Category: CS Foundation

Partnership Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes

→ According the partnership Act 1932 it is defined in the following words:
“Partnership is the relation between persons who have agreed to share profit of business carried on by all or any of them acting for all.”

→ A partnership is an unincorporated association of two or more individuals to carry on a business for profit. Many small businesses, including retail, service, and professional practitioners, are organized as partnerships. Individuals who join together are called Partners and collectively they are called Firm.

→ Main Characteristics or Features of Partnership:
1. Agreement: Without agreement partnership cannot be formed. The agreement may be written or oral. The persons who are making contract should be eligible to make contract.

2. Registration: It is not necessary that a partnership may be registered.

3. Number of Partners: In a partnership there should be at last two partners. In ordinary business the partners must not exceed the twenty. In case of banking not more ten.

4. Profit and Loss Distribution: The basic aim of partnership is to earn profit. This profit is distributed among the partners according their agreement. In case of loss also all the partners share in it.

5. Business: The object of the partnership it to carry on the business. It may be production or trading.

6. Unlimited Liability: The liability of the partner is not limited to his invested amount. In case of loss the private property of the partner also used to pay the business obligations.

7. Entity: Law has not granted it any legal entity, it is not independent from the partners. It has not separate entity from its members.

8. Share in Capital: According to the agreement every partner contributes his share. It is not necessary all the partners should contribute equally.

9. Management: All the partners can participate actively in the business management. Sometimes only few partners participate in business affairs.

10. Payment of Tax: Every partner pays the tax on his share of profit individually.

11. Co-Operation: For the successful partnership mutual co-operation and mutual confidence is an important factor.

12. No Audit: In the partnership there is no restriction for the audit of accounts. So this type of organization may operate freely.

13. Partners are Agent: Every partner stand as an agent and principal to one another. In the position of an agent one can do contract with other parties on behalf of the firm.

14. Transferability of Shares: No one partner can transfer his share to any other person without the consent of the existing partners.

15. Dissolution: It is a temporary form of business. It operates at the pleasure of the partners. It is dissolved if a partner leaves, dies or declared bankrupt or insane.

→ Partnership deed: A partnership deed can be defined as a document that is prepared to explain important points so that the chances of clash are minimized to a great extent. Such a document consists of all the significant clauses like name of the business, contribution of capital, , allocation of profit and the like. A partnership deed can be effected by word of mouth or can be in black and white A written accord should be favored so as to minimize the conflicts between partners.

→ Difference between Partnership and Joint Venture
A partnership is a business that is not registered as a corporation or a limited liability company, which is owned and carried on by two or more parties for the purpose of generating profit for the partners.

→ A joint venture is formed when two or more parties join together to take on a specific project. The parties share the costs and the risks, as well as any gains and benefits, and contribute money, property, effort and know-how to the venture.

→ While a joint venture is usually set up for a fixed time frame (i.e. the life of the project), a partnership is typically long-term and is intended to carry on as long as the partners want to continue doing business together.

→ Participants in a joint venture do not usually intend to conduct a common business with the other co-venturers, and they’re free to carry on their own businesses outside of the joint venture. Partners in a partnership, on the other hand, are typically already carrying on their business within the context of the partnership

→ Loan Accounts: If a partner gives loan to the firm above the amount of capital required to be given by him as per partnership agreement. This amount is transferred to a special account To loan account, at the time of dissolution of the firm partner who gave this loan is entitled to get the loan advanced by him back at priority but only after all the losses have been settled.

→ Capital Accounts: A separate capital account is required for each partner. This is to show the agreed amount of capital to be contributed by each of them. Amount contributed by each partner whether in cash or in some other form is kept in separate capital account of each partner.

→ Capital account are of two types

• Fixed Capital Account
• Fluctuating Capital Account

Following are the differences between Fixed capital method and Fluctuation capital method.

Fixed capital method	Fluctuation capital method.
Each partner has two accounts, capital and current account.	Each partner has only one account, capital account.
The capital account remains unchanged unless there is an addition to or withdrawal of capital.	The balance of capital account keeps on changing from time to time.
The fixed capital account of a partner can never show a negative balance.	The fluctuation capital account of a partner can show a negative balance.

→ Goodwill: Goodwill shows the value of a firm’s reputation. When a firm has a brand with a certain reputation and particular status within the market, this can be measured to have a lesser or greater value. If this is a positive value, then it is called goodwill. Goodwill is a fixed asset- something that has value in the company for an extended period. Since goodwill is not something that can be touched or felt, it can occasionally be difficult to calculate what it is worth. This is why goodwill is also an intangible asset in accounting.

→ Factors that contribute to the value of Goodwill
Various factors affecting the value of goodwill are as follows:
1. Nature of business. It means the prevailing competition, level of risk involved, etc. If the existing business units are earning more than normal profits and have secured monopolistic position, they will be enjoying more goodwill.

2. Favorable location. It is very well known that certain cities or places are most suitable for particular industries, business having units falling under same areas can enjoy the goodwill by selling more products.

3. Capital requirements. The business requiring less capital can realize higher amount of goodwill than another business earning less profits with a huge amount of capital.

4. Life of the business. Business running on profitable lines for the last many year enjoys more goodwill as compared to the recent started business.

5. Trade name. A firm which possesses the necessary patents and trademarks for selling its products will have built up good reputation and enjoys goodwill.

6. Reputation of the owners – If there is good reputation of owners then it increases the Goodwill.

7. Risk involved in the business. The value of goodwill is likely to be higher in the low risk business.

8. Profit trends. When the last year’s records of the business shows the constantly increasing profits, it will lead to attract higher value for its goodwill.

9. Money market conditions. When easy money market conditions prevail, there would be more buyers willing to buy an established business and pay a higher price for the goodwill or vice-versa.

→ Methods of valuation of Goodwill
There are three methods of valuation of goodwill of the firm

1. Average Profits Method
2. Super Profits Method
3. Capitalization Method

1. Average Profits Method: Under this method goodwill is calculated on the basis of the average of some agreed number of past years. The average is then multiplied by the agreed number of years. This is the simplest and the most commonly used method of the valuation of goodwill.
Goodwill = Average Profits x Number of years of Purchase

2. Super Profits Method: Super Profits are the profits earned above the normal profits. Under this method Goodwill is calculated on the basis of Super Profits i.e. the excess of actual profits over the average profits. For example if the normal rate of return in a particular type of business is 20% and your investment in the business is $1,000,000 then your normal profits should be $ 200,000. But if you earned a net profit of $ 230,000 then this excess of profits earned over the normal profits i.e. $ 230,000 – $ 200,000= Rs.30,000 are your super profits. For calculating Goodwill, Super Profits are multiplied by the agreed number of years of purchase.

Steps for calculating Goodwill under this method are given below:

• Normal Profits = Capital Invested x Normal rate of return/100
• Super Profits = Actual Profits – Normal Profits
• Goodwill = Super Profits × No. of years purchased

3. Capitalization Method – Capitalized Excess Earnings method determines the business value by summing the net tangible value of the business assets with the capitalized value of the “excess”eamings. The value of whole business is calculated by the below mentioned way
Average Annual Profit × 100/Normal Rate of Return

→ Partnership Final Accounts: These include:

• The Trading Account;
• The Profit and Loss Account;
• The Profit and Loss Appropriation Account;
• The Partners’ Current Account;
• The Balance Sheet

→ Profit and Loss Appropriation Account: In partnership profits are to be shared in a particular ratio after making necessary adjustments stated in the partnership deed. For this purpose, ‘Profit and Loss Appropriation Account’ maybe prepared. This is merely an extension of the profit and loss account and is prepared to show how net profit is to be distributed among the partners. For preparing the profit and loss appropriation account, the following journal entries have to be recorded for various items:

→ Interest on capital: When the profit sharing ratio is different from the ratio of capital invested by partners then interest on capital is given. Interest on partners’ capital are not expenses of the partnership therefore, this item do not enter into the matching of expenses with revenues and the determination of net income or net loss. Accounting entries will be

→ Salary or commission payable to partners – When one partner works full time in the firm and others are passive partners. Then since all partners have contributed varied amounts of time and energy towards the firm, it would not be appropriate to share the profits equally among them. In such case active partners are provided with salary. Profit equal to “Salary to Partners” is first paid away and then the remaining profit can be shared equally. Accounting entries will be

→ In case commission is provided to any partner for extra effort are made for partnership firm then that partner may be provided with commission. Profit equal to “Commission to Partners” is first paid away and then the remaining profit can be shared equally.

→ Past adjustment entry: Sometimes there has been an error in transferring the profits in the accounts of partners, these errors are to be rectified for which adjustment entry is to be passed. Amounts that have been debited or credited already to the accounts of the partners is tallied with the amount that should actually be debited or credited and an entry is passed accordingly to adjust the difference.

→ Guarantee of Profit to a partner: Sometimes to induce a person as a partner in the firm one or more partners may give a guarantee regarding the minimum profit the new entrant partner will get if joins the partnership. When such a guarantee is given then first the profit should be divided amongst all the partners and then if there is any shortfall of the amount that has been guaranteed then an equal amount is taken from rest of the partners to make the shortcoming. Thus, in such a case the following transactions are recorded in the books of accounts
1. Record all appropriations of profits (ignoring the fact that there is some guarantee). [Such appropriations include Salary to Partners, Commission to Partners, Interest on Capital, Interest on Drawings charged etc.]

2. Record sharing of distributable profit remaining after such appropriations in the profit sharing ratio between the partners

3. Record the entry for taking amounts from the guarantors and giving to the guaranteed for making good the shortfall, thus completing the adjustment for guarantee. For example if the guaranteed profit was Rs 20,000 and after distribution of profit after second step each partner gets Rs 15,000 then the balance Rs 5000 is charged equally from the other partners who gave the guarantee and is given to the guaranteed partner.

→ Reconstitution of Partnership: Whenever there is change in the partnership agreement the partnership firm is to be reconstituted. Some of the reasons responsible for changes in the constitution of the firm are

• Change in Profit sharing Ratio
• Admission of new partner
• Retirement of partner
• Death of partner

→ Change in profit sharing ratio: Whenever there is change in profit sharing ratio then valuation of the goodwill is required. A change in profit share ratio leads to gain to a partner and loss to another partner. For example, Three partners in business have profit sharing ratios of 5:3:2. they decide to share profit equally; so the bottom figure on the fractions will be (5 + 3 + 2) = 10.

