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Question
Ahamad and Basheer contribute ₹ 60,000 and ₹ 40,000 respectively as capital. Their respective share of profit is 2 : 1 and the profit before interest on capital for the year is ₹ 5,000. Compute the amount of interest on capital in each of the following situations:
- if the partnership deed is silent as to the interest on capital
- if interest on capital @ 4% is allowed as per the partnership deed
- if the partnership deed allows interest on capital @ 6% per annum.
Solution
- No interest on capital is allowed.
- Since there is sufficient profit, interest on capital will be provided.
Ahamad:
`60,000 xx 4/100` = ₹ 2,400
Basheer:
`40,000 xx 4/100` = ₹ 1,600 - Since the profit is insufficient, interest on capital will not be provided.
Ahamad:
`60,000 xx 6/100` = ₹ 3,600
Basheer:
`40,000 xx 6/100` = ₹ 2,400
Profit of ₹ 5,000 will be distributed to the partners in their capital ratio of 3 : 2.
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