Question 42 of 50intermediate🔧 ApplyLong Answer6 marks

Illustrate how interest on drawings will be calculated under various situations.

Correct Answer

Interest on drawings is calculated differently depending on the timing and pattern of withdrawals. Following are the various situations:

1. When Fixed Amount is Withdrawn at the Beginning of Each Month: The average period is calculated as: Average Period = (No. of months of 1st drawings + No. of months of last drawings)/2 = (12 + 1)/2 = 6½ months (13/2 months). Interest on Drawings = Total Drawings × Rate × 13/2×12 \times 1/12

2. When Fixed Amount is Withdrawn at the End of Each Month: The average period is: Average Period = (11 + 0)/2 = 5½ months. Interest on Drawings = Total Drawings × Rate × 11/2×12 \times 1/12

3. When Money is Withdrawn in the Middle of the Month: Nothing is added or deducted from the total period. Average Period = (11.5 + 0.5)/2 = 6 months. Interest on Drawings = Total Drawings × Rate × 6/12

4. When Dates of Withdrawal are Specified: Interest is calculated separately for each withdrawal based on the period from the date of withdrawal to the end of the accounting year. A statement showing calculation is prepared with columns for Date, Amount Withdrawn, Period (in months), and Interest. Total interest is the sum of all individual interest amounts.

5. When Fixed Amount is Withdrawn Quarterly: Interest is calculated based on the timing of quarterly withdrawals (beginning or end of each quarter).

Exercise: Long Answer Questions | Q: 4 | (Chapter: 37)
For More Understanding

Explanation

The textbook context provides detailed formulas and examples for calculating interest on drawings under different situations. The key concept is the 'Average Period' which varies based on when drawings are made - beginning, end, or middle of the month. The context shows numerical examples like Rs. 36,000 at 9% p.a. yielding Rs. 1,755 for beginning-of-month withdrawals and Rs. 1,485 for end-of-month withdrawals. The product method (Total Drawings × Rate × Average Period/12) is the standard approach taught in NCERT.

Solution Steps

  1. Step 1: Identify the timing of drawings (beginning/end/middle of month or specific dates)

  2. Step 2: Calculate the average period using the formula: (Months of first drawing + Months of last drawing)/2

  3. Step 3: Apply the formula: Interest = Total Drawings × Rate × Average Period/12

  4. Step 4: For specific dates, calculate interest for each withdrawal separately and sum up

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