Therefore, the first partners’ share will be 5 tenths of the profit, the second partners’ share will be 3 tenths of the profit and the third partners’ share will be 2 tenths of the profit.
Old profit sharing ratio is 5/10 : 3/10 :2/10
New profit sharing ratio is 1/3 : 1/3 : 1/3

Thus First partner loses 5/10 × 1/3 = 5/30 (loses as his percentage of profit sharing is reduced as per new profit sharing ratio on the basis of equal profit sharing)

Second partner gains 3/10 × 1/3 = 1/30 (gains as his percentage of profit sharing is increased as per new profit sharing ratio on the basis of equal profit sharing)

Third Partner gains 2/10 × 1/3 = 4/30 (gains as his percentage of profit sharing is increased as per new profit sharing ratio on the basis of equal profit sharing)

→ Admission of New Partner: New Partner may be added for getting more capital, managerial skill etc. At the time of admission of the new partner into the firm there is a need to calculate the new profit sharing ratio of the firm.

→ Some of the adjustments required to be made at the admission of new partner are
A. Calculation of new profit sharing ratio
B. Calculation of sacrificing ratio
C. Revaluation of assets
D. Treatment of Reserves and Accumulated Profits
E. Treatment of Goodwill
F. Adjustment regarding Capital of Partners

A. Calculation of new profit sharing ratio: whenever a new partner is admitted then the old profit sharing ratio will change so as to accommodate the profit sharing of new partner. Two scenarios for calculation of profit sharing ratio

(a) When old partners share remaining profit in the same ratio In this case it is assumed that the old partners will continue to share the remaining profits in the same ratio in which they were sharing before the admission of the new partner.

A and B are partners in the ratio 2:3. They admitted C into the partnership with l/4th share. Calculate the new profit sharing ratio of the firm.
Solution:
Let total profits = 1 C’s Share = 1/4
Remaining share = 1 – 1/4 = 3/4
A’s share = 2/5 of 3/4 = 6/20
B’s share = 3/5 of 3/4 = 9/20
C’s share = 1/4 = 5/20
Thus the new ratio among A,B and C is 6/20 : 9/20 : 5/20 i.e. 6:9:5.

(b) When the new partner purchases his share from the old partners
In this case we deduct the share given to the new partner by the old partners to get their new share and calculate their new ratio.
X and Y are partners in the ratio 2:1. They admit Z into the firm with 3/7 th share which he gets 2/7 from X and 1/7 from Y. Calculate the new profit sharing ratio.
Solution:
X’s old share = 2/3
X’s sacrifice for Z = 2/7
X’s new share = 2/3 – 2/7 = 8/21
Y’s old share = 1/3
Y’s sacrifice for Z = 1/7
Y’s new share = 4/21
Z’s share = 3/7 = 3/7 × 3/3 = 9/21
New Profit sharing Ratio among X, Y and Z is 8:4:9

B. Calculation of sacrificing ratio: – In this case first calculate the share surrendered by old partners in favor of new partner. From the old share of old partners, subtract their surrendered share to get their new share. Now add share surrendered by old partners to get the share of new partner.
X and Y are Partners sharing profits and losses in the ratio 2:1. They admit Z into the firm. X surrenders l/4th of his share and Y surrenders 3/4th of his share in favor of Z. Calculate their new profit sharing ratio.
Solution:
X’s old share= 2/3
Share surrendered in favor of Z = 2/3 × 1/4 = 1/6
X’s new share = 2/3 – 1/6 = 3/6 X
Y’s old share= 1/3
Share surrendered in favor of Z = 1/3 × 3/4 = 1/4
Y’s new share = 1/3 – 1/4 = 1/12
Z’s share = 1/6 + 1/4 = 5/12
New Profit Sharing Ratio among X, Y and Z is
3/6:1/12:5/12 i.e. 6:1:5
Sacrificing ratio between X and Y is 1/4: 3/4 i.e. 1:3

C. Revaluation of assets: At the time of entry of new partner he is not entitled to profits and losses of the firm that are due before his admission as a partner thus a revaluation account is opened to record any increase or decrease in the value of assets. Revaluation account is a special profit & loss account representing the combined capital accounts of partners. Any gain on revaluation of asset or liabilities, which are to be credited to partners, will be credited in the revaluation account. Similarly any loss on revaluation will be debited in revaluation account instead of debiting the capital accounts. The final balance in revaluation account indicates the profit or loss on the entire revaluation process. The revaluation account is closed by transferring this profit or loss to partner’s capital accounts in the ratio before revision (old profit sharing ratio).
Accounting entries:
With increase in assets value
Dr. Assets
Cr. Revaluation
With decrease in assets value
Dr. Revaluation
Cr. Assets
With profit on revaluation shared in the agreed ratio
Dr. Revaluation
Cr. Partner’s capital accounts
Or
With loss on revaluation shared in the agreed ratio
Dr. Partner’s capital accounts
Cr. Revaluation

→ Memorandum Revaluation Account
It is a nominal account prepared at the time of admission, retirement, etc., when the partners decide that the revised figures of assets and liabilities are not to be shown in the new balance sheet. This account has two parts. First part is same like Revaluation Account the balance of (Profit/loss) is transferred to the existing partners’ capital accounts according to their old ratio. In the second part of this account, the entries given in revaluation account will be reversed and balance of the (Profit/loss) is transferred to capital accounts of all the partners according to their new profit sharing ratio.

D. Treatment of Reserves and Accumulated Profits: Treatment of Reserves and Accumulated Profits – Accumulated profits such as general reserve, credit balance in profit &loss account etc. will be transferred to the capital accounts of old partners in the old profit sharing ratio. Similarly accumulated losses shall be transferred to the debit side of old partner’s capital accounts. Therefore these items will not appear in the new balance sheet.

E. Treatment of Goodwill: When a new partner is admitted in such case the profit sharing ratio will change therefore ownership of the goodwill will change. Some partners will need to compensate others for this change. Compensation takes place before the new agreement takes effect by making entries in the partners’ capital accounts. This can be done with or without the use of a goodwill account. The decision lies with the partners.

The general rules are:
(a) If for required amount of goodwill cash is paid by new partner and this amount is not withdrawn by old partners

(b) In case the goodwill amount brought by new partner is withdrawn by old partners then all the above entries mentioned in ‘a’ will be passed and an additional entry to be passed is

(c) If the New partner pays the amount of goodwill secretly then no accounting entry is required.

(d) When goodwill is already appearing in the books then firstly the goodwill is to be written off from the books and debited to the Capital account of the old partners in profit sharing ratio and credited to Goodwill Account. New partners Capital Account is debited with his difference of Goodwill amount not brought in cash and this amount is credited to old partners Capital Account in the sacrificing ratio, accounting entries will be

(e) Hidden Goodwill – sometimes the value of goodwill is not mentioned, in such cases the value of goodwill can be calculated in following way
Step I: Calculate the total capital of the firm on the basis of the capital brought by the new partner. It is calculated as follow:
Total Capital of firm = Capital of new partner × 1/New partner share
Step II: Find out the combined capital of all the partners. It is calculated as follow:
Combined Capital of all Partners = Old Partners Capital + New Partner’s Capital
Step III: Determine the Hidden Goodwill as under:
Hidden Goodwill = Total Capital of firm – Combined Capital of all Partners

→ Adjustment regarding Capital of Partners: When the partners change their profit sharing ratio at admission, they also rearrange their capital accounts. Capital contribution is not essentially the basis of profit sharing. However in most partnerships capital contribution is considered as the major factor in determining profit sharing ratio. At the time of admission, capital contribution will be raised as an important condition. When a new partner is admitted for a certain share of profit for a certain amount of capital contribution he would naturally expect the other also maintain a capital balance matching with their profit share.

→ When capital is readjusted on the basis of new partner’s capital contribution, the first step is to determine the revised capital balances of each partner. Readjustment in capital account is usually done by bringing in or taking out cash. Sometimes, in place of cash transactions, old partners may adjust their capital balances by transferring the excess or deficit in the capital accounts to their current accounts as a temporary measure. Once the capital balances are adjusted current accounts can be settled in due course.

Example Assume that there is a partnership between A and B, partnership has total capital of Rsl20,000. Where A’s Capital investment is Rs 50000 and B’s Capital Investment is Rs 70000. C acquires a 1/4 ownership (capital) interest in the partnership. Partnership ratio between A and B is 3 : 1 The procedure for determining C ‘s capital credit and the bonus to the old partners is as follows.
1. Determine the total capital of the new partnership: Add the new partner’s investment to the total capital of the old partnership.
Total capital of existing partnership (A and B ) = Rs 120,000
C’s share = %
Remaining share = 1 – 1/4 = 3/4
Total Capital = 120000 × 4/3 = 160000
Total capital of new partnership 160000

2. Determine the new partner’s capital credit: Multiply the total capital of the new partnership by the new partner’s
ownership interest.
C’s capital = 160000 × 1/4 = 40000

3. Determine the amount of bonus:
A‘s Capital = 160000 × 3/4 = 80000
B’s Capital = 160000 × 1/4 = 40000
Thus A will give Rs 30000 and B will get Rs 30000

→ Retirement of Partner – As per Section 32 (1) A partner may retire
(a) With the consent of all the other partners,
(b) In accordance with an express agreement by the partners, or
(c) Where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. Just like adjustments are required to be made when a new partner enters into partnership the same way when a partner retires then adjustment entries are required to be made. Various adjustment entries to be made are

→ Calculation of new profit sharing ratio: As soon as a partner retires the profit sharing ratio of the continuing partners get changed. The share of the retiring partner is distributed amongst the continuing partners.

For example, A, B and C are partners in a firm sharing profits in the ration of 2:2:1. B retires and his share is acquired by A and C equally. Calculate new profit sharing ratio of A and C.
Answer:
4 A’s gaining share = 2/5 × 1/2 = 1/5
A’s new share = 2/5 + 1/5 = 3/5
C’s gaining share = 2/5 × 1/2 = 1/5
C’s New share = 1/5 + 1/5 = 2/5
New ratio of A and C = 3:2

→ Calculation of Ratio of Gain: when a partner retires then the share of the profit of other partner increases.

