Practice Activity 11.4 Calculation of partner’s interest on capital

Ebubechukwu and Febechukwu contribute ₦500,000 and ₦300,000 respectively to commence a partnership business in April 2018. Based on the partnership agreement, the profits or losses of the business are to be shared equally and the interest on capital is 5 percent per annum. The work done by both partners is of equal nature. Both partners are actively involved in the partnership business. The profit for the accounting year ended 31 March 2019 is ₦1,500,000.

Required: Calculate the amount of profit attributable to each partner for the year ended 31 March 2019. Explain how the interest on capital has compensated the partner who contributed more capital to the partnership business.

A suggested solution to practice activity 11.4

Profit attributable to each partner for the year ended 31 March 2019

₦

Profit for the year 1,500,000

Interest on capital:

Ebubechukwu (5% of capital contributed, that is, ₦500,000) (25,000)

Febechukwu (5% of capital contributed, that is, ₦300,000) (15,000)

Balance of profit for the year 1,460,000

Share of profit:

Ebubechukwu (1/2) 730,000

Febechukwu (1/2) 730,000

Compensation of the partner who contributed more capital to the partnership business: Ebubechukwu has received ₦25,000 as interest on the capital contributed to the business. This interest is ₦10,000 more than the interest on capital received by Febechukwu. The excess of ₦10,000 is the return of investment received by Ebubechukwu for investing ₦200,000 more than what Febechukwu invested in the business.