Question

Ashok and Avinash were partners in a firm sharing profits and losses in the ratio of 3 : 2. On 1st April, 2023, their capitals were ₹10,00,000 and ₹15,00,000 respectively. After the accounts for the year ending 31st March, 2024 were prepared, it was discovered that interest on capital at the rate of 10% per annum, as provided for in the partnership deed, was not credited to the partners’ capital accounts before distribution of profits. Had the interest on capital been duly provided, the firm’s divisible profit would have:

• A. Reduced by ₹2,50,000
• B. Increased by ₹2,50,000
• C. No change in the profits
• D. Reduced by ₹25,000

Hint:

Interest on capital is an appropriation and reduces divisible profit. Always check if it was credited before distribution.

Answer 1

The Correct Option is A

Step 1: Calculate Interest on Capital for each partner
Ashok’s capital = ₹10,00,000
Avinash’s capital = ₹15,00,000
Rate = 10% per annum

Interest to Ashok = 10% of 10,00,000 = ₹1,00,000
Interest to Avinash = 10% of 15,00,000 = ₹1,50,000

Total interest = ₹1,00,000 + ₹1,50,000 = ₹2,50,000

Step 2: Effect on divisible profits
If interest had been allowed, it would have been deducted from the profit before distribution.
Therefore, divisible profit would have decreased by ₹2,50,000
$\Rightarrow$ Answer: Reduced by ₹2,50,000