Q.X, Y and Z are partners sharing profits in the ratio 2:2:1. Z retires, and after all adjustments (capital, share of goodwill, revaluation profit and reserves), the total amount due to Z is found to be Rs 60,000. It is agreed that Rs 20,000 will be paid to Z immediately in cash, and the balance will be transferred to Z's Loan Account, to be repaid in two equal annual instalments of Rs 20,000 each together with interest @9% p.a. on the outstanding balance. Show Z's Loan Account for the two years.

Once the amount finally due to a retiring partner is worked out, the firm may pay part of it immediately and carry the rest forward as a loan, on which interest must be paid every year on whatever balance is still outstanding. …

Step 1 — Amount transferred to loan. Total due to Z = Rs 60,000. Paid immediately in cash = Rs 20,000. Balance transferred to Z's Loan A/c = Rs 60,000 − Rs 20,000 = Rs 40,000.

Step 2 — Year 1 interest and instalment. Interest @9% p.a. on the opening loan balance of Rs 40,000 = 40,000 × 9/100 = Rs 3,600. Total paid at the end of Year 1 = principal instalment Rs 20,000 + interest Rs 3,600 = Rs 23,600. Balance carried forward = Rs 40,000 − Rs 20,000 = Rs 20,000.

Step 3 — Year 2 interest and instalment. Interest @9% p.a. on the remaining Rs 20,000 = 20,000 × 9/100 = Rs 1,800. Total paid at the end of Year 2 = 20,000 + 1,800 = Rs 21,800. Balance after this payment = Nil — the loan is fully repaid.

Step 4 — Z's Loan Account.

Alternative check: since the loan reduces by an equal Rs 20,000 principal each year, the total interest can also be verified using the average outstanding balance — average of Rs 40,000 and Rs 20,000 is Rs 30,000, and Rs 30,00 …

A common error is charging interest on the ORIGINAL loan amount (Rs 40,000) in both years instead of recalculating it on the reducing balance after each instalment. Students also sometimes …