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.

How much interest on capital is provided to partners?

₹40,000

The correct answer is option 2 i.e. ₹40,000

Aman's Capital = ₹5,00,000
Interest rate = 5% p.a.
I.O.C = 5,00,000 X 5/100
         = 25,000

Raghav's Capital = 3,00,000
Interest rate = 5% p.a.
I.O.C = 3,00,000 X 5/100
         = 15,000

TOTAL INTEREST = 25,000 + 15,000
                           = ₹40,000