Question

Ahamad and Basheer contribute ₹ 60,000 and ₹ 40,000 respectively as capital. Their respective share of profit is 2 : 1 and the profit before interest on capital for the year is ₹ 5,000. Compute the amount of interest on capital in each of the following situations:

1. if the partnership deed is silent as to the interest on capital
2. if interest on capital @ 4% is allowed as per the partnership deed
3. if the partnership deed allows interest on capital @ 6% per annum.

Answer 1

1. No interest on capital is allowed.
2. Since there is sufficient profit, interest on capital will be provided.
   Ahamad:
   `60,000 xx 4/100` = ₹ 2,400
   Basheer:
   `40,000 xx 4/100` = ₹ 1,600
3. Since the profit is insufficient, interest on capital will not be provided.
   Ahamad:
   `60,000 xx 6/100` = ₹ 3,600
   Basheer:
   `40,000 xx 6/100` = ₹ 2,400
   Profit of ₹  5,000 will be distributed to the partners in their capital ratio of 3 : 2.