Question

Q.16 A and B were partners in a firm sharing profits in the ratio of 5:3. Their fixed
capitals on 31st March, 2017 were: A Rs. 60,000 and B Rs. 80,000. They agreed to allow
interest on capital @ 12% p.a. The profit of the firm for the year ended 31st March, 2018
before allowing interest on capitals was Rs. 12,600. Pass necessary journal entries for
the above transactions in the books of A and B. Also show your working notes clearly.

Answer 1

Explanation:

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Answer 2

Journal Entry in the books of A & B

Explanation:

Working note:

1) Interest on Capital is an expense of the firm thus it will be debited and there is an increase in liability as to the A and B account increase thus it will be credited.

Interest to be given @12%

( A= 12% of 60,000)

(B = 12% of 80,000)

2) Profit for the year before interest on capital = 12,600

Interest on capital= 16,800

Thus loss for the year after charging interest on capital =

Interest on capital - profit  = 16,800 - 12,600 = 4,200

The Loss will be divided to A and B in the ratio of 5:3

Thus A(5/8 of 4,200)

         B(3/8 of 4,200)