Notes And Questions NCERT Class 12 Accountancy Chapter 2 Accounting for Partnership Basic Concepts

Please refer to Accounting for Partnership Basic Concepts Class 12 Accountancy notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Accountancy books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Accountancy Accounting for Partnership Basic Concepts Notes and Questions

“Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profit of the business carried on by all or any of them acting for all”
The partnership comes into existence by an oral or written agreement. The written document known as Part-nership Deed details the terms and conditions of the partnership.
In the absence of a partnership Deed or where it is silent, the provisions of the Indian partnership Act 1932 apply:

Financial statement of a Partnership business includes:
– Profit and Loss Account
– Profit and loss Appropriation
– Capital accounts of Partners
– Balance sheet

PROFIT AND LOSS APPROPRIATION ACCOUNT

It is an extension of the Profit and Loss Account prepared by the partnership firms to show the appropriation of profit. The divisible profit after the appropriation is transferred to partners’ capital accounts in their profit-shar-ing ratio.

Journal entries.

1. If profit and loss a/c show credit balance or Net Profit.
Profit and Loss A/c Dr
To Profit and loss appropriation A/c

2. If profit and loss a/c shows debit balance or Net loss.
Profit and loss appropriation A/c Dr
To Profit and loss a/c

3. Interest in Capital
(a). For allowing Interest on capital
Interest on capital A/c Dr
To Partners capital/ current a/c (individually)

(b). for transferring int. on capital to profit and loss appropriation a/c
Profit and loss appropriation a/c Dr
To interest in capital

4. Interest on Drawings
(a) For charging interest on drawings to partners’ capital accounts:
Partners’ Capital/Current A/Cs (individually) Dr.
To Interest on Drawings A/c
(b) For transferring interest on drawings to the Profit and Loss Appropriation Account:
Interest on Drawings A/c Dr.
To Profit and Loss Appropriation A/c

5. Partner’s Salary:
(a) For Allowing partner’s salary to partner’s capital account:
Salary to Partner A/c Dr.
To Partner’s Capital/Current A/c’s (individually)
(b) For transferring partner’s salary to Profit and Loss Appropriation Account:
Profit and Loss Appropriation A/c Dr.
To Salary to Partner’s A/c

6. Partner’s Commission:
a) For crediting commission allowed to a partner, to partners capital account:
Commission to Partner A/c Dr.
To Partner’s Capital/Current A/c’s (individually)
(b) For transferring commission allowed to partners to Profit and Loss Appropriation Account.
Profit and Loss Appropriation A/c Dr.
To Commission to Partners Capital/Current A/c

Share of Profit or Loss after appropriations:
(a) If Profit:
Profit and Loss Appropriation A/c Dr.
To Partner’s Capital/Current A/c’s (individually)
(b) If Loss:
Partner’s Capital/Current A/c (individually)
To Profit and Loss Appropriation A/c
Note: In case the firm suffers a loss, no interest on capital, salary, remuneration is to be allowed to be partners

– Charge against profits shall not be recorded in the Profit and Loss Appropriation Account, instead to be recorded in the profits and loss Account.
– Interest on loan by the partner
– Rent to the partner
– Commission to the manager

II. Interest on capital: Interest on capital = Amount of capital x Rate /100x Period

POINTS TO NOTE;
– It is an appropriation of profit, therefore to be allowed only when there is sufficient profit in the firm.
– It is to be calculated on the Opening capital of the partners.
Note: When Opening Capital is not given in the question.
It is to be calculated by using the following formula:

III. Interest in Drawings.
Drawings may be of two types:
– Drawings out of capital (permanent withdrawal)
– Drawings out of profit (temporary withdrawal)
Note: No interest shall be charged on permanent withdrawal
Interest on drawings is charged as per the partnership deed if provides for.

