Question

A partner withdraws ₹10,000 at the beginning of each quarter. If the rate of interest on drawings is 10% p.a., the interest on drawings for a year will be:

• A. ₹2,500
• B. ₹2,000
• C. ₹1,500
• D. ₹1,000

Hint:

For equal drawings at the beginning of each quarter, the average period is always 7.5 months. Interest on Drawings = Total Drawings × Rate × Average Period (100 × 12)

Answer 1

The Correct Option is A

Concept: Interest on drawings is charged when partners withdraw money from the firm for personal use. The interest is calculated for the period during which the amount remains withdrawn from the business. When equal amounts are withdrawn at the beginning of each quarter, the average period method can be used. For quarterly drawings made at the beginning of each quarter, the average period is: \[ \frac{12+9+6+3}{4}=7.5 \text{ months} \] This method saves time and avoids calculating interest separately for each withdrawal.

Step 1: Write the details given in the question.
Amount withdrawn at the beginning of each quarter: \[ ₹10,000 \] Number of quarters: \[ 4 \] Rate of interest: \[ 10% \text{ per annum} \] Therefore, total drawings during the year are: \[ ₹10,000 \times 4 = ₹40,000 \]

Step 2: Determine the average period.
Since the withdrawals are made at the beginning of each quarter: \[ \text{1st Quarter} = 12 \text{ months} \] \[ \text{2nd Quarter} = 9 \text{ months} \] \[ \text{3rd Quarter} = 6 \text{ months} \] \[ \text{4th Quarter} = 3 \text{ months} \] Average period \[ = \frac{12+9+6+3}{4} = \frac{30}{4} = 7.5 \text{ months} \]

Step 3: Apply the interest on drawings formula.
\[ \text{Interest on Drawings} = \frac{\text{Total Drawings}\times R \times T}{100 \times 12} \] Substituting the values: \[ = \frac{40,000 \times 10 \times 7.5}{100 \times 12} \] \[ = \frac{4,00,000 \times 7.5}{1200} \] \[ = ₹2,500 \]

Step 4: Interpret the result.
The partner has withdrawn money throughout the year. Since the withdrawals reduce the firm's available funds, the partner is charged interest on drawings. The total interest chargeable is: \[ \boxed{₹2,500} \] Hence Option (A) is correct.