→ For example, A, B and C are partners in a firm sharing profits equally. C retires from the firm. A and B decide to share the profits in future in the ratio 4:3. Calculate the Gaining Ratio.
Answer:
Gaining Ratio = New ratio – Old ratio
A’s Gain = 4/7 – 1/3 = 5/21
B’s Gain = 3/7 – 1/3 = 2/21
Gaining Ratio = 5:2

→ Treatment of Reserves and Undistributed Profits on Retirement: when a partner retires ten all the reserves and undistributed profit is transferred in the capital Accounts of all partners in their profit sharing ratio so that the retiring partner may get his share of accumulated profits. Accounting entries will be

→ Revaluation of Assets and Liabilities: on retirement of a partner, the assets and liabilities may be revalued to reflect the fair value of the business. Any profits or losses on revaluation are normally entered in the partners’ capital account according to the profit sharing ratio before there is a change in partnership due to retirement.
Accounting entries will be

→ Treatment of Goodwill: Each partner has a share of the profit-sharing ratio. At a change in the partnership, goodwill must be taken into account and shared among the existing partners, according to the existing profit-sharing ratio. When a partner wants to withdraw from a partnership, the partnership should revalue all the assets which belong to the leaving partner in order to compute the total amount of money that he can withdraw from the partnership. These adjustments are done to compensate the retiring partner. Thus Goodwill is calculated exactly the way it was calculated at the time of admission of new partner and distributed in the profit sharing ratio.

→ Adjustment of Capital Account: When a partner retires from the business, the existing partners have to rearrange their capital account according to the requirement. In that case, the excess capital of the existing partner will be paid or if there is deficiency, the partners should bring in.

→ Payment to Retiring Partner
Payment to the retiring partner can be made as specified in the partnership agreement otherwise as mutually agreed by the partners. Various options for making payment are
1. Lump sum Payment method
All the amount which is due to the retiring partner may be paid in lump sum. Capital Account of the retiring partner will be debited and Bank Account will be credited.

2. Instalment Payment Method
In such case some of the payment be made at the time of retirement and will be transferred to Bank Account of the retiring partner and the balance of the amount will be transferred to loan account. The instalments paid may be of two kinds
(i) Decreasing Payment Method
(ii) Equal Payment Method

→ Purchase of Retiring Partner’s Share
Sometimes remaining partners purchase the shares of the retiring partner. Example P, Q and R were partners in a firm sharing profits in 4:5:6 ratio. Q retired and his share of profits was taken over by P and R in 1:2 ratio. Calculate the new profit sharing ratio of P and R.

Thus 17:28 is the new ratio of profit distribution and the capital of the firm remains undisturbed because leaving partner’s shares have been purchased by remaining partners.

→ Death of a Partner: death of a partner also results in same position as retirement of Partner. But the only difference is that share of profit is calculated up to date of death of partner. Calculation is done
1. On the basis of time
Decease Partner’s share of Profit = Previous year’s profit or Average Profits x Time till death/12 or 365 X Deceased partner’s proportion of Profit

2. On the basis of turnover
Deceased partner’s share of profit= Last year’s Profit/Last year’s Sale X Sales till death X Deceased partner’s Profit Share.

→ Joint Life Policy
A Joint Life Policy is an assurance policy taken on the joint lives of the partners. On the death of a partner, the firm becomes liable to pay the executors of deceased partner his capital, interest on capital, his share of profit from the closing of the previous year to the date of death and his share of reserves, goodwill etc. The total amount thus becoming due to the executors is usually significant and immediate payment of such heavy amount out of firm’s resources is likely to affect firm’s finances very adversely. The above problem can be tackled if the firm takes policy on the lives of all the partners jointly.

In the books of Account joint life policy can be taken as
1. When premium is treated as expenditure
Under the first method the premium paid for the policy is treated as a expense and is written off to the profit and loss account. The value of the policy represents a secret reserve which belongs to the partners in the profit sharing ratio. Accounting entries will be

→ When premium is treated as on asset
Under the second method, a joint life policy account is opened in the books and the premium as and when they are paid are debited to this account. The book value of the policy is adjusted to its surrender value by transfer of the excess to the profit and loss account. Thus, the joint life policy account appears in the books of the concern at realizable value and is shown as an asset in the balance sheet on the death of a partner the policy amount along with the bonus received from the insurance company will be credited to the joint life policy account. The account is now closed by transfer to the capital accounts of the partners including the deceased partner in their profit sharing ratio.

→ When premium is treated as asset and joint life policy account is maintained:
Under the third method, the premium paid is debited to the joint life policy account. At the end of each year, a sum equal to the amount of annual premium paid is debited to the profit and loss account and credited to the joint life policy reserve account. The book value of the policy is adjusted to Its surrender value by a transfer of the excess amount over the surrender value from the joint life policy account to the joint life policy reserve account. On the death of a partner, the sum received under the policy will be credited to the joint life policy account. The existing balance in the joint life policy reserve account will be closed by transfer to the joint life policy account. The latter account will now be closed by transfer to the capital accounts of the partners in their profits sharing ratio. This method has the advantages of disclosing the existence of the assets at its realizable value and also of avoiding the danger of depleting working capital of the firm.

→ Individual Life Policies
Firm may adopt a policy of getting separate insurance cover on the life of each of the partners. However, in this case also the premium on the life of each partner’s policy share be paid by the firm. On the death of any partner only one policy mature and full amount insured on that policy shall be recovered from the insurance company. But other policies’ surrender value shall be taken into account while calculating amount due to the executors of deceased partner

Dissolution of Partnership – The dissolution of a partnership is the process during which the affairs of the partnership are wound up (where the ongoing nature of the partnership relation terminates)

→ Difference between dissolution of firm and dissolution of partnership
The following are the main points of distinction between the dissolution of firm and dissolution of partnership.
1. The dissolution of a firm involves the complete break down of partnership relation, and not any change in the constitution of firm. In dissolution of partnership the partners may by an agreement among themselves provide for the continuance of the firm after its dissolution by death, insolvency or retirement of a partner. In such cases, the firm is re-constituted without any dissolution. Thus, we say that dissolution of partnership does not necessarily involve dissolution of firm, whereas dissolution of firm does involve dissolution of partnership.

2. There is termination of the relation between the partners in the case of dissolution of a firm, whereas in the case of dissolution of a partnership, ordinarily one partner servers his connection with the firm.

3. As regards the dissolution of the firm, the business of the firm is closed while in dissolution of partnership, the business of the firm continues for all practical purposes as before.

4. After the dissolution of the firm. What remains to be done is the realization and distribution of assets among the partners, while after the dissolution of partnership, what remain to be done is the ascertainment of the share of the outgoing partner, without winding up the entire business.

→ Settlement of Accounts
In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner ratably what is due to him from the firm for advances as distinguished from capital.
(iii) in paying to each partner ratably what is due to him on account of capital; and
(iv) The residue, if any, shall be divided among the partners in the proportion in which they were entitled to share profits.

→ Accounting Treatment on Dissolution:
Following steps are to be carried on dissolution of Partnership

• In the partnership dissolution, an account named as ‘Realization Account’ will be opened to compute the profit or loss from realization which should be shared among the partners according to the profit or loss sharing ratio
• Actual amount received when assets are sold are credited to Realisation Account
• Actual amount paid to creditors is debited to Realisation Account
• Expenses occurred in the course of dissolution are debited to Realisation Account
• Loans Advanced by Partners is repaid
• Any accumulated profit or loss is transferred to Capital Accounts of partners in the profit sharing ratio If there is a debit in the capital account of any partner then he is required to bring cash to clear his account

Revaluation will usually be done upon a change in partnership such as:
(a) admission of a new partner,
(b) change in profit and loss sharing ratio, and
(c) withdrawal of the existing partner, etc.

→ Difference between Revaluation Account and Realization of Account
A revaluation account is opened to record any increase or decrease in the value of assets. Any profit and loss on the revaluation is shared among the partners in the agreed profit and loss sharing ratio.

A realization account is opened in order to ascertain whether a profit or a loss has been resulted upon the dissolution.
Return of premium on premature dissolution: Where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium.

Example A and B become partner for ten years. A paying B a premium of Rs 10000. A quarrel occurs at the end of the eight years, both parties being in wrong, and a dissolution is decreed. A is entitled to a return of Rs 2000 of the premium from B.

Insolvency of a Partner:
Garner vs Murray Rule
→ Under the rule, a partner is required to contribute cash to eliminate the debit balance in his capital account

→ In the court case of Gamer vs. Murray (1904), it was held that subject to any agreement to the contrary, such a debit balance deficiency was to be shared by the other partner not in their profit and loss sharing ratio but “ the ratio of their last agreed capitals”

→ If one partner is insolvent, his capital deficiency will be shared by other partners according to the ‘last agreed capital ratio’ (the ratio of the balances in the capital accounts before the dissolution, in the absence of any agreement to the contrary.

→ Thus on dissolution of partnership if one partner is insolvent then the other solvent partners will deficit of the amount due for insolvent partner because the whole liabilities of partnership firm is unlimited. Before the decision of Gamer V/s Murray case, this extra loss was termed as normal loss of the firm.

→ Insolvency of all Partners
If all the partners become insolvent in that case all the cash that is available together with all the cash collected from the private estate of the partners together is used to repay creditors. Amount realized from assets should be credited to Realization Account and all the expenses should be debited to Realization Account. Now the balance in the Realization Account should be transferred to Capital Account of all the partners in their profit sharing ratio. Now a Cash Account should be prepared. All the cash received from the estate of partners is transferred in this Account. This amount is distributed among the creditors ratably. Balances of the creditor’s account and the Capital accounts is transferred to Deficiency Account.

EXAMPLE: The following is a balance sheet for A and B as at 31st December, 2013.