1. When unequal amounts are withdrawn at different dates, there are two methods for calculating interest on drawings:
a. Simple Method: Under this method, calculation of interest on drawings is done for the period, the amount has been utilized.
Interest on Drawings = Amount of drawings × Rate/100 × No. of Months/12
b. Product method: When unequal amounts are withdrawn at an unequal interval of time, the product method is also used for calculating interest on drawings. Under this method, first, we calculate the period of each drawing. After that,t each drawing is multiplied by the period to get the product.
Interest on drawings= Total of Products × Rate/100 × 1/12

2. When equal amounts are withdrawn at regular/equal intervals of time.
Interest on a drawing can be calculated on the total amount drawn, for the average of the period.
Average Period =
No. of months left after the first drawings + No. of months left after the last drawings)/2
Interest on Drawings= Total amount of drawings × Rate/ 100 × Average Period/12

3. Monthly Drawings
a. When equal amounts are withdrawn at the beginning of every month throughout the year:
Average period = (12+1)/2 = 6.5 months
Interest on Drawings = Total of drawings × Rate/100 × 6.5/12
b. when equal amounts are withdrawn at the end of every month throughout the year:
Average period = (11+0)/2 = 5.5 months
Interest on Drawings = Total of drawings × Rate/100 × 5.5/12
c. When equal amounts are withdrawn in the middle of every month throughout the year:
Average period = (11.5+0.5)/2 = 6 months
Interest on Drawings = Total of drawings × Rate/100 × 6/12

4. Quarterly Drawings:
a. When equal amounts are withdrawn at the beginning of each quarter throughout the year:
Average period = (12+3)/2 = 7.5 months
Interest on Drawings = Total of drawings × Rate/100 × 7.5/12
b. When equal amounts are withdrawn in the middle of each quarter throughout the year:
Average period = (10.5+1.5)/2 = 6 months
Interest on Drawings = Total of drawings × Rate/100 × 6/12
c. When equal amounts are withdrawn at the end of each quarter throughout the year:
Average period = (9+0)/2 = 4.5 months
Interest on Drawings = Total of drawings × Rate/100 × 4.5/12

5. When the Date of withdrawal is not specified:
Sometimes when date of the drawing is not mentioned in the question. In such a case it is assumed that the amount is withdrawn evenly throughout the year and interest on drawings will be charged for the average period which is to be assumed as 6 months.
Interest on drawings = Total of drawings × Rate/100 × 6/12

PAST ADJUSTMENTS
Sometimes after the final accounts have been prepared and the Partners Capital Accounts are closed, it is found that certain items have been omitted by mistake or have been wrongly treated. Such omissions/mis-takes are usually related to the:
* Interest in Capital
* Interest in drawings
* Salary/ Commission to partners
* Distribution of profit in the wrong ratio
Where errors have been discovered after closing the accounts, instead of altering the closed accounts, an adjustment entry for such errors or omissions is made at the beginning of the next year.
Table showing adjustments in capital Accounts 

Adjustment Journal Entry:
Gaining Partner’s Capital A/c Dr ie, B’s Capital A/C Dr
To Sacrificing Partner’s Capital A/c To A’s Capital A/C

VI. GUARANTEE OF PROFIT TO A PARTNER
Sometimes, a partner may be guaranteed a minimum amount of profit irrespective of his share in the profits of the business.
When the share of profit of the partner is less than that of guaranteed profit, the deficiency is borne by the partner or partners who have guaranteed the profit in an agreed ratio. The guarantee may be provided by one or some or all of the partners in an existing ratio or some other agreed ratio.
A partner to whom a guarantee of minimum profit is given is called a guaranteed partner.
The partner, who has given the guarantee is called guaranteeing partner.

