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Moli and Bholi contribute Rs. 20,000 and Rs. 10,000 respectively towards capital. They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2: 3 and the net profit for the year is Rs. 1,500. Show distribution of profits: (i) where there is no agreement except for interest on capitals; and (ii) where there is an agreement that the interest on capital as a charge.

Solution

Calculation of Interest on Capital

Interest on Moli’s Capital= 20,000×6/100=1,200

Interest on Bholi’s Capital=10,000×6/100=600

Total Amount of Interest on Capital=1,200+600=1,800

Case (a) 

Where there is no clean agreement except for interest on capitals

Profit for the year ended = Rs.  1,500

Total amount of interest = Rs.  1,800

Here, total amount of interest on capital is more than the profit available for distribution. Therefore, profit of Rs 1,500 is distributed between Moli and Bholi in the ratio of their interest on capital.

Particulars   MoliBholi
Interest on Capital1,200600
Ratio of interest on Capital21

Moli will get Interest on Capital=1,500×2/3=1,000
Bholi will get Interest on Capital=1,500×1/3=500

Case (b)

In case, there is a clear agreement that the interest on capital will be allowed even if the firm has incurred loss, then the whole amount of interest on capital is to be allowed to the partners.
Interest on Moli’s Capital=20,000×6/100=1,200
Interest on Bholi’s Capital=10,000×6100=600
Total Amount of Interest on Capital= (1,200+600) =1,800
Total Profit of the firm = Rs.  1,500

Therefore, loss to the firm amounts to Rs.300. This loss is to shared by Moli and Bholi in their profit sharing ratio
that is 2: 3. 
Loss to Moli=300×2/5= 120
Loss to Bholi = 300×3/5=180

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