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PARTNERSHIP ACCOUNTING IMPORTANT QUESTIONS with ANSWERS

PARTNERSHIP ACCOUNTING IMPORTANT QUESTIONS with ANSWERS

PARTNERSHIP ACCOUNTING IMPORTANT QUESTIONS & ANSWERS

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QUESTION 1

Define Partnership.

Answer:

partnership agreement is an agreement between two or more individuals who sign a contract to start a profitable business together. In the Partnership agreement, the partners are equally responsible for the debt of an organization. Even if one person withdraws his/her partnership, they are liable for an already existing debt, and future liability if they do not provide with proper notice of retirement. Sometimes, a partnership can also exist without signing any scripted agreement, in such cases law that regulates partnership would apply.

QUESTION 2

Partners’ Current Accounts are opened when their capital accounts are

(1) Fixed

(2) Fixed and Fluctuating both

(3) Fluctuating

(4) None of these

Answer: Fixed

QUESTION 3

The interest on capital accounts of partners under the fluctuating capital account method is credited to

(1) Interest Account

(2) Profit and Loss Account

(3) Partners’ Capital Accounts

(4) None of these

Answer: Partners’ Capital Accounts

QUESTION 4

In the absence of an agreement to the contrary, partners share profits and losses in the

(1) Ratio of their capitals at the beginning of the year

(2) Ratio of their capitals at the end of the year

(3) Ratio of average capital

(4) Equal ratio

Answer: Equal ratio

QUESTION 5

In the absence of an agreement to the contrary, the partners are

(1) Entitled for 6% interest on their capitals, only when there are profits

(2) Entitled for 9% interest on their capitals, only when there are profits

(3) Entitled for interest on capital on the bank rate, only when there are profits

(4) Not entitled for any interest in their capitals

Answer: Not entitled for any interest in their capitals

QUESTION 6

The current account of a partner

(1) Will always have a credit balance

(2) Will always have a debit balance

(3) May have a debit or credit balance

(4) Can never have a debit balance

Answer: May have a debit or credit balance

QUESTION 7

Interest payable on the capitals of the partners is changed to

(1) Profit and Loss Account

(2) Profit and Loss Adjustment Account

(3) Realisation Account

(4) Profit and Loss Appropriation Account

Answer: Profit and Loss Appropriation Account

QUESTION 8

Interest on partner’s drawing under a fluctuating capital account is debited to

(1) Partner’s Capital Account

(2) Profit and Loss Account

(3) Drawing Account

(4) None of the above

Answer: Partner’s Capital Account

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QUESTION 9

Explain the importance of partnership agreement

Answer: A partnership agreement is vital to keep away the disagreement, confusion or any changes that might occur in the course of business tenure. Below are a few points that describe why a partnership agreement is essential:

  • To form distinguished roles and responsibilities for each partner.
  • To avoid tax problems, the tax status shows that the partner is dispensing profits to each partner based on accounting practice and acceptable tax.
  • To avoid liability and legal issue, if there is any with any of the partners.
  • It helps to deal with any lifestyle or circumstance changes of any partners. They usually deal with buy-out agreement with individual partners.
  • To surpass non-compete agreements and conflict of interest with partners.
  • To overrule the state law

QUESTION 10

What is a Partnership Deed?

Answer: A partnership deed, also called as a partnership agreement, is a record that outlines in detail the rights and functionalities of all parties to a business operation. It has the force of law and is designed to guide the partners in the conduct of the business.

QUESTION 11

Explain features of partnership.

Answer: The vital features of the partnership are:

  • Agreement: Partnership is the outcome of an accord between 2 or more people to regulate business and share its gains and losses. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written agreement
  • Sharing of Profit: Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership as an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.

QUESTION 12

Define Goodwill.

Answer: Goodwill is an intangible asset which places an enterprise at an advantageous position due to which an enterprise is able to earn higher profits without putting extra effort.

QUESTION 13

Give two features of goodwill.

Answer: The two features of goodwill are

  • It is an intangible asset. It does not have any physical existence
  • It helps in earning higher profits

QUESTION 14

What is the need for valuation of goodwill?

Answer: The need for valuation of goodwill arises.

  • When there is a change in the profit-sharing ratio
  • When a new partner is admitted
  • When a partner retires or dies
  • When a partnership firm is sold as a going concern
  • When two or more firms/partners amalgamates
  • When a partnership firm is converted into a company

 

QUESTION 15

What is purchased goodwill?

Answer: Purchased goodwill is that goodwill which is acquired by a firm for a consideration, whether paid in cash or kind.

QUESTION 16

What is self-generated goodwill?

Answer: Self-generated goodwill is the goodwill which is not purchased for consideration but is earned by the efforts of the management or partners.

QUESTION 17

What is super profit method?

Answer: When a buyer’s advantage lies in the excess of the normal return capital employed. The excess of actual/average profit over normal profit is known as super profit method.

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QUESTION 18

What are the factors that affect the value of goodwill?

Answer: The factors that affect the value of goodwill are.

