Providing Interest on Capital

Q.

A and B entered into partnership with capitals of Rs 4, 00, 000 and Rs 2, 00, 000 respectively and agreed to share profits & losses in the ratio of 3:2. Their partnership deed provided that interest on capital shall be allowed at 6% p.a. and it is to be treated as a charge against profits. Prepare the relevant account to allocate the profit in the following alternative cases :

(i) If profit for the year is Rs 80, 000;

(ii) If profit for the year is Rs 20, 000;

(iii) If loss for the year is Rs 20, 000.

Q.

A and B are partners sharing profits and losses in the ratio of 3 : 1. Their capitals at the end of the financial year 2016-17 were Rs 6, 00, 000 and Rs 3, 00, 000. During the year 2016-2017, A's drawings were Rs 80, 000 and the drawings of B were Rs 40, 000, which had been duly debited to partner's capital accounts. Profit before charging interest on capital for the year was Rs 80, 000. The same had also been credited in their profit sharing ratio. B had brought additional capital of Rs 70, 000 on October 1, 2016. Calculate interest on capital @ 12% p.a. for the year 2016-17.

Q.

A, B and C are partners in a firm sharing Profits and losses in the ratio of 2:3:5. Their fixed capitals were Rs 15, 00, 000, Rs 30, 00, 000 and Rs 60, 00, 000 respectively. For the year ended 31st March, 2014 interest on capital was credited to them at 12% instead of 10%. Pass the necessary adjustment entry.

Q.

Calculate (i) Debt-Equity Ratio; (ii) Total Assets to Debt Ratio; and (iii) Proprietary Ratio from the following particulars :

$\begin{array}{cc}\text{Particulars}& \text{Rs.}\\ \text{Equity Share Capital}& 3,00,000\\ \text{Preference Share Capital}& 1,00,000\\ \text{General Reserve}& 60,000\\ \text{Profit \& Loss Balance}& 40,000\\ \text{12 \% Mortgage Loan}& 1,80,000\\ \text{Current Liabilities}& 1,20,000\\ \text{Non Current Assets}& 4,50,000\\ \text{Current Assets}& 3,50,000\end{array}$

What conclusions do you draw from the above ratios ?

Q.

(a) From the following calculate 'Trade Receivables Turnover Ratio'.

Total Revenue from operation for year Rs 8, 40, 000.

Cash Revenue from operation-40% of credit revenue from operation.

Closing Trade Receivable over Opening Trade Receivable by Rs 80, 000. Opening Trade Receivables in 20% of credit Revenue from operation.

(b) From the following, calculate Interest Coverage Ratio.

Profit after Interest and Tax Rs 4, 97, 000.

Rate of Income Tax 30%.

12% Debentures Rs 6, 00, 000.

Q.

R and M were partners in a firm sharing profits in the ratio of 7:5. Their respective fixed capitals were R Rs 10, 00, 000 and M Rs 7, 00, 000. The partnership deed provided for the following :

(i) Interest on capital @ 12% p.a.

(ii) R's salary Rs 6, 000 per month and M's salary Rs 60, 000 per year. The profit for the year ended 31-03-2007 was Rs 5, 04, 000 which was distributed in 3:2 without providing for the above. Pass an Adjustment entry.

Q.

The following particulars are extracted from the Balance Sheet of Goodwill Enterprises Ltd. as at 31st March, 2018 :

$\begin{array}{cc}\text{Particulars}& \text{Rs.}\\ \text{Equity Share Capital}& \text{3, 00, 000}\\ \text{10 \% Preference Share Capital}& \text{1, 20, 000}\\ \text{Capital Reserve}& \text{60, 000}\\ \text{Profit \& Loss Balance}& \text{1, 20, 000}\\ \text{12 \% Debentures}& \text{50, 000}\\ \text{10 \% Mortgage Loan}& \text{1, 50, 000}\\ \text{Current Liabilities}& \text{2, 80, 000}\\ \text{Non Current Assets}& \text{4, 80, 000}\\ \text{Current Assets}& \text{6, 00, 000}\end{array}$

Showing the full working, calculate the following ratios :

(i) Debt-Equity Ratio

(ii) Proprietary Ratio

(iii) Interest Coverage Ratio

Net Profit after interest and tax amounted to Rs. 63, 000

Rate of Income Tax was 50%

Q.

