Anupam and Abhishek are partners. Their capital accounts showed balances of Rs. 1,50,000 and Rs. 2,00,000 respectively on April 01, 2019. Show the interest on capital for the year ending march 31, 2020 allowed, if the partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 14,000 during the year:
Anupam and Abhishek are partners. Their capital accounts showed balances of Rs. 1,50,000 and Rs. 2,00,000 respectively on April 01, 2019. Show the interest on capital for the year ending march 31, 2020 allowed, if the partnership deed provides for interest on capital @ 8% p.a. and the firm earned a profit of Rs. 14,000 during the year:
Solution
Calculation of Interest on Capital:
Anupam's Interest = 1,50,000 × 8/100 = Rs. 12,000
Abhishek's Interest = 2,00,000 × 8/100 = Rs. 16,000
Total Interest on Capital = Rs. 28,000
Key Principle: As per Accounting Standard-1, interest on capital is a charge against profits and can be allowed only if there are sufficient profits available.
Profit earned during the year = Rs. 14,000
Interest on Capital to be allowed = Rs. 28,000
Since the profit (Rs. 14,000) is less than the interest on capital (Rs. 28,000), only the available profit can be distributed as interest on capital.
Interest on Capital allowed = Rs. 14,000
This Rs. 14,000 will be distributed between partners in the ratio of their entitlement (3:4), meaning:
- Anupam will get: 14,000 × 3/7 = Rs. 6,000
- Abhishek will get: 14,000 × 4/7 = Rs. 8,000
The remaining interest (Rs. 14,000 shortfall) will not be credited to their capital accounts as there are insufficient profits to support it.
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