Both A and B share profit and loss equally and they decided to dissolve the partnership on 1st January, 2006 and the
following events occurred:
(i) The premises were sold for Rs 260,000 and the equipment for Rs 54,000.
(ii) The debtors paid Rs 193,000 and the stock was sold for Rs 141,000.
(iii) The creditors were paid Rs 35,000 for a full settlement.
Required: Show the following ledger accounts to record the dissolution:
(i) Realization account
(ii) Bank account
(iii) Partners’ capital account
(iv) Partners’ current account
Answer:

Partnership Accounts MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
It is UNOMMON in a partnership firm.
a. Partnership deed
b. An agreement between partners
c. some partners are major and some are minor
d. Carried on for doing business.
Answer:
c. some partners are major and some are minor

Question 2.
Which of the following is NOT a rule for revaluation of fixed assets?
a. The change in the value should be permanent
b. Revaluation has to be carried out at regular intervals
c. Whole class of asset has to be revalued
d. The profit on revaluation should be credited to revaluation reserve account
Answer:
d. The profit on revaluation should be credited to revaluation reserve account

Question 3.
Invariably is included in partnership deed
a. Name of firm
b. Powers of the partners
c. Salary payable to partners
d. All of me above
Answer:
d. All of me above

Question 4.
A partner was supposed to contribute Rs.50,000 in a partnership firm. He gave Rs.80,000 to the firm. How much interest he will get on the extra money we contributed to the firm above his agreed share in the firm
a. Nil
b. 6% of 30,000
c. 6% of 80,000
d. 6% of 50,000
Answer:
a. Nil

Question 5.
One of the partner contributed Rs.30,000 in the firm-How much interest he will get on the capital contributed
a. Nil
b. 6% of 30,000
c. 5% of 30,000
d. Income of the above
Answer:
a. Nil

Question 6.
If there is no partnership deed Mr. A who inverted Rs.20,000 will share the profit
a. Equally
b. In the ratio of 1:2
c. Will share profit in the ratio of 1:2 and loss equally
d. More of the above
Answer:
a. Equally

Question 7.
As per companies Act there can be _____________ no of partners
a. 20
b. 10
c. Unlimited
d. 50
Answer:
a. 20

Question 8.
The characteristic that is always present with joint venture is
a. It has an end life
b. There no specific act for joint venture
c. Profit are ascertained only after the end of the specific venture
d. All of the above
Answer:
d. All of the above

Question 9.
At the time of dissolution which payment will be made in priority
a. Capital to partners
b. Loan provided by partner
c. Fluctuating capital account
d. None of the above
Answer:
b. Loan provided by partner

Question 10.
A partner gave a loan of Rs.20,000 to the firm of dissolution of the firm the net losses of the firm were 30,000. How much money will the partner get on dissolution
a. Nil
b. 20,000
c. 20,000 +6% interest
d. None of the above
Answer:
a. Nil

Question 11.
In a partnership firm one of the partner ‘x’ had no capital account. What could be the reason
a. He is not a partner
b. He is employee
c. He did not contribute any money
d. All of the above
Answer:
c. He did not contribute any money

Question 12.
In a partnership account it was observed regular changes in the account balance showing debit in the account this could be:
a. Capital account
b. Current account
c. Fluctuating capital account
d. Both b&c
Answer:
d. Both b&c

Question 13.
Goodwill valuation is not required to be done in the following condition
a. Partnership business is being changed
b. Business is sold
c. At the time profit is being distributed among the partners at the end of financial year
d. All of the above
Answer:
c. At the time profit is being distributed among the partners at the end of financial year

Question 14.
The correct equation for calculation of super profit method used for calculation of Goodwill is
a. Annual profit-fair return of capital employed
b. Average annual profit -fair return of capital employed
c. Average annual profit-current profit of the firm
d. None of the above
Answer:
b. Average annual profit -fair return of capital employed

Question 15.
Interest on capital is given from profit and loss appropriation account to a partner
a. Only if allowed as per agreement
b. Only if there are any profits in P&L appropriation account
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 16.
A partnership contract was revised and due to this revision it was found that the distribution of profit amongst the partners is required to be changed after true closure of accounts. This will affect which account
a. Commission payable account
b. Past adjustment of profit
c. Interest on capital
d. Interest on drawings
Answer:
b. Past adjustment of profit

Question 17.
One of the partner of a partnership firm dies
a. Firm will dissolve
b. Partnership profits will change no effect on firm
c. Both a & b
d. All of the above
Answer:
a. Firm will dissolve

Question 18.
A new agreement of a partnership firm in replace the old one is formed only in these conditions
a. Admission of new partner
b. Death of a partner
c. Change in profit sharing
d. All of the above
Answer:
d. All of the above

Question 19.
Sacrificing ratio in case of admission of a new partner in a firm is
a. Reduction in the profit sharing of the old partners
b. Profit ratio of the new partner
c. Capital invested by the new partner
d. All of the above
Answer:
a. Reduction in the profit sharing of the old partners

Question 20.
Before the entry of a new partner
a. All assets and liabilities should be calculated so as to be appropriated in the capital account of old partner as per their profit sharing ratio
b. Reserves in the profit &Loss account should be transferred equally amongst the partners
c. Both a & b
d. Neither a nor b
Answer:
a. All assets and liabilities should be calculated so as to be appropriated in the capital account of old partner as per their profit sharing ratio

Question 21.
It is not uncommon to find these in memorandum revaluation account
a. Effect of revaluation of assets & liabilities are recorded old figures in new balance sheet
b. Effect of revaluation of assets & liabilities are recorded at new prices in the new balance sheet
c. Profit or loss of the second part of revaluation account goes to new partner.
d. Both a &c
Answer:
d. Both a & c

Question 22.
At the time of entry of a new partner no money is paid toward goodwill by the new partner. It is
a. Inherent goodwill
b. Middle goodwill
c. Goodwill
d. None of the above
Answer:
a. Inherent goodwill

Question 23.
When a partner dies the
a. Profit share of the decreased partner is divided amongst the remaining partner and the firm continues its business
b. Deceased partner’s share is given to his legal representative.
c. Both a & b
d. None of the above
Answer:
a. Profit share of the decreased partner is divided amongst the remaining partner and the firm continues its business

Question 24.
A partner retires but the business is still being carried on
a. Profit sharing between the remaining partners will remain same
b. Share proportion remains same
c. Share proportion changes
d. Both a & c
Answer:
d. Both a & c

Question 25.
After the retirement of a partner payment to the retiring partner is being made as Rs.20,000 after every certain period of time. This type of payment is
a. Lump sum payment method
b. Equal payment method
c. Decreasing payment method
d. All of the above
Answer:
b. Equal payment method

Question 26.
At the death of a partner following entries can be made
a. Transfer all balance from capital account of partner to loan account
b. Pay cash immediately from his capital account
c. Transfer all balance from capital account its partners executions account
d. Both b&c
Answer:
a. Transfer all balance from capital account of partner to loan account

Question 27.
Dissolution of partnership is
a. Dissolution of firm
b. Business of the firm is continued
c. Partnership amongst all the partners comes to an end
d. None of the above
Answer:
b. Business of the firm is continued

Question 28.
In a partnership firm one partner is solvent and rest all partner becomes insolvent. What will be the effect on partnership firm
a. Dissolution of firm
b. Dissolution of partnership
c. Firm will continue to exist
d. Both a&c
Answer:
a. Dissolution of firm

Question 29.
Under ______________ there have been made rules regarding the dissolution of firm
a. Indian partnership
b. Indian partnership Act section 45
c. Companies Act section 48
d. Companies Act section 45
Answer:
a. Indian partnership

Question 30.
Correct sequence of payment after the dissolution of firm will be
a. Debt to partner, advances given by partners, of each partner account of capital residue to be divided amongst partners in profit sharing ratio
b. Debt to parties, account of capital of each partner, advances given by partners, residue to be divided amongst partners in profit sharing ratio
c. Debt to parties, balance from P&L account amongst partners in their profit sharing ratio
d. All of the above
Answer:
a. Debt to partner, advances given by partners, of each partner account of capital residue to be divided amongst partners in profit sharing ratio

Question 31.
It is uncommon to find for realization account
a. Prepared at the time of dissolution of firm
b. Contains generally all assets and liabilities
c. Records the sale of various assets and payment of liabilities
d. None of the above
Answer:
d. None of the above

Question 32.
Garner vs. Murray gave accounting treatment regarding
a. Involvement of a partner
b. Death of partner
c. Admission of a new partner
d. Dissolution at will
Answer:
a. Involvement of a partner

Question 33.
Distribution of loss in case of insolvency is to be charged
a. From solvent partners first
b. From insolvent partner .
c. In insolvency debts cannot be cleaned as one partner is insolvent
d. No solvent partner is responsible for the debts due for insolvent partner
Answer:
a. From solvent partners first

Question 34.
If a worksheet is prepared, there is no need to separately prepare a(n)
a. trial balance.
b. balance sheet.
c. income statement.
d. Statement of owner’s equity.
Answer:
a. trial balance.

Question 35.
The adjusting process is based on two accounting principles. The two accounting principles are
a. realization and recognition
b. revenue recognition and matching
c. cost and business entity
d. continuing-concern and realization
Answer:
b. revenue recognition and matching

Question 36.
The notion that the life of a business is divisible into equal time periods of equal length is known as the
a. continuing concern principle
b. time-period principle
c. business entity principle
d. recognition principle
Answer:
b. time-period principle

Question 37.
The accounting profession can be divided into three major categories; specifically, the practice of public accounting, private accounting;- and governmental accounting. A somewhat unique and important service of public accountants is:
a. Financial accounting.
b. Managerial accounting.
c. Auditing.
d. Cost accounting.
Answer:
c. Auditing.

Question 38.
Amit and Varun are partners with capital balances of Rs. 60,000 and Rs. 20,000, respectively. Profits and losses are divided in the ratio of 60:40. Amit and Varun decided to form a new partnership with Amit, who invested land valued at Rs. 15,000 for a 20% capital interest in the new partnership. Amit’s cost of the land was Rs. 12,000. The partnership elected to use the bonus method to record the admission of Amit into the partnership. Amit’s capital account should be credited for _________________
a. 12,000
b. 15,000
c. 16,000
d. 19,000
Answer:
a. 12,000

Question 39.
Franchise rights, goodwill and patents are the examples of:
a. Liquid assets
b. Tangible assets
c. Intangible assets
d. Current assets
Answer:
c. Intangible assets

Question 40.
The business form(s) in which the owner(s) is (are) personally liable is (are) the:
a. Partnership only
b. Proprietorship
c. Corporation only
d. Partnership and proprietorship
Answer:
d. Partnership and proprietorship

Question 41.
Economic resources of a business that are expected to be of benefit in the future are referred to as:
a. Liabilities
b. Owner’s equity
c. Withdrawals
d. Assets
Answer:
d. Assets

Question 42.
Gross profit less expenses is known as:
a. Net profit
b. Net turnover
c. Cost of goods sold
d. Total drawings
Answer:
a. Net profit

Question 43.
Goodwill should be tested for value impairment at which of the following levels?
a. Each identifiable long-term asset.
b. Each reporting unit.
c. Each acquisition unit.
d. Entire business as a whole.
Answer:
b. Each reporting unit.

