Question

9. X and Y invested Rs. 20,000 & Rs. 10,000. Interest on capital is

allowed @ 6% per annum. Profits are shared in the ratio of 2:3.

Profits for the year ending 31.3.2015 is Rs. 1,500. Show

allocation of profits when partnership deed. (3)

a). Deed is silent on treating interest as charge.

b). Interest is charged against profit.​

Answer 1

Answer:

Interest on capital

X = 20,000 x 6% = 1200

Y = 10,000 x 6% = 600

Total interest = 1800

when partneeship deed is silent as regard to payment of interest on capital then no interest on capital will be allowed.

Interest on Capital = 0

Profit distribution

X : 1500 x (2/5) = 600

Y : 1500 x (3/5) = 900

When partnership deed provides for interest on capital but is silent as regard to whether to allow as charge or as appropriation then interest on capital is to be allowed on availability of profit.

Case - a : If there is adequate profit

Total interest will be allowed

Case -b : if there is inadequate profit

Interest on capital will be allowed to the extent of available profit in the ratio of capital or interest on capital.

Capital Ratio = 20,000 : 10,000 = 2:1

or

Interest on capital ratio = 1200 : 600 = 2:1

Interest on Capital

X = 1500 x 2/3 = 1,000

Y = 1500 x 1/3 = 500

Note : no profit available for distribution.

If partnership deed provides for interest on capital as charge against profit and there is inadequate profit then actual interest will be allowed to each partner and loss will be distributed in profit sharing Ratio

Total Interest on Capital = 1,800

Available Profit = 1,500

Interest on capital (each partner)

X = 20,000 x 6% = 1,200

Y = 10,000 x 6% = 600

Loss after interest on capital = 300

Distribution of loss

X = 300 x 2/5 = 120

Y = 300 x 3/5 = 180