12th | Accounting For Partnership Firms Fundamentals | Question No. 26 to 30 | Ts Grewal Solution 2022-2023

	A	B
Closing Capital Add; Drawings	1,60,000 30,000	1,40,000 30,000
Less: Profit already Credited (WN)	1,90,000 37,800	1,70,000 25,200
Less: Interest on Capital (WN)	1,52,200 13,836	1,44,800 13,164
Opening Capital	1,38,364	1,31,636

 

Working Notes:

Total Capital of A and B (1,60,000+1,40,000) Add: Drawings (30,000×2)	= =	3,00,000 60,000
Less: Profits (Including Interest on Capital)	=	3,60,000 90,000
Total opening Capital Including Interest on Capital	=	2,70,000

 

Interest on Capital @10 p.a. 2,70,000 is 27,000

Divisible Profits= 90,000 - 27,000 = 63,000

Distribution of profits

A = 63,000×3/5=37,800

B = 63,000×2/5=25,200

Individual interest on Capital

A= 1,52,200×10/110=13,836

B= 1,44,800×10/110=13,164

 

Following is the extract of the Balance Sheet of Neelkant and Mahadev as on 31st March, 2022.

BALANCE SHEET as at 31st March, 2022
Liabilities	`	Assets	`
Neelkant's Capital	10,00,000	Sundry Assets	30,00,000
Mahadev's Capital	10,00,000
Neelkant's Current A/c	1,00,000
Mahadev' Current A/c	1,00,000
Profit and Loss Appropriation A/c (2021-22)	8,00,000
	30,00,000		30,00,000

During the year, Mahadev's drawings were  ` 30,000. Profits during the year ended 31st March, 2022 is  ` 10,00,000. Calculate interest on capital @ 5% p.a. for the year ending 31st March, 2022.

Interest on Capital

Neelkant’s	= 10,00,000×5/100=50,000
Mahadev’s	= 10,00,000×5/100=50,000

Note: In this question, as the balances of both Partner's Capital Account and of Partner's Current Account are mentioned, so it is clear that the capital of the partners is fixed.

As we know, when the capital of the partners is fixed, drawings and interest on capital does not affect the capital balances of the partners. Rather, it would affect their current account balances. Therefore, in this case, capital at the beginning (i.e. opening capital) and capital at the end (i.e. closing capital) of the year would remain same. Thus, the interest on capital is calculated on fixed capital balances (given in the Balance Sheet of the question).

 

From the following Balance Sheet of Long and Short, calculate interest on capital @ 8% p.a. for the year ended 31st March, 2022.
 

BALANCE SHEET as at 31st March, 2022
Liabilities		`	Assets	`
Long's Capital A/c		1,20,000	Fixed Assets	3,00,000
Short's Capital A/c		1,40,000	Other Assets	60,000
General Reserve		1,00,000
		3,60,000		3,60,000

During the year, Long withdrew  ` 40,000 and Short withdrew  ` 50,000. Profit for the year was  ` 1,50,000 out of which  ` 1,00,000 was transferred to General Reserve.

Calculation of Capital at the beginning (as on April 01, 2021)

Particulars	Long ( `)	Short ( `)
Capital at the end	1,60,000	1,40,000
Less: Adjusted  Profit (1,50,000 – 1,00,000) in 1:1 ratio	(25,000)	(25,000)
Add: Adjusted Drawings	-	50,000
Capital in the beginning	1,35,000	1,65,000

 

Long’s Interest on capital= 1,35,000×8/100=10,800

Short’s Interest on capital= 1,65,000×8/100=13,200

 

Amit and Bramit started business on 1st April, 2021 with capitals of  ` 15,00,000 and  ` 9,00,000 respectively. On 1st October, 2021, they decided that their capitals should be  ` 12,00,000 each. The necessary adjustments in capitals were made by introducing or withdrawing by cheque. Interest on capital is allowed @ 8% p.a. Compute interest on capital for the year ended 31st March, 2022.

Calculation of Interest on Amit’s Capital

Date	Capital	×	Period	=	Product
April 01, 2021 to Sept. 30, 2021	15,00,000	×	6	=	90,00,000
Oct. 01, 2021 to March 31, 2022	12,00,000	×	6	=	72,00,000
Sum of Product					1,62,00,000

Interest on Capital = sum of product×Rate of drawing/100×1/ 12

Interest on Capital =1,62,00,000×8/100×1/12  =1,08,000

 

Calculation of Interest on Bramit’s Capital

Date	Capital	×	Period	=	Product
April 01, 2021 to Sept. 30, 2021	9,00,000	×	6	=	54,00,000
Oct. 01, 2021 to March 31, 2022	12,00,000	×	6	=	72,00,000
Sum of Product					1,26,00,000

Interest on Capital = sum of product×Rate of drawing/100×1/ 12

Interest on Capital =1,26,00,000×8/100×1/12  =84,000

 

Moli and Bholi contribute  ` 20,000 and  `  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  ` 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.

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 =  `  1,500

Total amount of interest =  `  1,800

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

Particulars	Moli	:	Bholi
Interest on Capital	1,200	:	600
or, Ratio of interest on Capital	2	:	1

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=10,000×6/100=600

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

Total Profit of the firm =  `  1,500

Therefore, loss to the firm amounts to  `300. This loss is to be 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