Question 44.
The trading account does not:
a. Show the effect of profit on capital
b. Include the cost of goods sold
c. Compare the sales with the cost of those sales
d. Calculate gross profit
Answer:
a. Show the effect of profit on capital

Question 45.
Which of the following would not appear on the balance sheet?
a. Drawings
b. Carriage inwards
c. Machinery
d. Money owed by the firm to suppliers
Answer:
b. Carriage inwards

Question 46.
Which of the following would not appear in the profit and loss account?
a. Rent received.
b. Cash expenses.
c. Carriage outwards.
d. Drawings.
Answer:
b. Carriage inwards

Question 47.
One advantage of operating as a partnership would include:
a. Being able to raise capital through share issues
b. Limited liability for all partners
c. Access to a larger amount of initial capital
d. Greater power than a sole trader for decision making
Answer:
c. Access to a larger amount of initial capital

Question 48.
In normal trading circumstances, which of the following would not be found in a partner’s current account?
a. Goodwill
b. Drawings
c. Interest on drawings
d. Salaries
Answer:
a. Goodwill

Question 49.
If a partner cannot clear his debts on dissolution, the other partners must clear these debts in the following manner:
a. Debts are shared equally
b. Debts should not be cleared by other partners
c. Partnership profit/loss sharing ratio
d. In the ratio of their last agreed capital balance
Answer:
d. In the ratio of their last agreed capital balance

Question 50.
The main account for dealing with partnership dissolution would be:
a. Realization.
b. Dissolution
c. Appropriation
d. Revaluation
Answer:
a. Realization.

Question 51.
Which of the following would not be found in a partnership appropriation account?
a. Interest on capital
b. Interest on loan by partner to partnership
c. Interest on drawings
d. Salaries
Answer:
b. Interest on loan by partner to partnership

Question 52.
If partners maintain both fixed capital and current accounts, which of the following would normally be credited to a partner’s capital account?
a. Profits on revaluation
b. Losses on revaluation
c. Interest on capital
d. Goodwill being written off
Answer:
a. Profits on revaluation

Question 53.
A debit balance on a partner’s current account must indicate that:
a. They have withdrawn more than they have earned in the partnership
b. They have a credit balance on their capital account
c. Drawings are higher than the profit share for that year
d. They are insolvent
Answer:
a. They have withdrawn more than they have earned in the partnership

Question 54.
Under following conditions the court may declare for the dissolution of firm.
a. A partner is guilty of misconduct
b. It is just and equitable to dissolve the firm
c. Business can only be carried on loss
d. All of the above
Answer:
d. All of the above

Question 55.
In normal trading circumstances, which of the following would not be found in a partner’s capital account?
a. Profits on revaluation.
b. Losses on dissolution.
c. Goodwill.
d. Drawings.
Answer:
d. Drawings.

Question 56.
Which of the following is TRUE about the sole trader form of business?
a. A sole trader is liable to pay income tax on his/her earnings
b. Sole traders must have to prepare books of accounts by law
c. Sole traders must register the name of their business with the Registrar of O^oanies
d. All of the given options
Answer:
d. All of the given options

Question 57.
Sole traders differ from other types of trading organizations. Which of the following statements correctly summarizes the key characteristics of a sole trader’s business?
a. Liability is limited to the providers of loan finance and only the trader takes an active part in managing the business.
b. The trader has unlimited liability and runs the business in conjunction with the providers of loan finance.
c. The trader has unlimited liability and must have the business accounts audited.
d. The trader has unlimited liability, takes sole responsibility for management of the business and no audit is needed.
Answer:
d. The trader has unlimited liability, takes sole responsibility for management of the business and no audit is needed.

Question 58.
In a partnership firm, a partner withdraws Rs. 5,000 per month in the beginning of month for personal use. The rate of interest on drawings is 6% p.a. What is the amount of interest on drawings for the year?
a. Rs. 1,950
b. Rs. 1,800
c. Rs. 300
d. Rs. 1,650
Answer:
a. Rs. 1,950

Hint:
Interest on drawings = \(\frac{\text { Total of products } \times \text { rate of interest }}{100} \times \frac{1}{12}\)
When the amount withdrawn is same every time and is drawn at regular intervals then
Take the period at the average of the periods applicable to the first and the last installments. In this
question, the period of first installment is 12 months and that of the last installments is one month.

Average is = \(\frac{\text { Period of first instalment + Period of lastinstalment }}{2}\)
= 12 + 1/2 = 6 1/2 months
Total of products = 5000 × 12 = 60000
Interest on drawings = 60000 × \(\frac{6}{100} \times \frac{6.5}{12}\)
= 1950

Question 59.
Interest” on capital will be paid to the partners if provided for in the partnership deed but only out of:
a. Profits
b. Reserves
c. Accumulated profits
d. Goodwill
Answer:
a. Profits

Hint:
Interest on capital is allowed only when there is profit if provided in the partnership deed, if partnership deed is silent about providing interest on capital then no interest will be provided

Question 60.
In case of partnership the act of any partner is:
a. Binding on all partners
b. Binding on that partner only
c. Binding on all partners except that particular partner
d. None of the above
Answer:
a. Binding on all partners

Hint:
Every partner is an agent as well as principle of another partner. Therefore, the act of any partner is binding on all partners.

Question 61.
Capital employed by a partnership firm is Rs. 50,000. Its average profit is Rs. 60,000. The normal rate of return in similar type of business is 10%. What is the amount of super profits?
a. Rs. 50,000
b. Rs. 10,000
c. Rs. 6,000
d. Rs. 56,000
Answer:
b. Rs. 10,000

Hint:
Super Profit = Average Profit – Normal Profit
Normal Profit = Capital employed × normal rate of return
= 5,00,000 × 10%
= Rs. 50,000
Super Profit = 60,000 – 50,000
= Rs. 10,000

Question 62.
A and B are partners ‘in a firm having capital balances of Rs. 54,000 and Rs. 36,000 respectively. They admit C in partnership for 1/3’d share and C is to bring proportionate amount of capital. The capital amount of C would be:
a. Rs. 90,000
b. Rs. 45,000
c. Rs. 5,400
d. Rs. 36,000
Answer:
b. Rs. 45,000

Hint:
Total capital (before the admission of C)
= 54,000 + 36,000 = Rs. 90,000
Remaining share of A and B = 1 – \(\frac{1}{3}\) = \(\frac{2}{3}\) shares
Total capital of the firm (after admission of C) will be
= 90 000 × \(\frac{3}{2}\)
= Rs. 1,35,000
So, Capital amount of C would be 13500 × \(\frac{1}{3}\) = 45,000

Question 63.
If the new partner brings any additional amount in cash other than his capital contribution then, it is termed as:
a. Capital
b. Reserves
c. Profits
d. Goodwill
Answer:
d. Goodwill

Hint:
If a new partner brings any additional amount in cash other than his capital contribution then, it is termed as Goodwill.

Question 64.
A firm earns profit of Rs. 1,10,000. The normal rate of return in a similar type of business is 10%. The total assets (excluding goodwill) and total outside liabilities are Rs. 11,00,000 and Rs. 1,00,000 respectively. The value of goodwill as per capitalisation method will be:
a. Rs. 1,00,000
b. Rs. 10,00,000
c. Rs. 10,000
d. None of the above
Answer:
a. Rs. 1,00,000

Hint:
Goodwill Capitalized value of average profit – Net assets
Capitalized value of average profit = Average Annual Profit × 100/Normal Rate of Return
Net assets = total assets – outsiders liabilities
Net assets = 1100000 – 100,000 = Rs 1,000,000
Capitalised value of average profit = 110000 × 100/10 = 1,100,000
Goodwill = 1,100,000 – 1,000,000 = 100,000

Question 65.
A and B are partners sharing profits in the ratio of 3 : 2 respectively. C is admitted in the firm for 1/3rd share in profits. The new profit sharing ratio amongst A, B and C will be.-
a. 12:08:05
b. 08: 12 : 05
c. 05:05:12
d. None of the above.
Answer:
d. None of the above.

Hint:
Old profit sharing ratio of A = \(\frac{3}{5}\)
Old profit sharing ratio of B = \(\frac{2}{5}\)
New partner C’s profit = \(\frac{1}{3}\)
Let total profits = 1
Hence, remaining profit = 1 – \(\frac{1}{3}=\frac{2}{3}\)
New Profit sharing ratio of A = \(\)
New Profit sharing ratio of B = \(\frac{2}{3} \times \frac{2}{5}=\frac{4}{15}\)
New Profit sharing ratio of C = \(\frac{1}{3} \times \frac{5}{5}=\frac{5}{15}\)
So A : B : C = \(\frac{6}{15}: \frac{4}{15}: \frac{5}{15}\) = 6 : 4 : 5

Question 65.
A’s capital in a business is Rs. 20,000 and 8’s capital is Rs. 25 000. Their profit sharing ratio is 4 : 5. They admit C in the firm as a new partner and ask him to contribute Rs. 40,000 for 1 13f6 share of profit. Find the premium paid by C on account of goodwill:
a. Rs. 17,500
b. Rs. 20,000
c. Rs. 15,000
d. None of the above
Answer:
a. Rs. 17,500

Hint:
Let total profits = 1
C’s Share = \(\frac{1}{3}\)
Remaining share = 1 – \(\frac{1}{3}\) = \(\frac{2}{3}\)
Total capital (after admission of C) = (20,000 + 25,000) × \(\frac{3}{2}\) = 67,500
Capital of C = \(\frac{1}{3}\) × 67500 =22,500
Total contribution of cash by C = 40,000
So, Premium paid by C = 40,000 – 22,500 = Rs. 17,500

Question 66.
A and B are partners in a business sharing profits and losses in. the ratio of 7 : 3 respectively. They admit C as a new partner A sacrificed 1lf share of his profit and B sacrificed 1/3’d of his share in favour of C. The new profit sharing ratio of A, B, and C will be:
a. 3: 1 : 1
b. 2: 1 : 1
c. 2: 2 : 1
d. None of the above.
Answer:
a. 3: 1 : 1

Hint:
A : B = 7 : 3
A’s old share = \(\frac{7}{10}\)
A’s sacrifice for C = \(\frac{3}{10} \times \frac{1}{7}=\frac{1}{10}\)
A’s new share = \(\frac{7}{10}\) – \(\frac{1}{10}\) = \(\frac{6}{10}\)
B’s old share = \(\frac{3}{10}\)
B’s sacrifice for C = \(\)
B’s new share = \(\frac{3}{10}\) – \(\frac{1}{10}\) = \(\frac{2}{10}\)
C’s new share = \(\frac{1}{10}\) + \(\frac{1}{10}\) = \(\frac{2}{10}\)
New profit sharing ratio of A : B : C = \(\frac{6}{10}: \frac{2}{10}: \frac{2}{10}\) = 3 : 1 : 1

