Question

Anupam and Abhishek are partners sharing profits and losses in the ratio of 3 : 2. Their capital accounts showed balances of Rs. 1,50,000 and Rs. 2,00,000 respectively on Jan 01, 2017. Show the treatment of interest on capital for the year ending December 31, 2017 in each of the following alternatives:
(a) If the partnership deed is silent as to the payment of interest on capital and the profit for the year is Rs. 50,000,
(b) If partnership deed provides for interest on capital @ 8% p.a. and the firm incurred a loss of Rs. 10,000 during the year,
(c) If partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 50,000 during the year,
(d) If the partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 14,000 during the year.

Answer 1

(a) In the absence of a specific provision in the Deed, no interest will be paid on the capital to the partners. The whole amount of profit will however be distributed among the partners in their profit sharing ratio.
(b) As the firm has incurred losses during the accounting year, no interest on capital will be allowed to any partner. The firm’s loss will however be shared by the partners in their profit sharing ratio.
`{:(," "Rs.),("Interest to Anupam @ 8% on Rs." 150","000,=12","000),("Interest to Abhishek @ 8% on Rs." 2","00","000,= 16","000),(,ulbar(ul(" "28","000))):}`
As the profit is sufficient to pay interest at agreed rate, the whole amount of interest on capital shall be allowed and the remaining profit amounting to Rs. 22,000 (Rs. 50,000 – Rs. 28,000) shall be shared by the partners in their profit sharing ratio.
(d) As the profit for the year is Rs. 14,000, which is less than the amount of interest on capital due to partners, i.e. Rs. 28,000 (Rs. 12,000 for Anupam and Rs. 16,000 for Abhishek), interest will be paid to the extent of available profit i.e., Rs. 14,000. Anupam and Abhishek will be credited with Rs. 6,000 and Rs. 8,000, respectively. Effectively this amounts to sharing the firm’s profit in the ratio of interest on capital.