Tag: book keeping and accountancy

Questions Related to book keeping and accountancy

X, Y and Z are sharing profits & losses in the ratio of 5:3:2. They decide to share future profits & losses in the ratio of 2:3:5 with effect from 1st April. They also decide to record the effect of following revaluations without affecting the book values of the assets & liabilities, by passing a single adjusting entry:

Book Figure Revalued Figure
Land & Building Rs 60,000 Rs 90,000
Plant & Machinery Rs 90,000 Rs 84,000
Trade Creditors Rs 30,000 Rs 27,000
Outstanding Expenses Rs 27,000 Rs 36,000

The necessary single adjusting entry will involve:

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. Debit Z and Credit X with Rs 5,400

  2. Debit X and Credit Z with Rs 5,400

  3. Debit Y and Credit X with Rs 5,400

  4. Debit X and Credit Y with Rs 5,400

Show answer
Correct Option: A
Explanation:

In this question,revaluation account has to be prepared to calculate any profit or loss due to revaluation of assets or liabilities.

A revaluation account is prepared on the basis that reduction in assets or increased liability are debited but reduced liability or increased assets are credited.
Revaluation profit or loss$=Rs30,000(credited)-Rs6,000(debited)+Rs3000(credited)-Rs9000(debited)\quad =Rs18,000$
The next step is to calculate sacrifising ratio of X, Y and Z
X's sacrifising ratio$=\frac { 5 }{ 10 } -\frac { 2 }{ 10 } \quad =\frac { 3 }{ 10 } $
Y's sacrifising ratio$=\frac { 3 }{ 10 } -\frac { 3 }{ 10 } \quad =\frac { 0 }{ 10 } $
Z's sacrifising ratio$=\frac { 2 }{ 10 } -\frac { 5 }{ 10 } \quad =\frac { -3 }{ 10 } $
It is clear from above that X has sacrifised whereas Z has gained and Y is out of it.
X's sacrificed amount$=\frac { 3 }{ 10 } \times Rs18,000\quad =Rs5,400$
Z's gained amount$=\frac { 3 }{ 10 } \times Rs18,000\quad =Rs5,400$
Since, journal entry for chnage in ratio is 
$Gain\ \quad To\quad Sacrifise$
Hence, X is credited with $Rs5,400$ and Z has to be debited with $Rs5,400$

X, Y and Z are partners sharing profits & losses in the ratio of 5:3:2. From 1st April they decide to share profits and losses in the ratio of 2:5:3. The Partnership deed provides that in the event of any change in profit sharing ratio, the goodwill should be valued at two years' purchase of the average profits of the preceding 5 years. The profits and losses of the preceding years are:
i. Profit Rs 39,000,
ii. Profit Rs 57,000,
iii. Profit Rs 24,000,
iv. Profit Rs 27,000,
v. Loss Rs 12,000.
The necessary single adjusting entry will involve:

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. Debit Y by Rs 10,800 and Z by Rs 5,400 and Credit X by Rs 16,200.

  2. Debit Z by Rs 10,800 and Y by Rs 5,400 and Credit X by Rs 16,200.

  3. Debit X by Rs 10,800 and Z by Rs 5,400 and Credit Y by Rs 16,200.

  4. Debit Z by Rs 10,800 and X by Rs 5,400 and Credit Y by Rs 16,200.

Show answer
Correct Option: A
Explanation:

Goodwill for two-year purchase of average profit can be calculated using the formula given below:

$Goodwill=\quad Average\quad profit\times No.\quad of\quad purchase\quad year$
Substitute values in the above equation
$Goodwill=\quad \frac { Rs39,000+Rs57,000+Rs24,000+Rs27,000-Rs12,000 }{ 5 } \times 2years\quad =\frac { Rs1,35,000 }{ 5 } \times 2\quad =Rs54,000$
Now, sacrifising ratio of X, Y and Z has to be calculated using the formula given below
$Sacrifising\quad ratio=\quad Old\quad ratio-New\quad ratio$
X's sacrifising ratio$=\quad \frac { 5 }{ 10 } -\frac { 2 }{ 10 } \quad =\frac { 3 }{ 10 } $
Y's sacrifising ratio$=\quad \frac { 3 }{ 10 } -\frac { 5 }{ 10 } \quad =\frac { -2 }{ 10 } $
Z's sacrifising ratio$=\quad \frac { 2 }{ 10 } -\frac { 3 }{ 10 } \quad =\frac { -1 }{ 10 } $
As we see that Y and Z are gaining due to change in ratios but X has sacrifised
Y's gain$=Rs54,000\times \frac { 2 }{ 10 } \quad =Rs10,800$
Z's gain$=Rs54,000\times \frac { 1 }{ 10 } \quad =Rs5,400$
X's sacrifise$=Rs54,000\times \frac { 3 }{ 10 } \quad =Rs16,200$
Journal entry for adjustement 
$Gain\ \quad To\quad Sacrifise$
Substitute values in above equation
$Y's\quad capital\quad a/c\quad Dr\quad Rs10,800\ Z's\quad capital\quad a/c\quad Dr\quad Rs5,400\ \quad \quad To\quad X's\quad capital\quad a/c\quad Rs16,200$
Hence, Y is debited with $Rs10,800$ along with Z as $Rs5,400$ but X is credited with $Rs16,200$

Which of the following does not appear in the Profit & Loss Appropriation Account? 