Question 67.
Ramesh and Suresh are partners sharing profits in the ratio of 2 : 1 respectively. (Ramesh Capital is Rs. 1,02,000 and Suresh Capital is Rs. 73,000). They admit Mahesh and agree to give him 1/Sth share in future profit. Mahesh brings Rs. 14,000 as his share of goodwill, He agrees to contribute capital in the new profit share ratio. How much capital will be brought by Mahesh?
a. Rs. 43,750
b. Rs. 45,000
c. Rs. 47,250
d. Rs. 48,000.
Answer:
c. Rs. 47,250

Hint:

Capital of Ramesh	1,02,00
Capital of Suresh	73,000
Goodwill	14,000
Total capital for 4/5th share	1,89,000

Let total profits = 1
Mahesh’s Share = \(\frac{1}{5}\)
Remaining share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)
Overall capital of firm will be 1,89,000 × \(\frac{5}{4}\) = 2,36,250
Mahesh brings in 1/5th of Rs. 2,36,250 = 47,250

Question 68.
Total capital employed in the firm is Rs. 8,00, 000, reasonable rate of return is 15% and Profit for the year is Rs. 12,00,000. The value of goodwill of the firm as per capitalization method would be:
a. Rs. 82,00,000
b. Rs. 12,00,000
c. Rs. 72,00,000
d. Rs. 42,00,000.
Answer:
c. Rs. 72,00,000

Hint:
Goodwill Capitalized value of average profit – Net assets
Capitalized value of average profit = Average Annual Profit × 100/Normal Rate of Return Capitalised value of average profit = 12,00,000 × \(\frac{100}{15}\) = 8,000,000
Goodwill = 8,000,000 – 8,00,000 = 7,200,000

Question 69.
X, Y and Z are partners sharing profits and losses equally. Their capital balances on March, 31, 2012 are Rs. 80,000. Rs. 60.000 and Rs. 40,000 respectively. Their personal assets are worth as follows: X – Rs. 20,000, Y • Rs. 15,000 and Z – Rs. 10,000. The extent of their liability in the firm would be:
a. X- Rs. 80,000 : Y – Rs. 60,000 : and Z – Rs. 40,000
b. X- Rs. 20,000 : Y – Rs. 15,000 : and Z . Rs. 10,000
c. X – Rs. 1,00,000 : Y – Rs. 75,000 : and Z – Rs. 50,000
d. Equal.
Answer:
b. X- Rs. 20,000 : Y – Rs. 15,000 : and Z . Rs. 10,000

Hint:

• The liability of partners in case of partnership is unlimited. The liability of the partner is not limited to his invested amount. In case of loss the private property of the partner also used to pay the business obligations.
• In this case liability is limited to the value of personal assets of the partners as they cannot contribute anything more than that. Hence liability is X : 20,000; Y : 15,000; Z: 10,000

Question 70.
Retiring partner is compensated for parting with the firm’s future profits in favour of remaining partners. The remaining partner’s contribute to such compensation amount in:
a. Gaining Ratio
b. Capital. Ratio
c. Sacrificing Ratio
d. Profit sharing Ratio
Answer:
a. Gaining Ratio

Hint:
As a partner retires the profit sharing ratio of the continuing partners get changed. The share of the retiring partner is distributed amongst the continuing partners. This is gaining part for the continuing partners.
Gaining ratio = New profit sharing ratio – old profit sharing ratio

Question 71.
A, B and C share profits and losses of the firm equally. B retires from . business and his share is purchased by A and C in the ratio of 2 : 3. New profit sharing ratio between A and C respectively would be:
a. 01:01
b. 02:02
c. 07:08
d. 03:05
Answer:
c. 07:08

Hint:
Old ratio A : B : C = 1 : 1 : 1
Gaining ratio of A and C = 2 : 3
Gaining share of A = \(\frac{1}{3} \times \frac{2}{5}=\frac{2}{15}\)
Gaining share of C = \(\frac{1}{3} \times \frac{3}{5}=\frac{3}{15}\)
A’s new ratio = Old ratio + Gaining ratio = \(\frac{1}{3}+\frac{2}{15}=\frac{7}{15}\)
C’s new ratio = Old ratio + Gaining ratio = \(\frac{1}{3}+\frac{3}{5}=\frac{8}{15}\)
New ratio between A and C = 7 : 8

Question 72.
If a partner goes insolvent and is not able to bring his share of deficiency in cash, then his deficiency should be borne by the remaining solvent partners:
a. Equally
b. On the basis of their profit sharing ratio
c. On the basis of their adjusted capital ratio
d. On the basis of their original investments
Answer:
c. On the basis of their adjusted capital ratio

Hint:
In the court case of Garner vs. Murray (1904), it was held that subject to any agreement to the contrary, if a partner goes insolvent a debit balance deficiency was to be shared by the other partner not in their profit and loss sharing ratio but “ the ratio of their last agreed capitals”

Question 73.
Which Of the following is true about a partnership
a. All partners invest an equal amount of capital in the partnership’s business
b. All partners are personally liable for the debts of the Partnership business
c. Partnerships- get favourable tax treatment compared.to corporations
d. A partnership requires at least three persons
Answer:
b. All partners are personally liable for the debts of the Partnership business

Hint:
A partnership is an unincorporated association of two or more individuals to carry on a business for profit. The liability of the partner is not limited to his invested amount. In case of loss the private property of the partner also used to pay the business obligations.
All partners are personally liable for the debts of the Partnership business.

Question 74.
In a partnership firm, in the beginning of the year, capital of one partner is Rs. 80,000. During the year, he introduced Rs. 7,000 as additional capital. In addition to this, he withdraws Rs. 2,000 in the middle of every month. The firm does not pay any interest on capital but charges 6% interest on drawings. His share of profit after interest on drawings is Rs. 20,000. At the end of the year, his capital in the firm would be-
a. Rs. 83,000
b. Rs. 1,05,000
c. Rs. 82,280
d. Rs. 1,09,000
Answer:
c. Rs. 82,280

Hint:

Question 75.
A firm earns a profit of Rs. 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are Rs. 11,00, 000 and Rs. 1,00,000 respectively.
The value of goodwill is
a. Rs. 1,00,000
b. Rs. 10,00,000
c. Rs. 10,000
d. None of the above
Answer:
a. Rs. 1,00,000

Hint:
Goodwill = Capitalized value of average profit – Net assets
Capitalized value of average profit = Average Annual Profit × 100/Normal Rate of Return
= 1,10,000 × 100/10 = 1,100,000
Net assets = total assets – outsiders liabilities
= 11,00,000 – 1,00,000 = 10,00,000
Goodwill = 1,100,000 – 10,00,000 = 1,00,000

Question 76.
M R and N are partners sharing profit and loss in equal ratio. Their capital balances stood at Rs. 23,000 and Rs. 27,000 respectively. They wanted to grow their business and admitted P as a working partner for 1 f3’d share. P is to bring capital in the proportion of his share of profit and besides capital, he is to bring Rs. 9,000 as goodwill. What will be the amount of capital to be brought in by P
a. Rs. 27,000
b. Rs. 23,000
c. Rs. 36,000
d. Rs. 29,500
Answer:
d. Rs. 29,500

Hint:
M : N = 1 : 1
Let total profit = 1
P’s Share = \(\frac{1}{3}\)
Remaining Share = 1 – \(\frac{1}{3}\) = \(\frac{2}{3}\)

Capital of M	23,000
Capital of N	27,000
Good will	9,000
Total capital for 2/3rd share	59,00

Total capital of the firm would be 59000 × \(\frac{3}{2}\) = Rs. 88,500
Capital will be bought by P = 88,500 × \(\frac{1}{3}\) = 29,500

Question 77.
A, B and C share profits and losses of a firm on 1:1:1 basis. B retired from business and his share is purchased by A and C in 40:60 ratio. New profit and loss sharing ratio between A and C would be –
a. 1:1
b. 2:3
c. 7:8
d. 3:5.
Answer:
c. 7:8

Hint:
Old ratio A : B : C = 1 : 1 : 1
After retirement of B new ratio between A and C
A : C = 40 : 60
New Ratio of A’s
= \(\frac{1}{3}+\frac{4}{30}=\frac{14}{30}=\frac{7}{15}\)
New ratio of C
= \(\frac{1}{3}+\frac{6}{30}=\frac{16}{30}=\frac{8}{15}\)
New share between A and C is 7 : 8

Question 78.
At the time of retirement of a partner from a partnership firm, the adjustment of goodwill is done in
a. Old profit sharing ratio
b. Gaining ratio
c. Sacrificing ratio
d. New profit sharing ratio
Answer:
b. Gaining ratio

Hint:
At the time of Retirement of a partner from a Partnership Firm, the continuing partners will gain in terms of profit sharing ratio. Therefore, the adjustment of goodwill is to be done in the gaining ratio to the retiring partners.

Question 79.
If partnership deed is not there, then profit is shared in :
a. Old Ratio.
b. Capital Ratio
c. Equally
d. New Ratio
Answer:
c. Equally

Hint:
The basic aim of partnership is to earn profit. This profit is distributed among the partners according their agreement. In case of loss also all the partners share in it. If there is no partnership deed then profit is shared equally.

Question 80.
What will be the interest on Partner’s loan when there is no partnership deed?
a. 6% p.a.
b. 6%
c. 6% simple interest p.a.
d. 6% compound interest p.a.
Answer:
c. 6% simple interest p.a.

