Partner's Loan Account

Correct answer: A. The amount payable increases

Interest credited to a retiring partner’s loan account is an additional amount owed by the firm. Therefore, the credit balance of the loan account and the total amount payable increase. It does not automatically increase bank balance, reduce goodwill, or reduce the liability. A payment would decrease the loan, but merely adding interest increases the obligation.

Correct answer: A. Firm’s outstanding liability to the partner

A credit balance in a partner’s loan account means that the firm has to pay that amount to the partner. Hence, it is a liability of the firm, not an asset, drawing, or sales income. Exam tip: a credit balance in the partner’s loan account represents an amount payable by the firm and receivable by the partner.

Correct answer: A. Executor loan account

Unpaid amount due to deceased partner is kept in executor loan account. It decreases with installment payments.

Correct answer: A. ₹3600

The governing concept is simple interest on the outstanding executor’s loan for the actual period. The annual interest is ₹90,000 × 8/100 = ₹7,200. Since the loan remains outstanding for only six months, the time fraction is 6/12, or one-half of a year. Therefore, interest is ₹90,000 × 8/100 × 6/12 = ₹3,600. Hence, option A is correct. Option B applies the annual interest for the full twelve months and ignores the six-month period. Option C does not follow the stated rate and principal, while option D is more than the correct annual interest and therefore cannot be valid for six months. The calculation assumes a constant loan balance throughout the six-month period.

Correct answer: A. ₹1,60,000

Repayment of principal reduces the outstanding loan balance. Therefore, remaining principal = ₹2,40,000 − ₹80,000 = ₹1,60,000. ₹80,000 is the amount repaid, not the balance remaining. For such questions, subtract the principal repaid from the opening loan balance, excluding any interest unless it is specifically mentioned.

Correct answer: A. On outstanding loan according to time

Interest on a retiring partner’s or executor’s loan is governed by two factors: the outstanding principal and the time for which that principal remains unpaid. The appropriate calculation is Principal × Rate × Time, with time expressed in years or an equivalent fraction such as months/12. If an installment is paid during the period, the balance falls from that date, so interest before and after payment may need separate calculations. Thus, option A is correct. Total sales, stock cost, and capital ratio do not determine loan interest. Those figures may be relevant to other accounting calculations, but they are unrelated to the contractual finance charge on an outstanding loan. The installment date is important because it identifies when the principal changes.

Correct answer: A. ₹3200

For first 4 months full ₹160000 was outstanding. Interest is (160000 \times \frac{6}{100} \times \frac{4}{12}=3200).

Correct answer: A. ₹120000

Interest on a loan is calculated on the principal that remains outstanding during the relevant period. At the beginning, the loan is ₹1,60,000. After four months, the partner repays ₹40,000 of principal, so the unpaid balance becomes ₹1,60,000 − ₹40,000 = ₹1,20,000.

For the next eight months, no longer is the original ₹1,60,000 outstanding; only ₹1,20,000 remains payable. Therefore, interest for those next eight months is charged on ₹1,20,000, making option A correct. The ₹40,000 amount is the part already repaid, not the remaining principal. The original amount would be used only for the first four months, unless the question specifically stated that the repayment did not reduce the interest-bearing balance.

Correct answer: A. By crediting it to loan account

The direct answer is A. When interest on a retiring partner’s loan is due but is not paid immediately, the firm still owes it. Therefore it must be added to the amount payable and credited to the loan account, according to the stated accounting treatment. Crediting the loan account increases the credit balance or liability because the firm’s obligation has increased. Option A is correct. Option B, sales account, is wrong because unpaid loan interest is not revenue from selling goods or services. Option C, drawings account, is wrong because drawings represent a partner’s personal withdrawal, not an amount owed by the firm as interest. Option D, stock account, is wrong because stock records goods held for sale and has no role in recording loan interest. The reasoning is: interest becomes due; it is not paid; unpaid due interest remains a liability; the liability is recorded by crediting the loan account. When payment is later made, the loan account is debited and cash or bank is credited. Memory cue: unpaid interest increases what the firm owes, so credit the liability account.

Correct answer: A. Personal account

The retiring partner’s loan account records the amount payable to that partner. Since it relates to an individual, it is classified as a personal account. It is not a real account because it does not record an asset or property. Exam tip: accounts representing amounts payable to or receivable from a person are generally treated as personal accounts.

Correct answer: A. When amount payable by firm increases

Direct answer: Option A, when the amount payable by the firm increases. In a personal account, the rule is: debit the receiver, credit the giver. Here, the lender has given money to the firm, so the lender is treated as the giver. The firm owes this person, and an increase in this obligation is recorded by crediting the lender’s account. Therefore, the credit balance or payable amount rises. Option A is correct because a higher liability means a higher credit. Option B is not the answer to this question: when the firm pays, the liability usually decreases, so the lender’s account is debited and cash is credited. Option C is unrelated because a fall in sales does not itself decide the lender’s account. Option D is also unrelated; purchasing goods affects purchases, cash, or creditors, not automatically this loan account. Remember: money received as a loan creates a credit to the lender; repayment reverses it.

