Question

Moli and Bholi 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

Calculation of Interest on Capital

$$\begin{gathered} \mathrm{Interest}\mathrm{on}\mathrm{Moli}\text{'}\mathrm{s}\mathrm{Capital}=₹\left(20,000\times \frac{6}{100}\right)=₹1,200 \\ \mathrm{Interest}\mathrm{on}\mathrm{Bholi}\text{'}\mathrm{s}\mathrm{Capital}=₹\left(10,000\times \frac{6}{100}\right)=₹600 \\ \mathrm{Total}\mathrm{Amount}\mathrm{of}\mathrm{Interest}\mathrm{on}\mathrm{Capital}=₹(1,200+600)=₹1,800 \end{gathered}$$

Case (a)

Where there is no clean agreement except for interest on capitals

Profit for the year ended = ₹ 1,500

Total amount of interest = ₹ 1,800

Here, total amount of interest on capital is more than the profit available for distribution. Therefore, profit of Rs 1,500 is distributed between Moli and Bholi in the ratio of their interest on capital.

Particulars	Moli	:	Bholi
Interest on Capital	1,200	:	600
or, Ratio of interest on Capital	2	:	1

$$\begin{gathered} \mathrm{Moli}\mathrm{will}\mathrm{get}\mathrm{Interest}\mathrm{on}\mathrm{Capital}=₹\left(1,500\times \frac{2}{3}\right)=₹1,000 \\ \mathrm{Bholi}\mathrm{will}\mathrm{get}\mathrm{Interest}\mathrm{on}\mathrm{Capital}=₹\left(1,500\times \frac{1}{3}\right)=₹500 \end{gathered}$$

Case (b)

In case, there is a clear agreement that the interest on capital will be allowed even if the firm has incurred loss, then the whole amount of interest on capital is to be allowed to the partners.

$$\begin{gathered} \mathrm{Interest}\mathrm{on}\mathrm{Moli}\text{'}\mathrm{s}\mathrm{Capital}=₹\left(20,000\times \frac{6}{100}\right)=₹1,200 \\ \mathrm{Interest}\mathrm{on}\mathrm{Bholi}\text{'}\mathrm{s}\mathrm{Capital}=₹\left(10,000\times \frac{6}{100}\right)=₹600 \\ \mathrm{Total}\mathrm{Amount}\mathrm{of}\mathrm{Interest}\mathrm{on}\mathrm{Capital}=₹(1,200+600)=₹1,800 \end{gathered}$$

Total Profit of the firm = ₹ 1,500

Therefore, loss to the firm amounts to ₹300. This loss is to shared by Moli and Bholi in their profit sharing ratio that is 2 : 3.

$$\begin{gathered} \mathrm{Loss}\mathrm{to}\mathrm{Moli}=₹\left(300\times \frac{2}{5}\right)=₹120 \\ \mathrm{Loss}\mathrm{to}\mathrm{Bholi}=₹\left(300\times \frac{3}{5}\right)=₹180 \end{gathered}$$