X and Y contribute Rs.20000 and Rs.10000 . They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2:3 and the business profit ( before interest ) for the year is Rs.1500. Show the distribution of profit (i). where there is no agreement except for interest on capitals. (ii) . where there is a clear agreement that the interest on capitals will be allowed even if it involves thr firm in loss.
Case 1:When there is no agreement except for interest on capitals
Calculation of Interest on Capital
Interest on X’s capital = 
Interest on Y’s capital = 
Total Interest on Capital = (Rs 1,200 + Rs 600) = Rs 1,800
Total profits available = Rs 1,500
As the total interest on capital is more than the total profits available, so the profits of Rs 1,500 is to be distributed between X and Y as per their interest on capital ratio.
X : Y
Interest on Capital Ratio = 1,200 : 600, or 2 : 1
Therefore,
Profit and Loss Appropriation Account for the year ended …… | ||||
Dr. |
|
| Cr. | |
Particulars | Amount Rs | Particulars | Amount Rs | |
Interest on Capital: |
| Profit and Loss A/c (Net Profit) | 1,500 | |
X | 1,000 |
|
|
|
Y | 500 | 1,500 |
|
|
| 1,500 |
| 1,500 | |
|
|
| ||
Case 2:When there is a clear agreement for Interest on Capital
Profit and Loss Adjustment Account for the year ended…… | |||||
Dr. |
|
| Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs | ||
Interest on Capital: |
| Profit and Loss A/c (Net Profit) | 1,500 | ||
X | 1,200 |
| Loss transferred to: |
| |
Y | 600 | 1,800 | X’s Capital A/c | 120 |
|
|
| Y’s Capital A/c | 180 | 300 | |
| 1,800 |
| 1,800 | ||
|
| ||||