Question

X and Y contribute Rs 20,000 and Rs.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 Rs.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.

Interest on X capital

$20,000\times \frac{6}{100}=Rs1200$

Interest on Y's capital

$10,000\times \frac{6}{100}=Rs600$

Total interest $(1200+600)=Rs1800$

Total profits available = $Rs.1500$

As total interest on capital is more than total profits, so profits of Rs $1500$ to be distributed between X & Y as per their interest on capital ratio.

$X:Y$

Interest on capital = $1200:600$ or $2:1$

$\therefore$ X share = $1500\times \frac{2}{3}=Rs1000$

Y share = $1500\times \frac{1}{3}=Rs500$
Part (ii)
When interest on capital is charge, complete interest on capital will be charged.
Total interest = Rs. 1800
Total Profit = Rs. 1500
There is loss of Rs. 300. This loss of Rs. 300 will be distributed between X and Y in 2:3 ratio.
X share of loss = 300*2/5 = Rs. 120
Y share of loss = 300*3/5 = Rs. 180.