Devarth withdraws ₹5,000 at the end of each quarter for six months. Interest on drawings is charged @10% p.a. Interest on drawings will be:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → ₹125
Interest on drawings is charged from the date of each withdrawal to the end of the period, here the six months.
First withdrawal (end of the first quarter) = 5,000 × 10% × 3/12 = Rs. 125
Second withdrawal (end of the second quarter, the last day) = 5,000 × 10% × 0/12 = Nil
Interest on drawings = Rs. 125
The same result comes from the average period: total drawings Rs. 10,000 for an average of (3 + 0) ÷ 2 = 1.5 months, 10,000 × 10% × 1.5/12 = Rs. 125.