Advertisements
Advertisements
Question
Illustrate how interest on drawings will be calculated under various situations.
Solution
When a partner withdraws any amount, either in cash or in any other form, from the firm for his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of drawings is termed as interest on drawings. The method of calculating interest on drawings depends on the information available for time and frequency of the drawings made by the partner. The following different situations of drawings made illustrate the calculation of interest charged on drawings.
Situation 1: When information regarding Amount, Date and Rate of Interest on drawings are given.
If a partner withdrew Rs 10,000 on May 01 and interest on drawing is charged at 10% p.a. and the firm closes its books on December 31 every year then interest of drawings amounts to Rs 667.
Interest on drawings = `"Total Amount" xx ("Rate of Interest")/100 xx "Period"/12`
Interest on drawings = `10000 xx 10/100 xx 8/12 = "Rs"667`
Situation 2: When information regarding Amount, Rate of Interest on drawings is given
Case I: If the Amount and Rate of Interest on drawings (per annumn) is given but date is not mentioned
If the details regarding the amount of drawings and rate of interest of drawings (p.a.) is given but the date of drawings is not mentioned then interest is charged on average basis and the period of drawings is taken as 6 months.
Example- If a partner withdrew Rs 10,000 and rate of interest on drawings is 10% p.a. then the interest of drawings amounts to Rs 500
Interest on drawings `= 10000 xx 10/100 xx 6/12 = 500`
Case II: If the Amount and Rate of Interest on drawings is given but the date and per annumn rate of interest is not mentioned
If the date and the rate of interest are given but per annum is not specified, then annual interest is charged.
Example- If a partner withdrew Rs 20,000 and interest rate is 10% , then the interest on drawings amounts to Rs 2,000.
Interest on drawings`= 20000 xx 10/100 = "Rs"2000`
Situation 3: When a fixed amount is withdrawn at regular interval
Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is calculated for 6.5 months.
Example- If a partner withdraws Rs 1,000 in the beginning of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 650.
Interest on drawings`= 12000 xx 10/100 xx 6.5/12 = 650`
Case II: If a fixed amount is withdrawn at the end of each month, then the interest is calculated for 5.5 months
Example- If a partner withdraws Rs 1,000 at the end of each month and rate of interest is 10% p.a., then the interest on drawings amount to Rs 550.
Interest on drawings`= 12000 xx 10/100 xx 5.5/12 = "Rs" 550`
Case III: If a fixed amount is withdrawn in the middle of every month then assuming that the drawings are made on15th of every month then interest on drawings is calculated for 6 months
Example- If a partner withdraws Rs 1,000 on 15th of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 600.
Interest on drawings`= 12000 xx 10/100 xx 6/12 = "Rs" 600`
Case IV: If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated for 7.5 months
Example- If a partner withdraws Rs 3,000 in the beginning of every quarter and the rate of interest is 10% p.a. then the interest on drawings amount to Rs 750
Interest on drawings`= 12000 xx 10/100 xx 7.5/12 = "Rs" 750`
Case V: If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5 months
Example- If a partner withdraws Rs 3,000 at the end of every quarter and the rate of interest is 10% p.a., then the interest on drawings amounts to Rs 450.
Interest on drawings`= 12000 xx 10/100 xx 4.5/12 = "Rs" 450`
Situation 4:
When different amount is at different intervals
If different amount is withdrawn by a partner at different points of time then the interest is calculated by Product Method. The period of drawings is calculated from the date of withdrawal to the last date of the accounting year.
Example- A partner withdraws Rs 5,000 on Feb 01, Rs 3000 on May 01, Rs 5,000 on Sep. 30 and Rs 1000 on Dec. 31 and the rate of interest on drawings is 10% p.a. The firm closes its book on December 31.
