MGT101 Financial Accounting GDB 2 Solution Spring 2014

Dear Students!
This is to inform that Graded Discussion Board (GDB) No. 02 will be opened on Aug 05, 2014 for discussion and last date for posting your discussion will be Aug 09, 2014
Topic/Area for Discussion

“Mark Up on Capital and Drawings”
Note:

Mr. A, Mr. B and Mr. C joined hands for mutual business as partnership firm. They are agreed on equal share in capital and profit & loss. However, after one year Mr. B provided extra Rs. 100,000 for contingency expense on 12% interest rate (Annual) until the repayment. It was not possible to return the loan amount to the Partner Mr. B due to the increasing requirement of capital for flourishing business. Mr. C withdraws Rs. 50,000 on 10% interest rate (Annual) from business resources for the treatment of his wife.

After few years, all partners agreed to convert partnership firm into public limited company, no change in business line, to meet the capital requirements and all partners with other four members became directors of newly incorporated ABC Corporation. Before signing the directorship document, each director legally bound to subscribe and paid for its shareholding. Mr. B has also been invested one million more in the newly incorporated Company. Company rules allow giving the interest free loan to the directors for not more than one year.

DISCUSSION QUESTIONS:

You are required to comment with logical reasoning,

  1. Is Mr. B still having the right to receive interest on its extra-invested amount? If, yes why, not why? Give logical reasoning.

Solution:

In partnership everything depends on the Partnership Deed . if there is a clause about interest on investing extra capital in the agreement then Yes Mr.B still having the right to receive 

interest on capital.  because in business there might come a situation where the partners needs to invest more but not every partner could be ready at that time to invest. if one partner agrees


to invest extra and they have clause about receiving interest on investing extra capital then that partner who invest will receive its interest on that capital invested. One may say that the same results  can be achieved by saying that profit and loss  sharing will be proportionate to the amount of capital invested.

If there is no clause about paying interest in the Partnership Deed the no interest will paying

2. Is Mr. C still liable to pay interest on withdrew amount? If, yes why, not why?


It depends upon the partnership Deed. if there is clause about paying interest on drawings by a partner then the partner is liable to pay interest on his withdrawing. interest on drawings can be on the total amount or on an amount exceeding a specific limit. Yes Mr.C is liable to pay interest on drawings.  If there is no clause about charging interest in the Partnership Deed the no interest will charged.

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