss = $56,000 - $42,000 = 14,000

SHARE OF A = 14,000×3/5 = 8400

SHARE OF B = 14,000×2/5 = 5600