  • Efficient Management
  • Favourable Location
  • Favourable Contracts
  • Advantage of Patent
  • Market Situation
  • Nature of Business

QUESTION 19

State two features of purchased goodwill.

Answer: The two features of purchased goodwill are:

  • It arises on the purchase of a business
  • It is shown in the Balance Sheet as an asset

QUESTION 20

State two features of self-generated goodwill.

Answer: The two features of self-generate goodwill are:

  • It is generated internally, generally over the years
  • Self-generated goodwill is not recorded in the books of accounts

QUESTION 21

Give the formula for super profit method.

Answer: The formula for super profit method is:

Super Profit= Average maintainable profits – Normal Profit

QUESTION 22

Show how super profit method is used to calculate goodwill.

Answer: The formula for super profit method is:

Super Profit = Average maintainable profits – Normal Profit

Now, goodwill can be calculated as:

Goodwill= Super Profit x Number of years’ purchase

QUESTION 23

Define Sacrificing ratio.

Answer: Sacrificing ratios is the ratio in which one or more partners of a company sacrifice their share of profit in favour of one or more partners of the firm.

QUESTION 24

How sacrificing the share of each partner is calculated.

Answer: The sacrificing share of each partner is calculated as follows:

Sacrificed Share= Old Share – New Share

QUESTION 25

Define Gaining ratio.

Answer: Gaining ratios is the ratio in which one or more partners gain a share of profit as a result of sacrificed share in profits by one or more partners of a company.

QUESTION 26

How gaining share of each partner is calculated.

Answer: The gaining share of each partner is calculated as follows:

Gaining Share= New Share – Old Share

QUESTION 27

Define Investment Fluctuation Reserve

Answer: Investments are recorded in the book of a company at cost. However, in the market, it might change. It may be higher or lower than the book value. Investment fluctuation reserve is a reserve set aside out of profit to meet fall in the market value of the investment.

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QUESTION 28

Explain the three types of the accounting treatment of Investment Fluctuation Reserve

Answer: The three types of the accounting treatment of Investment Fluctuation Reserve are.

  • When the book value and market value of the investment are the same- The amount of investment fluctuation reserve is transferred to partners’ capital account in their old profit-sharing ratio.
  • When the market value of investments is less than the book value- In this case, the treatment on investment fluctuation reserve depends on the amount of decrease.
  • When there is an increase in the market value of investment- The amount of investment fluctuation reserve is distributed among partners and an increase in the value of the investment is credited to revaluation account.

QUESTION 29

Define admission of partners.

Answer: Admission of a partner is a mode of reconstituting the firm because, with the admission of a partner, the existing agreement ends and new agreement among all the partners comes into force.

QUESTION 30

After admission what two rights does the partner gets?

Answer: The two rights that the partner gets after admission are

  • Right to share future profits of a company
  • Right to share in the assets of the firm

QUESTION 31

What is a new profit-sharing ratio?

Answer: A new profit-sharing ratio is a ratio which all partners along with fresh or incoming partner, will distribute future profit and loss of the business.

QUESTION 32

General reserve at the time of admission of a partner is transferred to

1) Revaluation Account

2) Old Partners’ Capital Account

3) Capital Account of all partners, including new partner

4) None of the above

Answer:  2) Old Partners’ Capital Account

QUESTION 33

When the incoming partner brings in his share of the premium for goodwill in cash, it is adjusted by crediting to

1) Incoming Partner’s Capital Account

2) A premium for Goodwill Account

3) Sacrificing Partners’ Capital Account

4) None of the above

Answer: 3) Sacrificing Partners’ Capital Account

QUESTION 34

Rohan is admitted to a company for a 1/4th share in the profits for which he brings in 10,000 towards premium for goodwill. It will be taken up by the old partners in which ratio?

1) The old profit-sharing ratio

2) The new profit-sharing ratio

3) The sacrificing ratio

4) None of the above

Answer: 3) The sacrificing ratio

QUESTION 35

Revaluation Account or Profit and Loss Adjustment Account is a.

1) Real Account

2) Nominal Account

3) Personal Account

4) None of the above

Answer:  2) Nominal Account

QUESTION 36

The balance in the investment fluctuation fund, after meeting the loss on revaluation of investments, at the time of admission of a partner will be transferred to

1) The old partners’ capital account

2) The revaluation Account

3) The General Reserve

4) None of the above

Answer: 1) The old partners’ capital account

QUESTION 37

If the incoming partner is to bring in premium for goodwill in cash and also a balance exists in the goodwill account, then this goodwill account is written off among the old partners in what ratio?

1) The new profit-sharing ratio

2) The old profit-sharing ratio

3) The Sacrifice Ratio

4) None of the above

Answer: 2) The old profit-sharing ratio

QUESTION 38

When X and Y contribute to share profit and loss in ratio of 3:2. Also, admit Z is a partner giving him a 1/5th share of profits. This will be given by X and Y

1) Equally

2) In the ratio of their capital

3) In the ratio of their profits

4) None of the above

Answer: 3) In the ratio of their profits

QUESTION 39

When a partner brings cash for goodwill, the amount is credited to

1) The premium for goodwill account

2) Capital account of the new partner

3) Cash account

4) None of the above

Answer: 1) The premium for goodwill account

QUESTION 40

Explain Retirement of a partner.

