# 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 Accountfor the year ended …… Dr. Cr. Particulars AmountRs Particulars AmountRs 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 Accountfor the year ended…… Dr. Cr. Particulars AmountRs Particulars AmountRs 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

• 25

As far as to my knowlege he answer is:-

i)As the agreement is silent on the topic that whether the interest on capital must be given when it leads to loss the interest is not to be given.

2x+3x=1500

5x=1500

x=1500/5=Rs.300

Therefor the share of

X is 2x=2x300=600

And

Y is 3x=3x300=900.

ii)When the agreement states that the interest on capital must be given even if it leads the firm into losses the interest on capital will be:-

for X

(6/100)x20000=Rs.1,200

for Y

(6/100)x10000=600.

After crediting their respective capital accounts (in case of fluctuating capital accounts method) or current accounts (in case of fixed capital accounts method) with these amounts you must debit their accounts by their share of loss.

• -2
What are you looking for?