# Solve the question Solution:
(a) Allow interest on capital & deed is silent on treating interest as charge

Dr                           Profit & Loss Appropriation A/c                                               Cr
 PARTICULARS AMOUNT PARTICULARS AMOUNT By interest on capital By Net Profit 1500 X - 1000 Y - 500 1500 1500 1500
Working notes-
Interest on X's capital = 20000 x6% = Rs 1200
Interest on Y's capital = 10000 X 6% = Rs 600
Thus total of interest on capital is more than the available profit. The interest on capital is allowed to the extent of available profit  in interest on capital ratio i.e 1200 : 600 or 2:1 to X & Y

(b) Interest is charge against profit

Dr                                Profit & Loss Appropriation A/c                                          Cr
 PARTICULARS AMOUNT PARTICULARS AMOUNT By interest on capital By Net Profit 1500 X - 1200 Y - 600 1800 By Net Loss t/f to X- 120 Y- 180 300 1800 1800
Working notes -
Interest on X's capital = 20000 x6% = Rs 1200
Interest on Y's capital = 10000 X 6% = Rs 600
When interest on capital is a charge than it is to be allowed whether the firm earns profit or loss

• 0
What are you looking for?