When Interest on Capital is an Appropriation and Profits are Inadequate
Question 26: Parul and Rajul were partners in a firm, sharing profits and losses in the ratio of 5:3. The balance in their Fixed Capital Accounts on 1st April, 2023 were: Parul ₹ 6,00,000 and Rajul ₹ 8,00,000. The partnership deed provided for allowing interest on capital at 129% per annum. The net profit of the frm for the year ended 31st March, 2024 was 1,26,000.
Prepare Profit & Loss Appropriation Account for the year ended 31st March, 2024. Show your working clearly. (CBSE 2025)
[Ans.: Interest on Capital: Paru54,000; Rajul 72,000.]
Answer:
Interest on capital is 12% per annum
Capital of Parul is ₹6,00,000 and Rajul ₹8,00,000
Interest on Capital of Parul is ₹72,000 and Rajul ₹96,000
Total interest is ₹72,000+₹96,000= ₹1,68,000 is more than profit available
Ratio of interest on capital = 3:4
Share of Profit :
Parul = 1,26,000×3/7= 54,000
Rahul = 1,26,000×4/7= 72,000
Note: Profit have been distributed in the ratio of interest on capital since profit is not adequate.
Calculate opening capital and interest on capital
Question 27: A and B are partners in the ratio of 3:2. The firm maintains Fluctuating Capital Accounts and the balance of the same as on 31st March, 2020 amounted to ₹1,60,000 and ₹1,40,000 for A and B respectively. Their drawings during the year were 30,000 each.
As per Partnership Deed, interest on capital@ 10% p.a. on opening capitals had been provided to them.
Calculate opening capitals of partners given that their profit was 90,000. Show your workings clearly.
Answer:
Calculation of opening Capital
|
|
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
Calculation of interest on Capital and Share of Profit
Question 28:
Amit and Bramit started business on 1st April, 2025 with capitals of ₹ 15,00,000 and ₹ 9,00,000 respectively. On 1st October, 2025, 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, 2026.
Answer:
Calculation of Interest on Amit’s Capital
|
Date |
Capital |
× |
Period |
= |
Product |
|
April 01, 2025 to Sept. 30, 2025 |
15,00,000 |
× |
6 |
= |
90,00,000 |
|
Oct. 01, 2025 to March 31, 2025 |
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, 2025 to Sept. 30, 2025 |
9,00,000 |
× |
6 |
= |
54,00,000 |
|
Oct. 01, 2025 to March 31, 2025 |
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
Question 29:
From the following Balance Sheet of Long and Short, calculate interest on capital @ 8% p.a. for the year ended 31st March, 2026.
|
BALANCE
SHEET |
||||
|
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.
Answer:
Calculation of Capital at the beginning (as on April 01, 2026)
|
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
Question 30: Sumit and Namit are partners sharing profits in the ratio of 3:2. They contribute ₹ 1,00,000 and ₹ 50,000 respectively towards capital. Compute interest on capital and show distribution of profit in the following cases:
(i) When Partnership Deed is silent as to the interest on capital and profit for the year is ₹ 50,000.
(ii) When Partnership Deed provides for interest on capital @ 10% p.a. and profit for the year is ₹ 15,000.
(iii) When the Partnership Deed provides for interest on capital @ 12% and profit for the year is ₹ 23,000.
(iv) When the Partnership Deed provides for interest on capital @ 5% p.a. and loss for the year is ₹ 8,000.
(V) When Partnership Deed provides for interest on capital @ 5% p.a. and profit for the year is ₹ 3,000.
(vi) When Partnership Deed provides for interest on capital @ 5% p.a. even if it involves the firm in loss and the profit for the year is ₹ 6,000.
Answer:
Case - (i) When Partnership Deed is silent as to the interest on capital and profit for the year is ₹ 50,000.
Solution: Interest on capital will not be allowed. Profits: Sumit =30,000; Namit =20,000.
Reason: Since no agreement as to interest on Capital. Interest on capital will not be allowed.
Case - (ii) When Partnership Deed provides for interest on capital @ 10% p.a. and profit for the year is ₹ 15,000.
Solution: Interest on Capital: Sumit ₹ 10,000, Namit = ₹ 5,000. Profit is not left for distribution.
Reason: interest is allowed as per agreement profit is enough to be distributed, but Profit is not left for distribution because interest and profit equal.
Case - (iii) When the Partnership Deed provides for interest on capital @ 12% and profit for the year is ₹ 23,000.
Solution: Interest on Capital: Sumit = ₹ 12,000; Namit = ₹ 6,000 as per rate of interest on capital @12%.
Profit: Sumit = ₹ 3,000; Namit - ₹ 2,000; Distributable profit= 23,000-18,000=5,000.
Case - (iv) When the Partnership Deed provides for interest on capital @ 5% p.a. and loss for the year is ₹ 8,000.
Solution: interest on capital is not distributed in case of loss.
Loss is distributed as per profit sharing ratio
Loss: Sumit = ₹ 4,800; Namit = ₹ 3,200
Case - (V) When Partnership Deed provides for interest on capital @ 5% p.a. and profit for the year is ₹ 3,000.
Solution: Since profit of ₹ 3,000 will be distributed in the ratio of 2:1 in the ratio of capital or interest on capital.
Interest on Capital: Sumit – ₹ 2,000 Namit = ₹ 1,000 as per ratio of interest on capital.
No profit is left for distribution among the partner since entire amount of Profit is distributed as interest.
Case - (vi) When Partnership Deed provides for interest on capital @ 5% p.a. even if it involves the firm in loss and the profit for the year is ₹ 6,000.
Solution: Interest on capital: Sumit = ₹ 5,000; Namit =₹ 2,500,
Loss: Sumit = ₹ 900; Namit = ₹ 600 (loss after interest= 6,000-7,500=1,500).
Ts Grewal Solution 2026-2027
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Class 12 | Volume I
Chapter 1 – Accounting For Partnership Firms Fundamentals
Question No. 1 To 5
Question No. 6 To 10
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Question No. 16 To 20
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Question No. 26 To 30
Question No. 31 To 35
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