Question

How will a firm deal with a situation when its partnership deed provides for interest on capital, but the profit earned by it is not enough to do so at the rate mentioned in the deed?

Answer 1

Interest will be restricted to the amount of profit. Hence, profit will be distributed in the ratio of interest on capital of each partner.

Answer 2

When the partnership deed allows interest on capital but the firm’s profits are insufficient, the interest on capital is limited to the amount of profit earned. This profit is then distributed among the partners in the ratio of their capital contributions.