Question

If a partner withdraws equal amount at the end of each quarter, then _____ are to be considered for interest on total drawings.

• A. $5.5$ months
• B. $6$ months
• C. $4.5$ months
• D. $7.5$ months

Hint:

For Quarterly Drawings: * Beginning of every quarter $\rightarrow 7.5$ months * Middle of every quarter $\rightarrow 6$ months * End of every quarter $\rightarrow 4.5$ months

Answer 1

The Correct Option is C

Concept: In partnership accounting, when drawings are made at regular intervals, the "Average Period Method" is used to simplify the calculation of interest. Instead of calculating interest for each individual withdrawal, we calculate interest on the total drawings for an average time period. The formula for the average period is: $$ \text{Average Period} = \frac{\text{Months left after first drawing} + \text{Months left after last drawing}}{2} $$

Step 1: Understanding the timing of drawings. The partner withdraws money at the end of each quarter. There are 4 quarters in a financial year:
• Quarter 1: April to June (Ends June 30)
• Quarter 2: July to September (Ends Sept 30)
• Quarter 3: October to December (Ends Dec 31)
• Quarter 4: January to March (Ends March 31)

Step 2: Calculating the months remaining for first and last drawings. 1. First Drawing: Made on June 30. Months left until the end of the year (March 31) = 9 months. 2. Last Drawing: Made on March 31. Months left until the end of the year = 0 months.

Step 3: Finding the average period. Applying the formula: $$ \text{Average Period} = \frac{9 + 0}{2} = 4.5 \text{ months} $$ Hence, interest is charged on the total drawings for 4.5 months.