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. Salary/Commission to a partner. 

  2. Salary/Commission to a manager. 

  3. Interest on capital of a partner. 

  4. Interest on loan of a partner.

  5. (a) & (c). 

Show answer
Correct Option: B
Explanation:

A Profit and loss Appropriation account is an account which is prepared after profit and loss account and is usually prepared by partnership firms for distribution/allocation of profit earned by the firm to partners. Salary/commission to manager is an item of Profit and loss account. Only items relating to partners will be entered in Profit and loss Appropriation like interest on capital, profit, interest on drawings, salary/commission to partners. 

Which of the following appear in the Profit & Loss Appropriation Account? 

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. Salary/Commission to a partner. 

  2. Salary/Commission to a manager. 

  3. Interest on capital of a partner. 

  4. Interest on loan of a partner. 

  5. (a) & (c). 

Show answer
Correct Option: E
Explanation:
A AND C.
A Profit and loss Appropriation account is an account which is prepared after profit and loss account and is usually prepared by partnership firms for distribution/allocation of profit earned by the firm to partners. Only items relating to partners will be entered in Profit and loss Appropriation like interest on capital, profit, interest on drawings, salary/commission to partners. 

When Profit & Loss Appropriation Account is prepared? 

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. For Proprietorship. 

  2. For Partnership firm. 

  3. Both (a) and (b). 

  4. None of the above. 

Show answer
Correct Option: B
Explanation:

Profit and loss Appropriation account is prepared for partnership firm. It is an extension of profit and loss account. It is used for allocation and distribution of Net profit among partners, reserves and dividends. It Is usually prepared after preparing Profit and loss account. 

A and B are Partners sharing profits in the ratio of 3:2 with capitals of Rs. 50,000 and Rs. 30,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of Rs. 2,500. During 2016, the profits of the year prior to calculation of interest on capital but after charging B's salary amounted to Rs. 12,500. Calculate the amount of profits to be distributed to A and B after the above effect.

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. A's Profit Rs. 4,389; B's Profit Rs. 2,926

  2. A's Profit Rs. 4,620; B's Profit Rs. 3,080

  3. A's Profit Rs. 4,000; B's Profit Rs. 3,000

  4. A's Profit Rs. 4,300; B's Profit Rs. 2,900

Show answer
Correct Option: B
Explanation:


A and B share profits in ratio 3:2

                              Profit & Loss Appropriation A/c

 Particulars (Dr.)  Amount  Particulars (Cr.) Amount 
 To interest on capitalA's capital       3,000B's capital       1,800To salary a/c (B)To profit on appropriationA's capital         4,620B's capital         3,080 4,8002,5007,700  By P&l a/c    12,500 + B's salary  2,500  15,000

Hence, A's share of proit is $Rs4,620$ whereas B's share is $Rs3,080$

Which of the following would not be found in a partnership appropriation account?

book keeping and accountancy accounting for partnership preparation of profit and loss appropriation account profit and loss appropriation account profit and loss appropriation account and distribution of profits among partners

  1. Interest on capital

  2. Interest on loan by partner to partnership

  3. Interest on drawings

  4. Salaries

Show answer
Correct Option: B
Explanation:

partnership appropriation account is to allow adjustments to be made to the net income from the profit and loss account before distribution of any residual net income is made to the partner capital accounts. The adjustments include such items as partner salaries and interest on partner capital, loans and drawings accounts.

At the time of dissolution of the firm, loan from partners relative is _________ .

book keeping and accountancy dissolution of firm accounting record at the time of dissolution procedure of settlement of accounts partnership account (dissolution of partnership)

  1. transferred to Realisation Account

  2. not transferred to Realisation Account

  3. transferred to the Partner's Capital Account

  4. Non of these

Show answer
Correct Option: A

On dissolution, all assets are transferred to realization account at ________.

book keeping and accountancy dissolution of firm accounting record at the time of dissolution procedure of settlement of accounts partnership account (dissolution of partnership)

  1. Book value

  2. Market value

  3. Cost or market value, whatever is less

  4. Replacement value

Show answer
Correct Option: A
Explanation:

All assets are transferred at book value because the main purpose to open realization account is to ascertain the profit or loss due to realization of assets and liabilities. If assets are not recorded at book value actual profit or loss can not be ascertained

When a firm is dissolved, Goodwill a/c is closed by transferring to:

book keeping and accountancy dissolution of firm accounting record at the time of dissolution procedure of settlement of accounts partnership account (dissolution of partnership)

  1. Capital account of the partners

  2. Revaluation account

  3. Realisation account

  4. Profit & loss account

Show answer
Correct Option: C
Explanation:

All the assets of the firm which can be converted into cash are transferred to Realisation Account. If goodwill is already appearing in the Balance Sheet, it is treated like any other asset, and is transferred to the Realisation Account at the value given in the Balance sheet. Following entry is passed for it:
Realisation A/c Dr. 
    To Goodwill A/c