Hint:
If there is no partnership deed, interest on loan is to be paid at the rate of 6%

Question 81.
In a firm of A & B having equal profit sharing ratio. Salary of A is 20,000, B is 10,000. Profit of the firm is 75,000. What is the total remuneration of A.
a. 20,000
b. 30,000
c. 42,500
d. 22,500.
Answer:
c. 42,500

Hint:

Profit to be distributed equally between A and B \(\frac{45000}{2}\) = 22500
Thus total remuneration of A = 22500 + 20000 = 42,500

Question 82.
Calculate interest on Drawings of A and B if accounts are closed on 31st March, 1973.
A – 10,000 – 1st April 1 972.
B – 20,000 – 17 August 1972.
Interest – 8.5%
a. 1,894.94
b. 1,890
c. 1,900
d. 1,902.6
Answer:
d. 1,902.6

Hint:
Interest on drawings = \(\frac{\text { Total of products } \times \text { rate of interest }}{100} \times \frac{1}{12}\)
Interest on drawings of A = 12 × 10000 × 8.5 × 1/100 × 12 = 850
Interest on drawings of B = 226 × 20000 × 8.5/100 × 365 = 1052.60
Total interest = 1052.60 + 850 = 1902.60

Question 83.
Under Fixed capital method, ………………………. A/c remains fixed and changes are made in current A/c.
a. Partner’s Capital A/c
b. Partner’s Current A/c
c. Both (a) and (b)
d. None of these
Answer:
a. Partner’s Capital A/c

Hint:
Under fixed capital method, each partner has two accounts, capital and current account. Partner’s capital A/c remain fixed.

Question 84.
A firm of X, Y and Z has a total capital investment of 2,25,000. The firm earned net profit during the last four years 35,000, 40,000, 60,000, 50,000. The fair return on the net capital employed is 15% . Find the value of goodwill if it is based on 3 years purchase of average super profit of past 4 years.
a. 35,000
b. 36,500
c. 40,000
d. 37,500
Answer:
d. 37,500

Hint:
Super profit = Average profit – Normal profit
Normal profit = Capital employed × Rate
Average profit = \(\frac{35,00+40,00+50,000+60,000}{4}\) = 46250
Normal profit = Capital employed × Rate
Super profit = Average profit – Normal profit
= 46,250 – 33,750 = 12,500
Goodwill of 3 years purchase = 12,500 × 3 = 37,500

Question 85.
Goodwill is which type 01 asset:
a. Tangible
b. Intangible
c. Depleting
d. Current,
Answer:
b. Intangible

Hint:
An intangible asset is an asset that lacks physical substance and usually is very hard to evaluate. It includes patents, copyrights, franchises, goodwill, trademarks, trade names.

Question 86.
Sona purchased Simmi’s business from 1st Jan, 1981. The profit disclosed by Simmi’s business for last 3 years:
1985 – Rs 40,000 [including abnormal gain of Rs. 5,000]
1986 – Rs 50,000 [after charging abnormal loss of Rs. 10,000]
1987 – Rs. 45,000 [excluding t 5,000 for insurance premium of firms property now to be insured]
Calculate the goodwill on the basis of 2 years purchase of average profit 01 last 3 years.
a. 80,000
b. 90,000
c. 1,20,000
d. 1,00,000
Answer:
b. 90,000

Hint:
Goodwill = Average Profits × Number of years of Purchase
Corrected Actual Profits:
Profits for 1985 = 40,000 – 5000( abnormal gain) = 35,000
Profits for 1986 = 50,000 + 10,000( abnormal loss) = 60,000
Profits for 1987 = 45,000 – 5000( insurance premium) = 40,000
Average profits = 35,000 + 60,000 + 40,000/3 = 45,000
Goodwill = 45,000 × 2 = 90,000

Question 87.
A & B are sharing profits and loss in ratio of 3:2. C was admitted for 1/5^1h share, which he takes equally from A & S, i.e. 1/10^h from A and 1 /10^1h from B. New profit sharing ratio will be
a. 5:3:2
b. 29: 19: 10
c. 9:6:5
d. None of these.
Answer:
a. 5:3:2

Hint:
A’s old share = \(\frac{3}{5}\)
A’s sacrifice for C = \(\frac{1}{10}\)
A’s new share = \(\frac{3}{5}\) – \(\frac{1}{10}\) = \(\frac{5}{10}\)
B’s old share = \(\frac{2}{5}\)
B’s sacrifice for C = \(\frac{1}{10}\)
B’s new share = \(\frac{2}{5}\) – \(\frac{1}{10}\) = \(\frac{3}{10}\)
C’s share = \(\frac{1}{10}\) + \(\frac{1}{10}\) = \(\frac{2}{10}\)
Hence, new profit sharing ratio is 5 : 3 : 2.

Question 88.
A & B are partners sharing profits in the ratio of 2:1 respectively (A’s capital is Rs. 1,02,000 & B’s capital is Rs. 73,000). They admit C & agreed to give him 1/5^1h share in future profit. C brings Rs. 14,000 and share of goodwill. He agreed to contribute capital in the new profit sharing ratio. How much capital will be brought by C.
a. 43,750
b. 45,000
c. 47,250
d. 48,000
Answer:
c. 47,250

Hint:
A : B = 2 : 1
Let total profits = 1
C’s Share = \(\frac{1}{5}\)
Remaining share = 1 – \(\frac{1}{5}\) = \(\frac{4}{5}\)

Capital of A	Rs. 1,02,000
Capital of B	73,000
Good will	14,000
Total capital for 4/5th share	1,89,000

Total capital of the firm would be 189000 × \(\frac{5}{4}\) = Rs. 236250
Capital will be bought by C = 236250 × \(\frac{1}{5}\) = 47250

Question 89.
At the time of admission of partner, amount of general reserve, revaluation A/c will be transferred to
a. Old Partners Capital A/c
b. New Partners Capital A/c
c. All Partners Capital A/c
d. None of the above.
Answer:
a. Old Partners Capital A/c

Hint:
At the time of admission of partners, all the reserves and profits of existing partners are transferred to existing partners i.e. to old partners capital a/c.

Question 90.
If A and B are sharing profits in the ratio of 5 : 3 and on admission of C, the new profit sharing ratio becomes 7 : 5 ; 4. Calculate the sacrificing ratio.
a. 3: 1
b. 5:4
c. 1:3
d. 7:5.
Answer:
a. 3: 1

Hint:
Old Ratio of A & B = 5 : 3
New Profit Sharing Ratio for A, B, C = 7: 5: 4
A’s old share = \(\frac{5}{8}\)
A’s new share = \(\frac{7}{16}\)
A’s sacrifice for C = \(\frac{5}{8}\) – \(\frac{7}{16}\) = 10 – \(\frac{7}{16}\) = \(\frac{3}{16}\)
B’s old share = \(\frac{3}{8}\)
B’s new share = \(\frac{5}{16}\)
B’s sacrifice for C = \(\frac{3}{8}\) – \(\frac{5}{16}\) = 6 – \(\frac{5}{16}\) = \(\frac{1}{16}\)
Sacrificing ratio = 3 : 1

Question 91.
X, Y, Z capitals are 80,000, 75,000 and 50,000 respectively. Z retired and is paid Rs. 60,000 and no goodwill is valued. What is the new capital of Y after retirement of Z.
a. 71,000
b. 74,000
c. 75,000
d. 86,000
Answer:
c. 75,000

Hint:
Z’s Capital = Rs. 50,000
Amount Paid to him = Rs. 60,000
Amount Paid to Z in excess of his capital = Rs. (60.000 – 50,000) = Rs. 10,000
= Rs. 10,000 to be borne by X & Y in equal ratio.

Question 92.
If at the time of retirement, JLP is received, it will be distributed among which partners –
a. Retiring Partner
b. Remaining Partner
c. All Partners
d. None of these
Answer:
c. All Partners

Hint:
At the time of retirement of an partner the amount of JLP is distributed among existing partners along with the retiring partner.

Question 93.
X, Y, Z are Partners in a firm, sharing profit and losses in the ratio 3:2:1.Z retires from the firm what will be the new profit sharing ratio.
a. 3:1
b. 3:2
c. 2:3
d. 1:2
Answer:
b. 3:2

Hint:
If the new profit sharing ratio of remaining partners are not given, it will be assumed that the remaining partners continue to share profits and losses in old ratio. Thus, after retirement of Z, new profit sharing ratio will be 3:2 same as old ratio.

Question 94.
Which amongst the following is transferred to Partner’s Executor’s A/c at the time of death of the partner?
a. Interest on Capital
b. Share in Goodwill
c. Share in Profit
d. All of the above.
Answer:
d. All of the above.

Hint:
Following particulars are transferred to the Partners’s executor account at the time of death of a partner
(a) Partner’s Capital A/c
(b) Interest on Partner’s Capital A/c
(c) Share in Goodwill
(d) Share of Profit & Loss

Question 95.
Calculate Gaining Ratio from following information:
Current Profit Sharing Ratio of A, B & C = 5:4:3 C retires and his share was taken equally by A and B.
a. 1:1
b. 1:3
c. 13:11
d. None of these
Answer:
a. 1 : 1

Hint:
Old ratio of A : B : C = 5 : 4 : 3
C’s Share \(\frac{3}{12}=\frac{1}{4}\)
C’s share is to be divided equally between A and B
A’s Gain = \(\frac{1}{4} \times \frac{1}{2}=\frac{1}{8}\)
B’s Gain =\(\frac{1}{4} \times \frac{1}{2}=\frac{1}{8}\)
Gaining ratio =1 : 1

Question 96.
When firm dissolves, then Goodwill is transferred to which A/c?
a. Realisation A/c
b. Goodwill A/c
c. Both (a) and (b)
d. None of the above.
Answer:
a. Realisation A/c

Hint:
When the firm is dissolved all assets and liabilities are transferred to Realisation A/c which includes goodwill.

Question 97.
When is premium of dissolution is not allowed to partners?
a. If firm is dissolved due to death of partner
b. If dissolution takes place due to misconduct of partner me king claim
c. Both (a) and (b)
d. None of the above
Answer:
c. Both (a) and (b)

Hint:
Premium on dissolution cannot be allowed as per Partnership Act

• When dissolution lakes place due to the misconduct of partner’s making claim
• When Firm is dissolved due to death of partner.

Question 98.
If a partner goes insolvent & is not able to bring his share of deficiency in cash, then his deficiency shall be borne by the remaining solvent .partners:
a. Equally
b. On the basis of profit sharing ratio
c. On the basis of their adjusted capital ratio
d. On the basis of their original investment
Answer:
c. On the basis of their adjusted capital ratio

Hint:
In the court case of Garner vs. Murray (1904), it was held that subject to any agreement to the contrary, a debit balance deficiency was to be shared by the other partner not in their profit and loss sharing ratio but “the ratio of their last agreed capitals”
If one partner is insolvent, his capital deficiency will be shared by other partners according to the ‘last agreed capital ratio’ (the ratio of the balances in the capital accounts before the dissolution, in the absence of any agreement to the contrary.

