Partner's Loan Account

Correct answer: A. Crediting interest to the loan account

Crediting interest to a retiring partner’s loan account increases the amount payable to that partner, thereby increasing the loan account balance. In contrast, paying an instalment or debiting the account reduces the outstanding liability. Exam tip: credit entries generally increase the amount due in a partner’s loan account.

Correct answer: B. ₹11,340

Interest = Principal × Rate = ₹1,68,000 × 6.75/100 = ₹11,340, so option B is correct. Options A and C result from incorrectly converting or multiplying the percentage. Exam tip: always convert the percentage into a fraction by dividing it by 100 before calculating interest.

Correct answer: B. Interest Payable Account

On payment of interest that has already become due, the interest liability is settled; therefore, Interest Payable Account is debited and Cash Account is credited. The Loan Account is not debited because the principal liability remains unchanged. Exam tip: When an outstanding liability is paid, debit the liability account and credit Cash or Bank.

Correct answer: B. ₹10920

Interest for one year = Principal × Rate = ₹208000 × \(\frac{5.25}{100}\) = ₹10920. Therefore, option B is correct. Option C is ₹1000 higher because of an incorrect calculation. In exams, first convert the percentage into a decimal or fraction before multiplying.

Correct answer: C. Both the assets and liabilities sides

When the loan is paid in cash, the cash balance decreases, reducing assets, while the liability shown in the partner’s loan account is also reduced or settled. Therefore, both the assets and liabilities sides of the balance sheet are affected. Exam tip: Cash settlement of a liability generally decreases both cash and the related liability.

Correct answer: B. ₹22,080

Interest = Principal × Rate = ₹1,92,000 × 11.5/100 = ₹22,080. Therefore, option B is correct. Option A results from applying a lower rate close to 11%. In an exam, convert the decimal percentage carefully: 11.5% = 0.115.

Correct answer: C. ₹2,00,000

The opening balance of the partner’s loan account is ₹2,75,000, and ₹75,000 has been paid. Therefore, the remaining balance is ₹2,75,000 − ₹75,000 = ₹2,00,000. A payment reduces the amount payable in the partner’s loan account. Exam tip: To find the balance after payment, subtract the amount paid from the opening balance; ₹1,90,000 reflects a common subtraction error.

Correct answer: C. ₹11,000

Interest = loan amount × rate = ₹88,000 × \(12.5/100\) = ₹11,000. Therefore, ₹11,000 is the correct answer. ₹12,000 would correspond to a rate of about 13.64%, so it is not correct. Exam tip: use \(12.5\% = 1/8\) for quick calculations.

Correct answer: B. On full payment

The amount payable to a retiring or deceased partner may be transferred to the partner’s loan account. It remains a liability of the firm and ceases only when the entire amount, including any due interest, is paid. Partial payment reduces the liability but does not eliminate it. Exam tip: A loan account remains outstanding until its complete settlement.

Correct answer: C. ₹17,360

One-year interest = Principal × Rate = ₹1,24,000 × 14/100 = ₹17,360. Therefore, option C is correct. Option B results from an arithmetic error; 14% should be converted to 0.14 before multiplication. Exam tip: Always check the time period when calculating interest on a partner’s loan; apply proportionate time if it is not one year.

Correct answer: A. Interest is accruing on the loan but has not been paid

Interest is credited on the amount outstanding in a partner’s loan account. If this interest is accrued but not paid, the balance of the loan account increases. Under option B, repayment of principal would reduce the balance; closing the account or settling the entire liability would eliminate the outstanding amount. Exam tip: When a loan-account balance rises, first check whether unpaid interest has been added to it.

Correct answer: B. ₹11,400

One year’s interest = Principal × Rate = ₹1,52,000 × 7.5/100 = ₹11,400. Therefore, option B is correct. Amounts such as ₹10,400 or ₹12,400 result from errors in applying the percentage. In the examination, convert 7.5% to 0.075 before multiplying.

Correct answer: A. To clearly show the loan as a liability separate from capital

A loan given by a partner to the firm is a liability of the firm, whereas the capital account records the partner’s capital and related adjustments. Keeping the two accounts separate clearly identifies the loan balance, its repayment, and any interest independently of capital. Therefore, option A is correct; separating the account does not itself increase profit or reduce tax. Exam tip: In the balance sheet, a partner’s loan is generally shown separately from partners’ capital under liabilities.

Correct answer: C. ₹15,840

Interest for one year = Principal × Rate × Time = ₹2,64,000 × 6/100 × 1 = ₹15,840. Therefore, option C is correct. Option B results from an arithmetic error. In exams, convert the percentage to a fraction or decimal before multiplying it by the principal.

Correct answer: B. ₹3,52,000

Interest = ₹3,20,000 × 10/100 = ₹32,000. Therefore, the new loan account balance = ₹3,20,000 + ₹32,000 = ₹3,52,000, so option B is correct. Option A results from adding an incorrect interest amount. Exam tip: calculate the interest first and then add it to the opening balance.

Correct answer: B. To record the unpaid liability separately and show the interest payable on it

After the immediate payment, the balance remains a liability payable by the firm to the deceased partner or the partner’s executor. It is therefore transferred to a separate loan account, which keeps the unpaid amount distinct and allows interest payable on it to be recorded according to the agreement. This treatment does not increase profit, reduce capital arbitrarily, or change stock value. Exam tip: First calculate the amount due up to the date of death; show the unpaid balance in the deceased partner’s executor’s loan account.