Ram and Shyam are partners with a capital of Rs 1, 00, 000 and Rs 1, 60, 000 on January 1, 2016 respectively. Ram introduced additional capital of Rs 30, 000 on July 1, 2016 and another Rs 20, 000 on October 31, 2016. Calculate interest on capital for Ram for Financial Year ending December 2016. The rate of interest is 9% p.a.

1. None of these

2. Rs 9, 000

3. Rs 10, 650

4. Rs 10, 300

Q.

On March 31, 2003, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of Rs 24, 000, Rs 18, 000 and Rs 12, 000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2003, amounted to Rs 36, 000 and the partner's drawings had been Ram, Rs 3, 600; Shyam, Rs 4, 500 and Mohan, Rs 2, 700. The profit sharing ratio of Ram, Shyam and Mohan was 3 : 2 : 1. Calculate interest on capital.

Q.

X & Y started business on 1st April 2017 with capitals of Rs 5, 00, 000 & Rs 3, 00, 000 resp. There is no withdrawal or addition of capital during the year.

Calculate the interest on capital @ 12% p.a. if the books of accounts are closed on 31st March 2018.

1. Rs 3, 600 & Rs 6, 000

2. Rs 45, 000 & Rs 27, 000

3. Rs 27, 000 & Rs 45, 000

4. Rs 60, 000 & Rs 36, 000

Q.

What is meant by 'Issue of debentures for consideration other than Cash'?

Q.

X & Y share profits in the ratio of 2:3 with capitals of Rs 20, 000 & Rs 10, 000 respectively. What shall be the amount of interest on capital for Mr. X, if profits of the year are Rs 2, 100 & partnership deed provides for interest on capital @ 6% p.a..

1. Rs 600

2. Zero

3. None of the above

4. Rs 1200

Q. Using the following balance sheet calculate debt equity ratio.

$$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs.)}& \text{Assets}& \text{Amt. (Rs.)}\\ \text{General Reserve}& 80,000& \text{Preliminary Expensses}& 20,000\\ \text{Profit and Loss}& 1,20,000& \text{Cash}& 1,00,000\\ \text{Loan}@15\%& 2,40,000& \text{Stock}& 80,000\\ \text{Bills Payable}& 20,000& \text{Bills Receivable}& 40,000\\ \text{Creditors}& 80,000& \text{Debtors}& 1,40,000\\ \text{Share Capital}& \underset{–}{2,00,000}& \text{Fixed Assets}& \underset{–}{3,60,000}\\ & \underset{–}{7,40,000}& & \underset{–}{7,40,000}\end{array}$$

Q. Interest on capital is for the business.

1. an income
2. an expense
3. an asset
4. a liability

Q.

A and B are partners sharing profits and losses in the ratio of 3 : 2 having capital of Rs 50, 000 and Rs 40, 000 on 1-4-2007. On 1st July 2017, A introduced Rs 10, 000 as his additional capital whereas B introduced only Rs 1, 000. If the interest on capital is allowed to partners at 10% p.a., calculate interest on capital if the financial year closes on 31st March every year.

Q. A and B share profits in the ratio of 3 : 2 with capitals of ₹20, 000 and ₹10, 000 respectively. What shall be the amount of interest on capital for Mr. A, if profit for the year is ₹1, 500 and the partnership deed provides for interest on capital at 6% p.a.?

[0.88 marks]

1. ₹1, 200
2. ₹1, 000
3. ₹1, 500
4. ₹500

Q.

Y.Ltd. issued 2, 000, 6% Debentures of Rs 100 each payable as follows: Rs 25 on application; Rs 50 on allotment and Rs 25 on First and Final call.

Q. X and Y are partners with capital of Rs 1, 00, 000 and Rs. 80, 000 respectively on 1st April 2016 and their profit sharing ratio is 2:1. Interest on capital is agreed @12% p.a. Y is to be allowed an annual salary of Rs. 6, 000. The profit for the year ended 31st March, 2017 amounted to Rs.50, 000.Manager is entitled to a commission of 10% of the profits. Prepare Profit and Loss Appropriation Account.

