Read the following information to answer.
Arun and Ram are partners in a restaurant business sharing profits and losses in capital ratio. Their fixed capital from the beginning of the firm was ₹2,00,000 and ₹1,50,000 respectively.
The profit for the year ended 31 March 2022 before the appropriation of Salary and Interest on Capital was ₹2,20,000. Ram is allowed a salary of ₹2,000 per quarter, and both partners are allowed interest on capital @ 10% p.a.
Due to the further expansion of the business, they decided to admit Sanjeev as a new partner for 1/5 share in profits. It was agreed that Sanjeev will bring ₹1,00,000 as capital and ₹50,000 as his share of Goodwill. It was decided that he will give ₹1,00,000 as loan to the firm for 3 years.
The amount of distributed profits of both the partners will be:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → ₹1,77,000
The divisible (distributed) profit is what remains after the partners’ salary and interest on capital are appropriated from the profit.
Ram’s salary = ₹2,000 × 4 quarters = ₹8,000
Interest on Arun’s capital = ₹2,00,000 × 10% = ₹20,000
Interest on Ram’s capital = ₹1,50,000 × 10% = ₹15,000
Profit to be distributed = ₹2,20,000 − ₹8,000 − ₹20,000 − ₹15,000 = ₹1,77,000
This ₹1,77,000 is then shared by Arun and Ram in their capital ratio of 4:3.