Interest on capital favors Raj's higher investment

Steps:

• Compare capitals: Raj contributed $40,000 vs. Suni's$20,000, giving Raj twice the investment.
• Note equal 50:50 profit sharing and identical $5,000 drawings, creating a baseline without favoritism.
• Evaluate provisions: Interest on capital rewards higher contributions before profit split, increasing Raj's total share.
• Assess impact: In 2020, this provision credits Raj more interest, enhancing his net profit over equal sharing alone.

Why A is correct:

• Partnership accounting allows interest on capital as a prior charge to profit sharing; Raj's larger capital yields higher interest (e.g., at 10%, Raj gets $4,000 vs. Suni's$2,000), directly boosting his 50% share.

Why the others are wrong:

• B: Interest on drawings penalizes both equally ($5,000 each), reducing profits symmetrically without favoring Raj.
• C: Limits apply uniformly, restricting both partners alike and not addressing capital disparity.
• D: Salaries are typically fixed and equal under 50:50 sharing, providing no advantage to Raj's higher capital.

Final answer: A