Tag: accounting for partnership

Questions Related to accounting for partnership

The right to indemnity is lost on ___________________.

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. the dissolution of the partnership

  2. the death of the partner

  3. the retirement of the partner

  4. neither (a) nor (b) nor (c)

Show answer
Correct Option: D

P and Q are two partners sharing profit and loss equally. P draws Rs. 2,000 at the end of each month for 6 months whereas Q draws Rs. 1,000 at the beginning of each month for six months. Assuming that interest on drawing is to be charged at 6% p.a. Interest on drawing of Q will be.

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. Rs.105

  2. Rs.100

  3. Rs.110

  4. Rs.101

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Correct Option: A

P and Q are two partners sharing profit and loss equally. P draws Rs. 2000 at the end of each month for 6 months whereas Q draws Rs. 1,000 at the beginning of each month for six months. Assuming that interest on drawing is to be charged at 6% p.a. Interest on drawing of P will be __________.

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. Rs. 150

  2. Rs. 80

  3. Rs. 86

  4. Rs. 90

Show answer
Correct Option: A

Bill and Monica are partners sharing profits and losses in the ratio of $3:2$ having the capital of Rs. $80,000$ and Rs. $50,000$ respectively. They are entitled to $9\%$ p.a. interest on capital before distributing the profits. During the year firm earned Rs. $7,800$ before allowing any interest on capital. Profits apportioned among Bill and Monica is?

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. $4,680$ and $3,120$

  2. $4,800$ and $3,000$

  3. $5,000$ and $2,800$

  4. None of these

Show answer
Correct Option: D

State with reasons whether the following statement is true or false:
Loss of stock is said to be abnormal loss when such loss is due to inherent characteristics of the commodities.

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. True

  2. False

Show answer
Correct Option: B

Interest on capital is given from profit and loss appropriation account to a partner __________________.

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. Only if allowed as per agreement

  2. Only if there are any profits in P&L appropriation account

  3. Both a & b

  4. None of the above

Show answer
Correct Option: C
Explanation:

Interest on capital is that amount which any partner receives at the end of financial year beacuse of his capital being invested in business. Moreover, interest on capital is not charge on profits, that is, interest is based on the profits earned by business in that year.

Interest on capital is given to partners only when it is mentioned in the partnership deed or agreement and if the company has earned any profit in the respective year.
If there is any loss in the business, interest on capital will not be provided to partners.

X and Y are partners sharing profit and loss at the ratio of 1/3 and 2/3 respectively. The net income for this accounting period is Rs 10,000 while salary of X = Rs 2,000, interest on Y's drawings = Rs 3,000 and interest on X's capital = Rs 2,000. What is the X's share of profit or loss after the adjustment for partner's salary, interest on capital and interest on drawings?

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. 3,000

  2. 6,000

  3. 9,000

  4. 2,000

Show answer
Correct Option: A
Explanation:


X and Y share profit & loss in a 1:2 ratio. Salary of X is Rs2,000 along with interest on his capital of Rs2,000. Y has to pay interest on drawings of Rs3,000 and firm earned Rs10,000 ass profits.

                                     Profit & Loss Appropriation a/c

 Particulars (Dr.)  Amount  Particulars (Cr.)  Amount
To Interest on capital a/c (X)To salary a/c (X)To profit on appropriationX's capital a/c      3,000Y's capital a/c      6,000  2,0002,0009,000  By p/l a/cBy interest on drawings a/c (Y) 10,0003,000

Thus, X's share of profit after all appropriations is $Rs3,000$


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.