Question

The capital balance of a partner at the end of the year (after adjusting for his drawings Rs. 3,500 and his share in the profit Rs. 2,300) is Rs. 12,000. Interest on capital is payable to him at 5% per annum. What will be the amount of interest on capital?

• A. Rs. 660
• B. Rs. 600
• C. Rs. 540
• D. None of these

Hint:

A common trap is to calculate 5% on the Rs. 12,000 closing balance (which would be Rs. 600). Always remember: Closing Capital is "polluted" by the year's events; you must find the "clean" Opening Capital before applying interest.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Interest on capital is always calculated on the Opening Capital (the capital at the beginning of the year), unless any additional capital was introduced during the year. If the closing balance is given, we must work backward to find the opening balance.
Key Formula or Approach:
\[ \text{Opening Capital} = \text{Closing Capital} + \text{Drawings} - \text{Share of Profit} \]
Step 2: Detailed Explanation:
1. Calculate Opening Capital:
- Closing Capital: Rs. 12,000.
- Add: Drawings (drawings reduce capital, so we add them back): Rs. 3,500.
- Less: Share of Profit (profit increases capital, so we subtract it): Rs. 2,300.
\[ \text{Opening Capital} = 12,000 + 3,500 - 2,300 = 13,200 \).
2. Calculate Interest on Capital:
- Interest Rate: 5% per annum.
\[ \text{Interest on Capital} = 13,200 \times \frac{5}{100} = 660 \).
Step 3: Final Answer:
The amount of interest on capital is Rs. 660.