Nidhi and Kunal were partners in a firm sharing profits and losses in the ratio of 4 : 1. Their capitals were Rs. 3,00,000 and Rs. 2,00,000 respectively. They were entitled to interest on capital @ 6% p.a. The firm earned a profit of Rs. 15,000 during the year. Interest on partners' capitals will be :
Nidhi and Kunal were partners in a firm sharing profits and losses in the ratio of 4 : 1. Their capitals were Rs. 3,00,000 and Rs. 2,00,000 respectively. They were entitled to interest on capital @ 6% p.a. The firm earned a profit of Rs. 15,000 during the year. Interest on partners' capitals will be :
Options
Correct option: (C) Nidhi Rs. 9,000 ; Kunal Rs. 6,000
Full interest on capital (Nidhi Rs. 18,000 + Kunal Rs. 12,000 = Rs. 30,000) exceeds the available profit of Rs. 15,000. Since interest on capital is only an appropriation here (not a charge), it is restricted to the available profit and shared in the ratio of the interest amounts (18,000 : 12,000 = 3 : 2), giving Nidhi Rs. 9,000 and Kunal Rs. 6,000.
Marking Scheme
- 11 mark for identifying that available profit (Rs. 15,000) is less than the total interest entitlement (Rs. 30,000) and hence interest must be restricted to the profit available.
- 2Full credit only for selecting option (C) with the profit shared in the ratio 3:2 (i.e., in the ratio of interest amounts), not equally or in the profit-sharing ratio.
Hint
When profit is less than the total interest on capital and interest is an appropriation (not a charge), distribute the available profit in the ratio of the partners' interest entitlements.
Quick Oral Answer
When available profit is less than the total interest on capital due and interest is only an appropriation, we restrict the interest to the available profit and divide it among partners in the ratio of their interest amounts, not equally.
Analysis & Explanation
Concept
Interest on capital is normally an appropriation of profit (not a charge) unless the partnership deed specifically states otherwise. An appropriation can never exceed the profit actually available for distribution.
Working
- Full interest entitlement: Nidhi = ; Kunal = ; Total = Rs. 30,000
- Available profit = Rs. 15,000, which is less than Rs. 30,000
Since interest on capital here is an appropriation, it is restricted to Rs. 15,000 and shared between the partners in the ratio of their interest entitlements, i.e. 18,000 : 12,000 = 3 : 2.
- Nidhi =
- Kunal =
This matches option (C).
Why other options are wrong
- (A) Rs. 18,000 : Rs. 12,000 is the full entitlement, ignoring that profit is insufficient.
- (B) Rs. 7,500 : Rs. 7,500 wrongly splits the available profit equally, ignoring the interest ratio.
- (D) Rs. 12,000 : Rs. 3,000 does not correspond to any valid distribution basis.
Exam trap
Students often forget that when interest on capital is NOT stated to be a charge, it must be capped at available profits and shared in the ratio of interest amounts — not distributed in the profit-sharing ratio (4:1) or the capital ratio directly.
Common Mistakes
- 1Calculating full interest on capital (Rs. 18,000 and Rs. 12,000) without checking whether the available profit is sufficient to cover it.
- 2Dividing the available profit equally between partners instead of in the ratio of their interest entitlements.
- 3Treating interest on capital as a charge (paid in full even if it causes a loss) when the question gives no such instruction.
Interesting Facts
Under the Indian Partnership Act, 1932, in the absence of a partnership deed no partner is entitled to interest on capital at all — the very fact that this question allows 6% p.a. means there must be a specific deed clause.
CBSE examiners frequently test this 'insufficient profit' scenario because it is one of the most common real errors made by commerce students in board exams, second only to drawings interest calculation errors.
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Frequently Asked Questions
Is interest on capital a charge or an appropriation?
By default, interest on capital is an appropriation of profit and can only be allowed out of available profits, unless the partnership deed expressly states it is a charge against profit (payable even if it results in a loss).
How do you divide interest on capital when profit is insufficient?
The available profit is distributed among the partners in the ratio of their respective interest-on-capital entitlements (not equally and not in the profit-sharing ratio).