Question

Daya and Deena were partners in a firm sharing profits and losses in the ratio of 3 : 1. On 1st April, 2023, their capital accounts showed balances of ₹ 5,00,000 and ₹ 6,00,000 respectively. The partnership deed provided for interest on capital @ 12% p.a. Show the treatment of interest on capital in the following cases:

[(i)] During the year ended 31st March, 2024, the firm earned a profit of ₹ 2,00,000.

[(ii)] During the year ended 31st March, 2024, the firm earned a profit of ₹ 66,000.

Hint:

If profit is less than interest on capital, distribute the available profit in the ratio of entitled interest amounts.

Answer 1

Given:
Capital of Daya = ₹5,00,000
Capital of Deena = ₹6,00,000
Interest on capital = 12% p.a.
Profit-sharing ratio = 3 : 1

Case (i): Profit = ₹2,00,000
Interest on Daya’s capital = $5,00,000 \times 12\% = ₹60,000$
Interest on Deena’s capital = $6,00,000 \times 12\% = ₹72,000$
Total Interest on Capital = ₹60,000 + ₹72,000 = ₹1,32,000
Since profit (₹2,00,000) is greater than total interest (₹1,32,000), full interest can be paid.

Distribution:
- Daya gets ₹60,000
- Deena gets ₹72,000
Balance profit = ₹2,00,000 – ₹1,32,000 = ₹68,000
Divide remaining profit in 3 : 1 → Total parts = 4
- Daya = $₹68,000 \times \dfrac{3}{4} = ₹51,000$
- Deena = $₹68,000 \times \dfrac{1}{4} = ₹17,000$

Final distribution:
- Daya = ₹60,000 + ₹51,000 = ₹1,11,000
- Deena = ₹72,000 + ₹17,000 = ₹89,000

Case (ii): Profit = ₹66,000
Total interest required = ₹1,32,000
Since profit is less than interest payable, it is distributed in ratio of interest on capital:
$60,000 : 72,000 = 5 : 6$
Total parts = 11

Distribution:
- Daya = $₹66,000 \times \dfrac{5}{11} = ₹30,000$
- Deena = $₹66,000 \times \dfrac{6}{11} = ₹36,000$

In this case, no further profit is available beyond interest.