Different Conditions Regarding Guarantee of Profits:
Guarantee by the firm to a Partner
Guarantee by One Partner to another Partner
Guarantee is given by the Partner to the Firm

Accounting Treatment of Guarantee of Profit to a Partner
On charging deficiency to guaranteeing partners
Guaranteeing partner’s Capital, A/c Dr.
To Guaranteed Partner’s Capital A/c

 Profit and loss appropriation a/c

GOODWILL

Goodwill is the value of the reputation of a firm which enables it to earn higher profits in com-parison to the normal profits earned by other firms in the same trade.

Characteristics or features of goodwill
It is an intangible asset.
It helps in earning higher profits. Its value is liable to constant fluctuations: It is valuable only when the entire business is sold
Goodwill is divided into two categories.

1. Purchased Goodwill: Purchased goodwill means goodwill for which consideration has been paid
2. Self-generated Goodwill is also called inherent goodwill. It is an internally generated goodwill that arises from a number of factors that a running business possesses due to which it is able to earn more profits in the future.

Factors Affecting the Value of Goodwill

1. Efficient management: If the business is run by experienced and efficient management, its profits will go on increasing, which results in increase in the value of goodwill.
2. Quality of products: If the firm is supplying good quality of products, then the customer will come again and again for the same and thus will create the goodwill and brand name for the same.
3. Location of business: If the business is located at a convenient or prominent place, it will attract more customers and therefore will have more goodwill.
4. The Longevity of the business: An older business is better known to its customers, therefore it is likely to have more goodwill. When a business enterprise has built up good reputation over a period of time, the number of customers will be more in comparison to the customers of new entrants. Num-ber of customers is an indicator of profit earning capacity of a business.
5. Monopolistic and other Rights: If a business enjoys monopoly market, it will have assured profits. Similarly, if it holds some special rights such as patents, trademarks, copyrights or concessions, etc., it will have more goodwill
6. Other factors:
 (i) Good industrial relations.
(ii) Favourable Government regulations
(iii) Stable political conditions
(iv) Research and development efforts
(v) Effective advertising to establish brand popularity
(vi) Popularity of product in terms of quality. Need for Valuing Goodwill: Whenever the mutual rights of the partner’s changes the party which makes a sacrifice must be compensated. This basis of compensation is goodwill so we need to calculate goodwill.

Under following circumstances, Goodwill will be valued
1. When profit sharing ratio changes
2. On admission of a partner
3. On Retirement or death of a partner
4. When amalgamation of two firms taken place
5. When partnership firm is sold. Method of valuation of goodwill: Usually, there are three methods of valuing goodwill:
1. Average profit method
(a) Simple average profit method
Formula for calculation of goodwill Goodwill = Average Profits Number of years of purchase
Number of years of purchase means for how many years the firm will earn the same amount of profits in future.
Average Profits = Total Profits/Number of years

NOTE
i. Abnormal income of a year should be deducted from the net profit of that year.
ii. Abnormal loss of a year should be added back to the net profit of that year.
iii. Income from investments should be deducted from the net profits of that year because this income is received from outside the business.
iv. Recurring expenses are to be deducted from the average profit.
(b) Weighted Average Profit Method:

 Goodwill = Weighted Average Profit No. of years of purchase.

2. Super profit method.
Super Profit are the excess of actual profit over normal profits. Where Normal profits are profits earned by similar business.

 Goodwill is calculated by the formula
Goodwill = Super ProfitNumber of years of purchase
Super Profit = Average profit – Normal profits

All Assets – (Goodwill, fictitious assets and non-trade Investment) – Outsider’s Liabilities

3. Capitalization method: Under this method, goodwill can be calculated in two ways:

Goodwill is calculated by deducting the actual capital employed in business from the capitalized value of average profits.
There will be no goodwill if the actual capital employed in the business exceeds or equals the capitalized value of the average profits.

Net Assets or Capital employed = Total assets – Outside liabilities
Goodwill = Capitalized value of average profits – Capital Employed

(b) Capitalisation of Super Profit Method: Under this method, first of all, we calculate the super profits and then we assess the capital needed for earning such super profits on the basis of the normal rate of return. Such capital is actually the amount of goodwill. Super profits are calculated in the same manner as calculated in the super profits method. Goodwill of the firm = Super Profits * 100 / Normal rate of return.