Calculation of Interest on Drawings by Product Method
|
Interest on Drawings
|
|||||
|
Date |
Amount Rs |
Outstanding Period |
Product |
||
|
Feb. 01 |
5,000 |
11 |
5,000 × 11 = |
55,000 |
|
|
May. 01 |
3,000 |
8 |
3,000 × 8 = |
24,000 |
|
|
Sep. 30 |
5,000 |
3 |
5,000 × 3 = |
15,000 |
|
|
Dec. 31 |
1,000 |
0 |
1,000 × 0 = |
0 |
|
|
|
|
|
|
94000 |
|
Interest on Drawings`= "Sum of product" xx "Rate"/100 xx 1/12`
Interest on Drawings`= 94000 xx 10/100 xx 1/12 = 783.33`
APPEARS IN
RELATED QUESTIONS
Prem, Param and Priya were partners in a firm. Their fixed capitals were Prem Rs 2,00,000; Param
Rs 3,00,000 and Priya Rs 5,00,000. They were sharing profits in the ratio of their capitals. The firm was engaged in the sale of ready-to-eat food packets at three different locations in the city, each being managed by Prem, Param and Priya. The outlet managed by Prem was doing more business than the outlets managed by Param and Priya. Prem requested Param and Priya for a higher share in the profits of the firm which Param and Priya accepted. It was decided that the new profit sharing ratio will be 2: 1: 2 and its effect will be introduced retrospectively for the last four years. The profits of the last four years were Rs 2,00,000; Rs 3,50,000; Rs 4,75,000 and Rs 5,25,000 respectively. Showing your calculations clearly, pass a necessary adjustment entry to give effect to the new agreement between Prem, Param and Priya.
Sunflower and Pink Rose started partnership business on April 01, 2016 with capitals of Rs 2,50,000 and Rs 1,50,000, respectively. On October 01, 2016, they decided that their capitals should be Rs 2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2017.
On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at Rs 4,00,000, Rs 3,00,000 and Rs 2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to Rs 1,50,000 and the partner’s drawings had been Mountain: Rs 20,000, Hill Rs 15,000 and Rock Rs 10,000. Calculate interest on capital.
Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2020:
Balance Sheet as at March 31, 2017
|
Liabilities |
Amount (Rs) |
Assets |
Amount (Rs) |
|
Neelkant’s Capital |
10,00,000 |
Sundry Assets |
30,00,000 |
|
Mahadev’s Capital |
10,00,000 |
|
|
|
Neelkant’s Current Account |
1,00,000 |
|
|
|
Mahadev’s Current Account |
1,00,000 |
|
|
|
Profit and Loss Apprpriation |
8,00,000 |
|
|
|
|
30,00,000 |
|
30,00,000 |
During the year Mahadev’s drawings were Rs 30,000. Profits during 2016-17 is Rs 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2020.
Anju, Manju and Mamta are partners whose fixed capitals were Rs 10,000, Rs 8,000 and Rs 6,000, respectively. As per the partnership agreement, there is a provision for allowing interest on capitals @ 5% p.a. but entries for the same have not been made for the last three years. The profit sharing ratio during there years remained as follows:
|
Year |
Anju |
Manju |
Mamta |
|
2016 |
4 |
3 |
5 |
|
2017 |
3 |
2 |
1 |
|
2018 |
1 |
1 |
1 |
Make necessary and adjustment entry at the beginning of the fourth year i.e. April 2017.
Mohan, Vijay and Anil are partners, the balance on their capital accounts being Rs 30,000, Rs 25,000 and Rs 20,000 respectively. In arriving at these figures, the profits for the year ended March 31, 2017 amounting to Rupees 24,000 had been credited to partners in the proportion in which they shared profits. During the tear their drawings for Mohan, Vijay and Anil were Rs 5,000, Rs 4,000 and Rs 3,000, respectively. Subsequently, the following omissions were noticed:
1. Interest on Capital, at the rate of 10% p.a., was not charged.
2. Interest on Drawings: Mohan Rs 250, Vijay Rs 200, Anil Rs 150 was not recorded in the books.
Record necessary corrections through journal entries.
Kavita and Pradeep are partners, sharing profits in the ratio of 3 : 2. They employed Chandan as their manager, to whom they paid a salary of Rs 750 p.m. Chandan deposited Rs 20,000 on which interest is payable @ 9% p.a. At the end of 2017 (after the division of profit), it was decided that Chandan should be treated as partner w.e.f. Jan. 1, 2014 with 1/6 th share in profits. His deposit being considered as capital carrying interest @ 6% p.a. like capital of other partners. Firm’s profits after allowing interest on capital were as follows:
|
|
|
Rs |
|
2014 |
Profit |
59000 |
|
2015 |
Profit |
62000 |
|
2016 |
Loss |
(4000) |
|
2017 |
Profit |
78000 |
Record the necessary journal entries to give effect to the above.