Q. X, Y and Z are partners sharing profits & losses in the ratio of 5:3:2. From 1st April they decide to share profits and losses in the ratio of 2:5:3. The Partnership deed provides that in the event of any change in profit sharing ratio, the goodwill should be valued at two years' purchase of the average profits of the preceding 5 years. The profits and losses of the preceding years are:
i. Profit Rs 39, 000,
ii. Profit Rs 57, 000,
iii. Profit Rs 24, 000,
iv. Profit Rs 27, 000,
v. Loss Rs 12, 000.
The necessary single adjusting entry will involve:

1. Debit Y by Rs 10, 800 and Z by Rs 5, 400 and Credit X by Rs 16, 200.
2. Debit Z by Rs 10, 800 and Y by Rs 5, 400 and Credit X by Rs 16, 200.
3. Debit X by Rs 10, 800 and Z by Rs 5, 400 and Credit Y by Rs 16, 200.
4. Debit Z by Rs 10, 800 and X by Rs 5, 400 and Credit Y by Rs 16, 200.

Q. In the absence of partnership deed:

1. Interest is to be charged on drawing
2. Partners are entitled to any interest on their capital balances
3. Partners share profit or losses equally
4. Partners are entitled for any remuneration

Q. Aman and Bahadur are partners in a firm, and share profits and losses in the ratio of 2 : 3. The following was the balance sheet of the firm as on 31st March 2021.


Additional infornation:
The profit of ₹60, 000 for the year ended 31st March 2021 was divided between the partners without allowing interest on capital at 10% p.a. and salary to Aman at ₹6, 000 per quarter. During the year, Aman withdrew ₹20, 000 and Bahadur withdrew ₹40, 000.
Calculate the interest on capital for Aman and Bahadur.

[0.88 marks]

1. Aman - ₹11, 600; Bahadur - ₹4, 400
2. Aman - ₹6, 000; Bahadur - ₹2, 000
3. Aman - ₹4, 800; Bahadur - ₹200
4. Aman - ₹7, 000; Bahadur - ₹4, 000

Q. When the partners capital accounts are fixed, then as per the decision in the Garner vs. Murray case, any loss arising due to the capital deficiency in the insolvent partner's capital accounts is to be borne by solvent partners in the ratio of _______.

1. Profit sharing ratio
2. Gaining ratio
3. Scarifying ratio
4. Last agreed capital ratio

Q. In the absence of any provision in partnership deed, interest on capital ____________.

1. will not be allowed
2. will be allowed @6%p.a.
3. will be allowed only out of profit
4. will be allowed even if there are no profits

Q. Why is Interest on Capital allowed by the firm to its partners, when the firm already given share in firm’s profit to partners ?

Q. When the Interest on capital is allowed to partners, Interest on Capital Account is debited and Partner's Capital Account is credited. It is called _____________.

1. an opening entry
2. a closing entry
3. an adjusting entry
4. a transfer entry

Q. is allowed to compensate partners for contributing capital more than the profit sharing ratio.

1. interest on Drawings
2. interest on Profit
3. interest on Capital
4. interest on Assets

Q. As per Garner Vs Murray Rule, the loss resulting from a partner's insolvency is borne by other partners in ___________.

1. their Capital Ratio
2. their Profit Sharing Ratio
3. 3 : 1
4. Equal Ratio

Q. A partner claim interest on capital __________.

1. Even if there is loss
2. If there is profit
3. If there is profit and there is an agreement to pay it
4. Whether there is profit or loss to the firm

Q. Select the most appropriate alternative from those given below and rewrite the statement.

The interest on capital of a partner is credited to __________________ account.
a) trading
b) profit and loss
c) partner’s capital
d) cash

Q. $A$ and $B$ are partners sharing profits and losses in the ratio of $3:2$. At the end of the year, i.e., on 31st March, 2018, (after division of the year's profit), they decided to take $C$ into partnership with effect from 1st April, 2015. As $C$ was getting annual salary of $Rs.45,000$, he had also advanced $Rs.3,00,000$ to the firm by way of a loan on which he is getting interest @$10\%$, p.a. During the three financial years, firm's profits after adjusting salary to $C$, interest on loan and interest on the capital of the partners were:

Year Ended
31st March, 2016	Profit	Rs. 4, 00, 000
31st March, 2017	Loss	Rs. 2, 00, 000
31st March, 2018	Profit	Rs. 6, 00, 000

According to the new agreement, $C$ is to be given annual salary of $Rs.35,000$ and $\frac{1}{5}th$ share in the profits of the firm. $C^{\prime }s$ loan shall be treated as his capital from the beginning and similar to other partners, his capital will carry interest @ $6\%$ p.a.
Record necessary entries to give effect to the above arrangement.