Ram and Laxman started business on 1st Jan 2020 with a capital of Rs. 1,20,000 and Rs. 80,000 respectively. Ram introduced Rs. 50,000 to the firm on 1st July 2020 as additional capital. If the rate of interest is 15% p.a. Assuming that accounts are closed as per calender year then the Interest payable to Ram on Capital would be:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 21,750
Interest on capital is charged for the time each amount stays in the business. The accounts follow the calendar year, so Ram’s opening capital earns interest from January 1 to December 31, and the additional capital from July 1 to December 31 (6 months).
On opening capital: Rs. 1,20,000 × 15/100 = Rs. 18,000
On additional capital: Rs. 50,000 × 15/100 × 6/12 = Rs. 3,750
Interest payable to Ram = Rs. 18,000 + Rs. 3,750 = Rs. 21,750
Rs. 18,000 is only the interest on the opening capital; it leaves out the six months’ interest on the Rs. 50,000 brought in.