READ THE FOLLOWING INFORMATION AND ANSWER THE FOLLOWING QUESTIONS-

Aman and Raghav were in partnership. On 1st April, 2020 they had Capitals of ₹5,00,000 and ₹3,00,000 respectively, General Reserve existed in the Balance Sheet at ₹50,000 and also Profit and Loss Account(Credit) of ₹1,00,000. On 1st October 2020, Aman advanced ₹1,00,000 for Loan to the firm and on the same date, the firm advanced loan ₹50,000 to Raghav. Both the loans were without any agreement. Interest on Capital is to be allowed @ 5%p.a. as a charge. Manager's Commission ₹20,000 was not yet allowed. Loss for the year before allowing and charging interest on loans was ₹50,000.

Which of the following option is correct regarding 'interest on Loan' by Aman?

will be allowed @6% p.a. and debited to Profit and Loss account, which will Increase the amount of Loss.

The correct answer is option 3- will be allowed @6% p.a. and debited to Profit and Loss account, which will Increase the amount of Loss.

Loan by Aman = ₹1,00,000
As there is no agreement so interest will be provided @6% p.a. and it is a charge against profit so debited to profit and loss account. On debiting the interest in profit and loss account, loss of the firm will increase.