When equal amounts are withdrawn at the beginning of every month throughout the year, the interest on partner's drawings are charged for how many months on average method basis?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- 6.5.
When the amount is withdrawn at the first day of each month
Ist drawing = 1 April so months left after it was 12 months
Last drawing = 1 March so months left after it was 1 month
Average Period = (No. of months left after 1 drawings + No. of months left after last drawings)/2
= (12+1)/ 2
= 6.5 months
Average period is calculated for calculating interest on drawings and the average period depends on the timing of withdrawal.
The formula for calculating the average period is = (Months left after Ist drawing + Months left after last drawing) / 2
After calculating the average period interest on drawings is calculated. The formula for calculating interest on drawing is = Total drawings X (Rate of interest/100) X (Average period/12).