Question 99.
When is the realisation A/c made in partnership?
a. At the time of admission of partner
b. At the time of death of partner
c. At the time of retirement
d. At the time of dissolution of firm.
Answer:
d. At the time of dissolution of firm.

Hint:
At the time, of dissolution of firm realisation account is prepared. A realization account is opened in order to ascertain whether a profit or a loss has been resulted upon the dissolution.

Question 100.
Loss on Realisation is:
a. Debited to Partner’s Capital A/c
b. Credited to Partner’s Capital A/c
c. Debited to Partner’s Current A/c
d. Credited to Partner’s Currant A/c Questions of December 2014
Answer:
a. Debited to Partner’s Capital A/c

Hint:
In the partnership dissolution, an account named as ‘Realization Account’ will be opened to compute the profit or loss from realization which should be shared among the partners according to the profit or loss sharing ratio. Any accumulated profit or loss is transferred to Capital Accounts of partners in the profit sharing ratio.

Question 101.
A partner that doesn’t take part in the management of business, but he/she has made investment is business and liable to creditors of the business is known as:
a. Dormant partner
b. Active partner
c. Minor partner
d. Junior partner
Answer:
a. Dormant partner

Hint:
A partner who takes no share in the active business of a company or partnership, but is entitled to a share of the profits and subject to a share in losses is called Dormant partner.

Question 102.
The goodwill of a business is to be valued at 3 years purchase of the average profits of the last three years. The profits of the last three years are Rs. 5,000, Rs. 6,000 and Rs. 7,000 respectively. Hence, the goodwill be valued at:
a. Rs. 12,000
b. Rs. 15,000
c. Rs. 18,000
d. Rs. 6,000
Answer:
c. Rs. 18,000

Hint:
Goodwill = Average Profits × Number of years of Purchase
Average Profit = \(\frac{5,000+6,000+7,000}{3}\) = 6000
Goodwill = 6000 × 3 = 18000

Question 103.
On 1^S1 April, 2012 Raghu invested capital of Rs. 2,00, 000. He withdrew Rs. 50,000 during the year. Interest on drawings is charged @. 10% per annum. The amount of interest on drawings deducted from capital at the end of financial year is:
a. Rs. 15,000
b. Rs. 2,500
c. Rs. 7,500
d. Rs. 5,000
Answer:
b. Rs. 2,500

Hint:
Interest on drawings = \(\frac{\text { Total of products } \times \text { rate of interest }}{100} \times \frac{1}{12}\)
= 50000 × 10 × 6/100 × 12 = 2500
Whenever date of drawing is not given in the question then interest is calculated for average period of 6 months.

Question 104.
A started a business with Rs. 18,000 after 4 months 8 joins with Rs. 24,000. After 2 more months C joins with Rs. 30,000. At the end of 10 months from A started the business. C received V 1,850 as his share. They decided to share profit or losses in the ratio of capital. The total profit of the firm would be:
a. Rs. 7,955
b. Rs. 8,510
C. Rs. 7,030
d. Rs. 6,845
Answer:
d. Rs. 6,845

Hint:
Hint:
Total profit for 10 months = 1850
A’s capital = 18000, duration = 10 months
B’s capital = 24000, duration = 6 months
C’s capital = 30000, duration = 4 months
Total weighted capital ratio = (18000 × 10) : (24000 × 6) : (30000 × 4)
= 180000 : 144000 : 120000
Total profit of the firm = c’s share in profits × \(\frac{\text { Total capital }}{\text { C’s Capital }}\)
= 1 × \(\frac{4,44,000}{1,20,000}\) = 60845

Question 105.
The balance of Revaluation account created at the time of admission of a new partner is:
a. Transferred to old partners capital account
b. Transferred to all partners capital account
c. Transferred to profit and loss account
d. Transferred to new partners capital account
Answer:
a. Transferred to old partners capital account

Hint:
The balance of Revaluation account created at the time of admission of a new partner is transferred to old partners capital account.

Question 106.
In a partnership firm A, Band C are partners sharing profit and loss in ratio of 3:2:1. They have taken a joint life policy of Rs. 1,00,000 and the Joint Ufe Insurance premium is treated as an expense. On death of B, the claim amount was received. The amount received on Joint Life Policy will be:
a. Credited to all partners capital account
b. Credited to B’s capital account
c. Debited to B’s capital account
d. Credited to remaining partners capital account.
Answer:
a. Credited to all partners capital account

Hint:
When premium is treated as expenditure the premium paid for the policy is treated as a expense and is written off to the profit and loss account.. The value of the policy represents a secret reserve which belongs to the partners in the profit sharing ratio.
When the policy money is received the accounting entry will be

Thus on the death of B, the amount received of JLP will be credited to all partner’s capital account.

Question 107.
On the retirement of a partner any reserve lying in the books of account:
a. Should be transferred to retiring partner only
b. Should be transferred to all partner in the old profit sharing ratio
c. Should not be transferred
d. Should be transferred to remaining partners in the new profit sharing ratio
Answer:
b. Should be transferred to all partner in the old profit sharing ratio

Hint:
When a partner retires then all the reserves and undistributed profit is transferred in the capital Accounts of all partners in their profit sharing ratio so that the retiring partner may get his share of accumulated profits.

Question 108.
On dissolution at partnership firm, X one of the partners was to receive f 3,000 as remuneration for the dissolution work, the entry in the books of partnership will be:
a. Debit x’s Capital A/c Rs. 3,000 Credit Realisation A/c Rs. 3,000
b. Debit Realisation A/c Rs. 3,000 Credit x’s Capital A/c Rs. 3,000
c. Debit Revaluation A/c Rs. 3,000 Credit x’s Capital A/c Rs. 3,000
d. Debit x’s Capital A/c Rs. 3,000 Credit Revaluation A/c Rs. 3,000
Answer:
b. Debit Realisation A/c Rs. 3,000 Credit x’s Capital A/c Rs. 3,000

Hint:
The following entry will be passed.

Question 109.
Which of the following is not recorded in the partners current accounts?
a. Interest on Drawings
b. Administrative Expenses
c. Drawings
d. Partners Salaries.
Answer:
b. Administrative Expenses

Hint:
Administrative expenses are shown in Profit & Loss A/c.

Question 110.
Total capital employed by a partnership firm is Rs. 1,00,000 and its average profit is Rs. 25,000. Normal rate 01 return is 20% in similar firms working under similar conditions. The firm earns super profit of:
a. Rs. 5,000
b. Rs. 2,000
c. Rs. 4,000
d. Rs. 3,000.
Answer:
a. Rs. 5,000

Hint:
Super profit = Average profit – Normal profit
Normal profit = Capital × Rate
Normal profit = 1,00,000 × 20%
= Rs. 20,000
Super profit = Rs. 25,000 – 20,000 = Rs. 5,000

Question 111.
The investment of personal assets by the owner in the business will:
a. Increase total assets and increase owners equity
b. Increase assets and decrease liabilities
c. Increase total assets only
d. Has no effect on assets but increase owners equity.
Answer:
a. Increase total assets and increase owners equity

Hint:
Introducing of personal assets by the owner in the business will increase total assets of the business and will also have effect of increase in owner’s equity.

Question 112.
In a Partnership firm, the Joint Life Insurance premium is treated as an expense. Which of the following account is credited for amount received from Joint Life Insurance Policy on the death of a partner?
a. Bank Account
b. All Partners Capital Account
c. Deceased Partners Capital Account
d. Remaining Partners Capital Account.
Answer:
b. All Partners Capital Account

Hint:
When the policy money is recevied

Question 113.
In a partnership firm, Ram’s Capital is Rs. 80,000, Sita’s Capital is Rs. 75,000 and Mohan’s Capital is Rs.50,000. They share income in 3:2:1 ratio respectively. Mohan is retiring from the partnership. Mohan is paid Rs.60,000 and no goodwill is recorded. What will be the Ram’s Capital’ balance after the retirement of Mohan?
a. Rs.74,000
b. Rs.70,000
c. Rs.75,000
d. Rs.86,000.
Answer:
a. Rs.74,000

Hint:
Mohan’s Capital = Rs. 50,000
Amount Paid to him = Rs. 60,000
Amount Paid to Mohan in excess of his capital = Rs. (60.000 – 50,000) = Rs. 10,000
= Rs. 10,000 to be borne by Ram & Sita in gaining ratio i.e. 3:2

Question 114.
A, 8 and C were In partnership sharing profits in the ratio of 4:2:1 respectively. A guaranteed that is no case C’s share in profit should be less than Rs.7,500. Profits ottne firm for the year 2013 amounted to Rs. 31,500. A’s share in profit will be:
a. Rs. 15,000
b. Rs. 18,000
c. Rs. 16,000
d. Rs. 3,000
Answer:
a. Rs. 15,000

Hint:
A’s share = 31,500 × 4/7 = 18.000
B’s share = 31,500 × 2/7 = 9,000
C’s share – 31,500 × 1/7 = 4,500
But C was guaranteed by A that his share will not be less than 7,500.
C s share = 4500 + 3000 (from A) = 7500
Therefore, A will compensate from his share i.e. 18,000 – 3,000 = 15,000

Question 60.
A Court may dissolve the partnership firm on the grounds of – (i) insanity of a partner (ii) permanent incapacity of partner (iii) misconduct by a partner. The options are:
a. All (i), (ii) and (iii)
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i) and (ii) only
Answer:

Question 115.
A, B and C are partners in a firm, sharing profits and losses in the ratio of 5:3:2 respectively. The balance of capital is Rs.50,000 for A & 8 each and Rs.40,000 for ‘C’ , ‘8’ decides to retire from firm. The goodwill of firm is valued at Rs.30,000 and profit on revaluation of assets at Rs.5,000. The firm also have a balance in the Reserve A/c for Rs. 15,000 on that date. What amount will be payable to ‘B’?
a. Rs.55,000
b. Rs.65,000
c. Rs.75,000
d. Rs.45,000.
Answer:
b. Rs.65,000

Hint:
Profit sharing ratio A : B : C = 5 : 3 : 2
B’s share in the profit & loss ratio = 3/10
Capital of B = 50,000
Add: share in goodwill 30,000 × \(\frac{3}{10}\) = 9,000
Add: share in profit on revaluation 5000 × \(\frac{3}{10}\) = 1,500
Add: share in reserve account 15000 × \(\frac{3}{10}\) = 4,500
Amount payable to B = 65,000

CS Foundation Fundamentals of Accounting and Auditing Notes