Question. As per the Companies Act 2013, the Central Government is empowered to prescribe the maximum number of partners in a firm, but the number of partners cannot be more than —
a.50
b.100
c.20
d.10

Question. A partnership Deed provides for the payment of interest on capital, but there was a loss in-stead of profits during the year 2020-21. At what rate will the interest on capital be al-lowed?
a. 6% p.a
b. 12%p.a
c. The rate specified in the partnership deed
d. No interest on capital will be allowed

Question. In the absence of Partnership deed, the profits of a firm are divided among the partners
a. In the ratio of capital
b. Equally
c. In the ratio of time devoted for the firm’s business
d. According to the managerial abilities of the partners

Question. P and Q are partners in a firm. They had advanced a loan of ₹.60, 000, contributed equally to the firm on 1st August 2020.The Partnership Deed is silent regarding the rate of interest on loan. What amount of interest on loan is payable to P, if the firm closes its books of ac-count on 31st March every year.
a. ₹.1200
b. ₹.3,600
c. ₹.1,800
d. None of these

Question. Which of the following transactions is always recorded in the partner’s Capital account ir-respective of whether the partners’ capitals are fixed or fluctuating?
a. Additional capital introduced
b. Withdrawal of Capital by a partner
c. Interest on partner’s loan
d. Both (a) & (b)

Question. Nima & Hima are partners sharing profits and losses equally. On 1st April 2020, their cap-ital accounts showed balance of Rs.4, 00,000 & 1, 00,000 respectively. Calculate the share of divisible profit of the partners if the partnership deed provided for interest on capital @ 10% p.a. and the firm earned a profit of Rs.50,000 for the year ended 31st March 2021
a.Nima ₹.40,000 & Hima ₹.10,000
b.Nima ₹,000 & Hima ₹.25,000
c.Nima Nil & Hima Nil
d. None of these

Question. Bobby and Sanjay were partners sharing profits & losses in the ratio of 5:3. On 1st April 2020, their capital accounts showed balances of ₹.3, 00,000 and ₹.2, 00,000 respectively. The Partnership Deed provided for interest on capital @10% p.a and the firm earned a profit of Rs.45, 000 for the year ended 31st March 2021. The interest on partners’ capitals to Bobby & Sanjay will be:
a. ₹.22,500 to both partners
b. ₹.27,000 & ₹.18,000 respectively
c ₹.28,125 & ₹.16,875 respectively
d. None of the above

Question. X and Y are partners in a firm having Rs.4, 00,000 & Rs.8, 00,000 respectively. The part-nership deed provides for charging interest on drawings @5% pa. X withdrew Rs.1, 00,000 for his personal use during the year 2020-21.Y withdrew Rs.1, 00,000 from his capital on 1.9,2020. The amount of interest that will be charged on partners’ drawings are
a. X-.₹.2,000 & Y-₹.4,000
b. ₹.5,000 from X &Y
c. X-₹.5,000 &Y- Nil
d. X-₹.2,500 & Y-Nil

Question. Goodwill of the firm on the basis of 2 years’ purchase of average profit of the last 3 years is ₹.25, 000. Find Average profit
a. ₹.50, 000,
b. ₹.37, 500
c. ₹.12, 500
d. None of these

Question. Interest on Capital of Partners is a
a. Charge on profit
b. Loss to the firm
c. Profit to the firm
d. None of these

Question. Goodwill is valued at the time of
a. Change in profit sharing Ratio
b. Admission of a partner
c. Retirement of a partner
d. All of the above

Question. A, B & C are partners in a firm sharing profits & losses in the ratio of 5:3:2. A guaranteed profit of ₹.20, 000 to C.Net profit for the year ending 31st March 2021, was ₹.80, 000. A’s share in the profit of the firm will be
a. ₹.36,000
b. ₹.16,000
c. ₹.38,000
d. ₹.44,000

