Question

X and Y contribute ₹ 20,000 and ₹ 10,000 respectively towards capital. They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2 : 3 and the net profit for the year is ₹ 1,500. Show distribution of profits:
(i) where there is no agreement except for interest on capitals; and
(ii) where there is an agreement that the interest on capital as a charge.

Answer 1

Solution:

Calculation of Interest en Capital:

Interest on X's Capital  $=20,000 \times \frac{6}{100}=1,200$

Interest on Y's Capial = $10,000 \times \frac{6}{100}=600$

Total amount of interest on capital = 1,200+600=1,800.

Case (a)

Where there is no clean agreement except for interest on capitals

Profit for the year ended = Rs.1.500.

Total amount of interest = R s, 1,800.

Here, Interest on capital > the profits available for distribution. Therefore, profit of Rs. 1.500 is distributed between X and Y in the ratio of  their interest on capital.

X will get interest on Capital  $=1,500 \times \frac{2}{3}=1,000$

Y  will get interest on Capital = $1,500 \times \frac{1}{3} = 500$

Case (b)

In case, there is an agreement that the interest on capital as a charge, then the whole amount of interest on capital is to be allowed to the partners.

$\text { Interest on } X^{\prime} \text { 's Capital } 20,000 \times \frac{6}{100} = 1,200$

$\text { Interest on Y's Capital }=10,000 \times \frac{6}{100} = 600$

Total Profit of the firm = Rs 1,500

Total amount of Intereat on Capital = Rs.1, 800 (i.e. Rs. 1,200+ Rs 600) Therefore, loss to the firm amounts to Rs. 300 .

This loss is to be shared by X and Y in their profit sharing ratio that is 2.3 .

$\text { Loss to } X =300 \times \frac{2}{5}=120$

$\text { Loss to } Y=300 \times \frac{3}{5}=180$