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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Rajesh, a sole proprietor, withdrew Rs 5,000 on the first day of every month throughout the year ended 31 March. Interest on drawings is charged at 12% per annum. What is the interest on drawings chargeable to him for the year?

The interest on drawings is Rs 3,900. Total drawings are Rs 60,000, and because each withdrawal is made at the start of a month, the average period is 6.5 months. Interest is 60,000 x 12% x 6.5/12. Using 6 months would be incorrect.

  1. ARs 3,900Correct
  2. BRs 3,600
  3. CRs 4,200
  4. DRs 7,200

Explanation

Total drawings = 5,000 x 12 = 60,000. When withdrawals are at the start of each month, the average period is 6.5 months, because the first amount is held for 12 months and the last for 1 month. Interest = 60,000 x 12% x 6.5/12 = Rs 3,900. Rs 3,600 uses 6 months, which applies only to mid-month withdrawals.

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