Question. Which of the following will be shown on the credit side of Profit & Loss Appropriation account
a. Interest on Capital
b .Interest on Loan
c. Interest on drawings
d. Salary to partners

Question. X & Y are partners sharing profits and losses in the ratio of 2:1 with capitals ₹.1,00,000 and ₹.80,000 respectively. The interest on capital has been provided to them @8% instead of 10%. In the rectifying entry
a. Y will be debited by ₹.400
b. Y will be credited by ₹.400
c. Y will be debited by ₹.800
d. Y will be credited by ₹.800

Question. Capital employed of a firm is ₹.25, 00,000.Its average profit is ₹.3, 10,000. The normal rate of return in similar type of business is10%.What is the amount of super profit?
a. ₹.2, 50,000
b. ₹.60, 000
c. ₹.50, 000
d. None of these

ASSERTION –REASON-BASED QUESTIONS

Question. Assertion (A): Mohit, a partner in the firm gave a loan of ₹.2,00,000 to the firm without an agreement as to the rate of interest. At the year-end, the remaining partners agreed to allow interest on the loan of @6% p.a
Reason (R): In the absence of a Partnership deed, provisions of the Partnership Act 1932 is applicable and hence interest on loan of @6% p.a can be provided
In the context of the above two statements, which of the following is correct?
a. Both Assertion(A) and Reason (R) are true and Reason(R) is the correct explanation of Assertion(A)
b. Both Assertion(A) and Reason (R) are true and Reason(R) is not the correct explanation of Assertion(A)
c. Assertion(R) is true but the Reason(R) is false
d. Assertion(R) is false but the Reason(R) is true

Question. Assertion(A):The value of Goodwill calculated on Average profit Method and Super profit Method is not the same
Reason (R): The value of Goodwill calculated on Average profit Method and Super profit Method is not the same as the basis of valuation is different
In the context of the above two statements, which of the following is correct?
a. Both Assertion(A) and Reason (R) are true and Reason(R) is the correct explanation of Assertion(A)
b. Both Assertion(A) and Reason (R) are true and Reason(R) is not the correct explanation of Assertion(A)
c. Assertion(R) is true but the Reason(R) is false
d. Assertion(R) is false but the Reason(R) is true

Question. Assertion(A): A guarantee of minimum profit may be given to a partner
Reason (R): Minimum profit must be guaranteed by the remaining partners in equal ratio
In the context of the above two statements, which of the following is correct?
a. Both Assertion(A) and Reason (R) are true and Reason(R) is the correct explanation of Assertion(A)
b. Both Assertion(A) and Reason (R) are true and Reason(R) is not the correct explanation of Assertion(A)
c. Assertion(R) is true but the Reason(R) is false
d. Assertion(R) is false but the Reason(R) is true

Question. Assertion(A): Rent to partner is shown in Profit& Loss Appropriation Account
Reason (R): Rent to partner is a charge against profit
In the context of the above two statements, which of the following is correct?
a. Both Assertion(A) and Reason (R) are true and Reason(R) is the correct explanation of Assertion(A)
b. Both Assertion(A) and Reason (R) are true and Reason(R) is not the correct explanation of Assertion(A)
c. Assertion(R) is true but the Reason(R) is false
d. Assertion(R) is false but the Reason(R) is true

Question. Assertion(A):A partnership firm can have a maximum of 50 partners
Reason (R): Maximum limit of partners is prescribed in Indian Partnership Act,1932
In the context of above two statements, which of the following is correct?
a. Both Assertion(A) and Reason (R) are true and Reason(R) is the correct explanation of Assertion(A)
b. Both Assertion(A) and Reason (R) are true and Reason(R) is not the correct explanation of Assertion(A)
c. Assertion(R) is true but the Reason(R) is false
d. Assertion(R) is false but the Reason(R) is true

