Capitals are Rs 4,00,000 and Rs 2,00,000 and profits are shared 3:2. Profit before interest on capital is Rs 27,000 and interest on capital is agreed at 5 per cent per annum. What happens?

1. Interest on capital at 5 per cent would be Rs 20,000 on Rs 4,00,000 and Rs 10,000 on Rs 2,00,000, totalling Rs 30,000. 2. The profit available is only Rs 27,000, so the profit is insufficient to meet the interest. 3. The textbook's rule is that where the net profit is less than the interest on capital, interest on capital will not be provided at all. 4. Instead the profit is distributed among the partners in their capital ratio. 5. The capitals are Rs 4,00,000 and Rs 2,00,000, so the capital ratio is 2 to 1 and the Rs 27,000 is split on that basis. 6. The profit sharing ratio of 3 to 2 is deliberately not used, which is the whole point of the rule. _Source: TN HSC Class 12 Accountancy (Samacheer Kalvi, Govt of Tamil Nadu), Unit 3 "Accounts of Partnership Firms - Fundamentals", §3.7.1 and Illustration 10_