On March 31, 2017 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were Rs 80,000, Rs 60,000 and Rs 40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin Rs 20,000; Monu, Rs 15,000 and Ahmed, Rs 9,000. Interest on drawings chargeable to partners were Eluin Rs 500, Monu Rs 360 and Ahmed Rs 200. The net profit during the year amounted to Rs 1,20,000. The profit sharing ratio was 3 : 2 : 1. Pass necessary adjustment entries.
The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit sharing ratio should come into effect retrospectively were for the last three year. Harry and Porter have agreement on this account. The profits for the last three years were:
|
|
Rs |
|
2014-15 |
22,000 |
|
2015-16 |
24,000 |
|
2016-17 |
29,000 |
Show adjustment of profits by means of a single adjustment journal entry.
The net profit of X, Y and Z for the year ended March 31, 2016 was Rs 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books :
i) Interest on Capital @ 5% p.a.
ii) Interest on drawings amounting to X Rs 700, Y Rs 500 and Z Rs 300.
iii) Partner’s Salary : X Rs 1000, Y Rs 1500 p.a.
The capital accounts of partners were fixed as : X Rs 1,00,000, Y Rs 80,000 and Z Rs 60,000. Record the adjustment entry.
Ram, Mohan and Sohan are partners with capitals of Rs 5,00,000, Rs 2,50,000 and 2,00,000 respectively.After providing interest on capital @ 10% p.a. the profits are divisible as follows:
Ram 1/2 , Mohan 1/3 Sohan 1/6 . But Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than Rs 25,000, in any year. The net profit for the year ended March 31, 2017 is Rs 2,00,000, before charging interest on capital. You are required to show distribution of profit.
Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of Rs 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the profit and loss appropriation account showing distribution of profits among partners in case the profits for year 2015 are: (i) Rs 2,50,000; (ii) 3,60,000.
If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Sonu and Rajat started a partnership firm on April 1, 2017. They contributed ₹ 8,00,000 and ₹ 6,00,000 respectively as their capitals and decided to share profits and losses in the ratio of 3: 2.
The partnership deed provided that Sonu was to be paid a salary of ₹ 20,000 per month and Rajat a commission of 5% on turnover. It also provided that interest on capital be allowed at 8% p.a. Sonu withdrew ₹ 20,000 on 1st December 2017 and Rajat withdrew ₹ 5,000 at the end of each month. Interest on drawings was charged at 6% p.a. The net profit as per Profit and Loss Account for the year ended 31st March 2018 was ₹ 4,89,950. The turnover of the firm for the year ended 31st March 2018 amounted to ₹ 20,00,000. Pass necessary journal entries for the above transactions in the books of Sonu and Rajat.
Ajay and Vinod are partners in the ratio of 3:2. Their fixed Capital were ₹3,00,000 and ₹4,00,000 respectively. After the close of accounts for the year it was observed that the Interest on Capital which was agreed to be provided at 5% pa was erroneously provided at 10%p.a. By what amount will Ajay’s account be affected if partners decide to pass an adjustment entry for the same?
Green and Orange are partners. Green draws a fixed amount at the beginning of every month. Interest on drawings is charged @8% p.a. At the end of the year interest on Green's drawings amounts to ₹ 2,600. Monthly drawings of Green were ______.
Girdhar, a partner withdrew ₹ 5,000 in the beginning of each quarter and interest on drawings was calculated as ₹ 1,500 at the end of accounting year 31 March 2022. What is the rate of interest on drawings charged?
P, Q and R were partners with fixed capital of ₹ 40,000, ₹ 32,000 and ₹ 24,000. After distributing the profit of ₹ 48,000 for the year ended 31st March 2022 in their agreed ratio of 3:1:1 it was observed that:
- Interest on capital was provided at 10% p.a. instead of 8% p.a.
- Salary of ₹ 12,000 was credited to P instead of Q.
You are required to pass a single journal entry in the beginning of the next year to rectify the above omissions.