Correct answer: A. Add credit dues and interest then subtract debit payments

In loan account credit side increases amount payable and debit side reduces it through payments. The difference shows remaining liability.

Correct answer: A. After finding final amount due in capital account

First goodwill revaluation and other adjustments are completed in capital account. Loan account is prepared only after final amount due is found.

Correct answer: A. Capital account is closed

Transferring the due balance to loan account clears the capital account balance. Therefore capital account is closed.

Correct answer: A. It keeps final amount due as unpaid liability

Settlement fixes the amount due and payment may happen later. Loan account shows this unpaid due amount.

Correct answer: A. ₹33600

The governing accounting idea is that a bank payment made for both principal and interest includes both components. The installment represents repayment of loan principal, while the separately stated ₹3,600 represents the interest expense or finance charge. Therefore, the total amount leaving the bank is calculated by addition: ₹30,000 + ₹3,600 = ₹33,600. Option A is correct. Option B includes only the principal installment and ignores the interest paid at the same time. Option C includes only the interest and ignores the installment. Option D is the difference between the two amounts, not their combined payment. In the firm’s records, the payment would normally reduce the loan by the principal component and record interest separately, but the bank total must include both amounts.

Correct answer: A. ₹40000

The governing concept is the separation of a combined payment into interest and principal components. When the total payment is ₹42,800 and it includes ₹2,800 of interest, the amount available to repay and reduce the loan principal is found by subtraction: ₹42,800 − ₹2,800 = ₹40,000. Therefore, option A is correct. Option B is the entire cash payment, but it incorrectly treats the interest portion as principal repayment. Option C is only the interest amount and therefore does not reduce the principal. Option D adds interest to the total payment, which reverses the required calculation and produces an impossible higher principal repayment. In accounting, the interest is recorded as an expense or interest liability, while only ₹40,000 is credited to the bank and debited against the loan principal.

Correct answer: A. Amount already repaid

Interest on a retiring partner’s loan is charged only on the amount that remains outstanding for the relevant period. Once any portion of the loan has been repaid, that portion no longer carries interest. Therefore, option A is correct. In an exam, remember that after partial repayment, interest is calculated on the remaining outstanding balance, not on the amount already paid.

Correct answer: A. ₹1800

For first 2 months full ₹180000 was outstanding. Interest is (180000 \times \frac{6}{100} \times \frac{2}{12}=1800).

Correct answer: A. ₹120000

The governing principle is that interest after a principal repayment is calculated on the revised outstanding loan, not on the original amount. The original loan is ₹1,80,000. After two months, ₹60,000 of principal is repaid, so the remaining principal is ₹1,80,000 − ₹60,000 = ₹1,20,000. Consequently, interest for the following ten months is charged on ₹1,20,000, making option A correct. Option B would wrongly continue using the original balance after repayment. Option C is only the amount repaid, not the amount still owed. Option D incorrectly adds the repayment to the original loan. If the full interest for the entire twelve-month period were required, the first two months would be calculated on ₹1,80,000 and the next ten months on ₹1,20,000; however, for the specified next ten months, only ₹1,20,000 is relevant.

Correct answer: A. Principal loan will not change

Interest credit and payment of the same interest cancel each other for principal. Hence principal loan has no net effect.

Correct answer: A. The entire amount due to the retiring partner has been paid

When the amount due to a retiring partner is not paid immediately, it is transferred to the partner’s loan account. A zero balance in this account shows that the entire loan liability has been settled and nothing remains payable. Option B relates to the adjustment of capital, not to the settlement of the loan account. Exam tip: the credit balance of a partner’s loan account represents the outstanding amount; a zero balance means full settlement.

Correct answer: A. Correct

The statement is correct because a retiring partner’s loan represents an amount that the firm owes and must pay in the future. It is therefore a liability, normally shown on the liabilities side of the balance sheet. Under the rules of double entry, payment of a liability decreases that liability. A decrease in a liability is recorded by debiting the liability account, while the bank or cash account is credited because money leaves the firm. Thus, option A is correct. Option B ignores the effect of payment on a liability. Options C and D are unrelated restrictions: the rule does not apply only to goodwill or sales. The loan account is debited when payment is made, and its balance is reduced by the amount paid.

Correct answer: A. ₹185000

Interest is (250000 \times \frac{6}{100}=15000) so amount due becomes ₹265000. After ₹80000 payment the balance is ₹185000.

Correct answer: A. Loan account will not be needed

When the full amount due is paid immediately no unpaid liability remains. Therefore a separate loan account is not required.