Prathma, Madhyama and Tritiya were partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. On 1st April, 2023, their capital accounts showed balances of ₹ 10,00,000, ₹ 8,00,000 and ₹ 6,00,000 respectively. The partnership deed provided for interest on capital @ 10% 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 ₹ 3,00,000.
[(ii)] During the year ended 31st March, 2024, the firm earned a profit of ₹ 1,20,000.
[(i)] During the year ended 31st March, 2024, the firm earned a profit of ₹ 3,00,000.
[(ii)] During the year ended 31st March, 2024, the firm earned a profit of ₹ 1,20,000.
Show Hint
When profit is insufficient, interest is distributed proportionally based on capital ratio.
Solution and Explanation
Given:
Capital of Prathma = ₹ 10,00,000
Capital of Madhyama = ₹ 8,00,000
Capital of Tritiya = ₹ 6,00,000
Rate of Interest on Capital = 10% per annum
Profit-sharing ratio = 2 : 2 : 1
(i) When Net Profit = ₹ 3,00,000
Step 1: Calculate Interest on Capital:
Prathma: $₹\ 10,00,000 \times 10\% = ₹\ 1,00,000$
Madhyama: $₹\ 8,00,000 \times 10\% = ₹\ 80,000$
Tritiya: $₹\ 6,00,000 \times 10\% = ₹\ 60,000$
$\Rightarrow$ Total Interest = ₹ 2,40,000
Step 2: Compare Interest with Profit
Since Profit (₹ 3,00,000) > Interest on Capital (₹ 2,40,000),
$\Rightarrow$ Full interest on capital will be allowed.
Step 3: Remaining profit = ₹ 3,00,000 – ₹ 2,40,000 = ₹ 60,000
This remaining profit is distributed in ratio 2:2:1:
Total ratio = 5 parts
Prathma: $\dfrac{2}{5} \times ₹\ 60,000 = ₹\ 24,000$
Madhyama: $\dfrac{2}{5} \times ₹\ 60,000 = ₹\ 24,000$
Tritiya: $\dfrac{1}{5} \times ₹\ 60,000 = ₹\ 12,000$
Final Distribution:
Prathma: ₹ 1,00,000 + ₹ 24,000 = ₹ 1,24,000
Madhyama: ₹ 80,000 + ₹ 24,000 = ₹ 1,04,000
Tritiya: ₹ 60,000 + ₹ 12,000 = ₹ 72,000
(ii) When Net Profit = ₹ 1,20,000
Step 1: Interest on Capital requirement = ₹ 2,40,000 (as above)
But profit is only ₹ 1,20,000, which is less than interest required.
$\Rightarrow$ Interest will be allowed in the ratio of capital contributions.
Capital Ratio:
10,00,000 : 8,00,000 : 6,00,000 = 10 : 8 : 6
$\Rightarrow$ Simplified = 5 : 4 : 3
Total parts = 12
Proportionate Interest Distribution:
Prathma: $\dfrac{5}{12} \times ₹\ 1,20,000 = ₹\ 50,000$
Madhyama: $\dfrac{4}{12} \times ₹\ 1,20,000 = ₹\ 40,000$
Tritiya: $\dfrac{3}{12} \times ₹\ 1,20,000 = ₹\ 30,000$
Final Distribution:
Prathma: ₹ 50,000
Madhyama: ₹ 40,000
Tritiya: ₹ 30,000
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