Solve this: Illustration 24 (Interest on Capital when Profit is Inadequate) A and B contribute Rs 4,00,000 - Accountancy - Accounting for Partnership Basic Concepts

Question

Solve this:

Illustration 24 (Interest on Capital when Profit
is Inadequate) A and B contribute Rs 4,00,000 and Rs 2,00,000
respectively as capital on which they agree to pay interest @ 6% p
a Their respective share of profit is 2: 3 and the profit (before
interest) for the year is Rs 30,000 Show the relevant account to
allocate interest on capitals:

(i) if the Partnership Deed is silent about the treatment of
interest on capital, and

(ii) if interest is a charge as per the Partnership Deed

Neha Chopra · Accepted Answer

Dear Student

(i)
Interest on Capital :
A - 4,00,000 x 6% = 24,000/-
B - 2,00,000 x 6% = 12,000/-

Since profit is insufficient Interest would be divided as
follows:

Profit
and Loss Appropriation A/c

Date
Particulars

Amount
Date
Particulars

Amount

(Rs)

Net profit

30,000

Interest on Capital

A - 30,000 x 24,000 / 36,000
20,000

B - 30,000 x 12,000 / 36,000
10,000
30,000

30,000

(ii)
In this case, when interest is treated as a charge against profit,
it shall be debited to profit and loss account or Profit and loss
adjustment A/c and then the leftover profit or loss shall be
transferred to Appropriation account

Profit
and Loss Adjustment A/c

Date
Particulars

Amount
Date
Particulars

Amount

(Rs)

Profit and Loss A/c

30,000

Interest on Capital

A - 30,000 x 24,000 / 36,000
24,000

B - 30,000 x 12,000 / 36,000
12,000
36,000

Net Loss - (To be transferred to Profit
and loss Appropriation A/c)

6,000

36,000

Regards

Profit and Loss Appropriation A/c

Date	Particulars		Amount	Date	Particulars	Amount
			(Rs)			(Rs)
					Net profit	30,000

	Interest on Capital
	A - 30,000 x 24,000 / 36,000	20,000
	B - 30,000 x 12,000 / 36,000	10,000	30,000




			30,000			30,000

Profit and Loss Adjustment A/c

Date	Particulars		Amount	Date	Particulars	Amount
			(Rs)			(Rs)
					Profit and Loss A/c	30,000

	Interest on Capital
	A - 30,000 x 24,000 / 36,000	24,000
	B - 30,000 x 12,000 / 36,000	12,000	36,000

					Net Loss - (To be transferred to Profit and loss Appropriation A/c)	6,000


			36,000			36,000