Answer: Retirement of partner refers to retiring from the partnership, i.e., ceasing to be a partner of the enterprise. A partner may retire from the firm anytime in the following scenarios:

  • If there exists an agreement to that effect
  • If all the partners agree to his retirement

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Question 41

The share of the goodwill of a retiring partner is debited to remaining partners in their,

a. Capital Ratio
b. New Ratio
c. Gaining Ratio
d. Fixed Ratio

Answer: c. Gaining Ratio

Question 42

When a partner dies, the amount of general reserve is transferred to the partners’ capital a/c in,

a. New profit sharing ratio
b. Old profit sharing ratio
c. The capital ratio

Answer: b. Old profit sharing ratio

Question 43

What is Gaining Ratio?

Answer: Gaining Ratio is such type of ratio in which partners have agreed to gain their share of profit from the other partners of the firm.

Question 44

Define the new profit sharing ratio.

Answer: New profit sharing ratio is the ratio by which existing partner and new partner will share profits and losses of the firm.

Question 45

Explain the meaning of Sacrificing Ratio.

AnswerSacrificing Ratio is the ratio in which the old partners agree to sacrifice their shares of profit in favour of new or incoming partner.

Question 46

Pass the necessary journal entry when the Goodwill does not appear in the books.

Answer: The journal entry passed is as follows,

Goodwill a/c  Dr.

To all partner’s capital a/c (in old profit sharing ratio)

Question 47

How is the new profit sharing ratio mathematically stated?

Answer: New share of a partner = Old Share + Acquired Share

Question 48

Pass the necessary journal entry when the Goodwill appears in the books.

Answer: The journal entry passed is,

All Partner’s capital a/c Dr.

To Goodwill a/c

Question 49

What does Dissolution of Partnership Firm mean?

Answer: Dissolution of partnership and dissolution of the partnership firm are two different concepts. The dissolution of a partnership means a change of business relationship between partners whereas the dissolution of a firm means dissolving of the firm along with the relation between partners. In this case, all the assets and liabilities are settled and appropriately disposed.

Dissolution of partnership is said to take place when one of the partners associated with the business, ceases to be a part of the business going forward. It is very different from the termination of partnership. Dissolution can be defined as the process that ultimately leads to the termination of partnership. After dissolution, the remaining partners carry on the partnership but, this partnership is a completely new and different partnership.

Question 50

What does Dissolution of Firm mean?

Answer: Dissolution of Firm means closure of the enterprise and end of the business association among all the partners.

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Reasons for Dissolution of partnership

There can be several reasons for the dissolution of a partnership, which are mentioned below:

  1. Death of a partner.
  2. Admission of a new partner.
  3. Insolvency of an existing partner.
  4. Early retirement of a partner.
  5. Due to expiry of a partnership period after a certain time as mutually agreed upon by all partners.

Question 51

What are the modes of Dissolution of Firm?

Answer: The modes by which a Firm can be dissolved are:

  • Mutual agreement
  • Compulsory dissolution
  • By notice
  • The occurrence of an event
  • Dissolution by court

Question 52

Mention the accounting treatment on the dissolution of the firm.

Answer: Dissolution process begins by preparing the following accounts in the enterprise’s books:

  • Realisation A/c
  • Partner’s loan A/c
  • Partner’s capital A/c
  • Bank or cash A/c

Question 53

Pass the necessary journal entry ‘for closing the asset A/c’.

Answer: The journal entry passed is,

Realisation A/c Dr.

To Various assets A/c

Question 54

Pass the necessary journal entry when realisation expenses are borne and paid by the enterprise.

Answer: The journal entry passed is,

Realisation A/c Dr.

To Cash/bank A/c

Question 55

Pass the necessary journal entry when realisation expenses were to be borne by the enterprise but are paid by a partner.

Answer: The journal entry passed is,

Realisation A/c   Dr.

To   Concerned partner’s capital A/c

Question 56

During the dissolution of a firm, if goodwill appears in the balance sheet, it is transferred to,

Answer: Realisation A/c

Question 57

An unrecorded asset when realised is credited to,

A. Realisation A/c

B. Partners’ capital A/c

C. None of the above

Answer: B. Realisation A/c

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Question 58

An unrecorded liabilities when paid is debited to,

A. Realisation A/c

B. Partners’ capital A/c

C. None of the above

Answer: B. Realisation A/c

Question 59

Pass the necessary journal entry when realisation expenses are borne and paid by the same partner.

Answer: No entry

Question 60

Pass the necessary journal entry when realisation expenses are borne by a partner and paid by the firm.

Answer: The journal entry passed is,

Concerned partner’s capital A/c DR

To    Cash/bank A/c     CR

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