Which of the following is correct in respect of interest on capital in case partnership deed provides such interest?
Answer & explanation
Correct answer: option 4
The correct answer is option 4- All of the above.
1) In case firm suffers a loss, no interest on capital is to be allowed to partners. The interest on capital is allowed only when the firm has earned profit during the accounting year. Hence, no interest will be allowed during the year the firm has incurred net loss.
2) If, profit > Interest on capital, Full Interest on capital will be allowed- If in a year, the profit of the firm is more than the amount due to the partners as interest on capital, the full payment of interest will be done to partners. The remaining profit is distributed between partners in their profit-sharing ratio.
3) If, profit < Interest on capital, Interest on capital will be allowed in proportion to profit in the ratio of the amount of interest on capital- If in a year, the profit of the firm is less than the amount due to the partners as interest on capital, the payment of interest will be restricted to the amount of profits. In that case, the profit will be effectively distributed in the ratio of interest on capital of each partner.