ASSERTION –REASON BASED QUESTIONS

Question. Read the following Assertion (A) and Reason(R). Choose one of the correct alternatives given below.
Assertion (A): In a specified situation, interest on the Partners’ Capital is shown in the Profit and Loss Account.
Reason(R): Interest on capital is transferred to the debit of the Profit and Loss Account if it is specified to be a charge.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation Assertion (A).
(c) Assertion (A) is true but the Reason (R) is false
(d) Assertion (A) is false but the Reason (R) is true

Question. Read the following Assertion (A) and Reason(R). Choose one of the correct alternatives given below.
Assertion (A): If drawings by a partner are on the different dates and/or amounts of draw-ings is not the same interest on drawings is calculated using the product method.
Reason (R) : Interest on drawings is charged for the period it is drawn by a partner, in case the amount of drawings and/or period for which is drawn is not uniform, average method cannot be applied to determine interest on capital.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation Assertion (A).
c) Assertion (A) is true but the Reason (R) is false
d) Assertion (A) is false but the Reason (R) is true

Question. Read the following Assertion (A) and Reason(R). Choose one of the correct alternatives given below.
Assertion (A): Adith, a partner in the firm gave a loan of ₹. 50,000 to the firm without an agreement to rate of interest. Interest on Loan by Adith is to be allowed at @6% p.a.
Reason (R): In the absence of the Partnership Deed, Provisions of the Partnership act 1932, apply. Thus interest on a loan to a Partner should be charged @6% p.a
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation for Assertion (A).
c) Assertion (A) is true but the Reason (R) is false
d) Assertion (A) is false but the Reason (R) is true

Question. Read the following Assertion (A) and Reason(R). Choose one of the correct alternatives given below.
Assertion (A): Ankur, Bhaskar and Rakesh are partners with capitals of ₹. 3, 00,000, 4, 00,000 and 5, 00,000 respectively. The partnership deed provided to allow remuneration to each partner of ₹, 50,000 p.a. and interest on capital @5% p.a. Profit for the year ended 31st March 2021 of ₹. 2, 10,000 was distributed without allowing remuneration and interest on capital. Rectifying entry for the above will be Dr. Ankur and Cr Rakesh by ₹. 5000.
Reason (R): Remuneration and Interest to Ankur, Bhaskar and Rakesh are ₹. 65000, 70,000 and 75000 respectively. Each partner was credited by ₹. 70000. As a result Ankur was ex-cess credited by 5000 and Rakesh was short credited by 5000. Thus Ankur will be debited and Rakesh will be credited by ₹. 5000.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation Assertion (A).
c) Assertion (A) is true but the Reason (R) is false
d) Assertion (A) is false but the Reason (R) is true

Question. Read the following Assertion (A) and Reason(R). Choose one of the correct alternatives given below.
Assertion (A) Sandhya, Sudheer, and Namitha are partners sharing profits in the ratio of 3:2:1, Sandhya is guaranteed a minimum profit share of ₹. 75000 p.a after appropriations. Profit for the year after all adjustments were ₹. 1, 80,000. The profit share of Sandhya and Namitha will be Rs.90000, 30000 respectively.
Reason (R): The profit share of Sudheer is ₹. 75000 since her actual share is ₹. 60000(1, 80000*2/6). Balance profit ₹, 105000 will be distributed between Sandhya and Namitha in the ratio of 3:1. Thus Sandhya will get ₹. 78750, and Namitha ₹. 26,250.
Alternatives:
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation Assertion (A).
c) Assertion (A) is true but the Reason (R) is false
d) Assertion (A) is false but the Reason (R) is true

Case studies – MCQs.

Read the hypothetical text and answer the following questions.

Arun, Varun, and Tarun were partners in firm sharing profits equally. On 1st April, 2020, their capitals stood at ₹ 2, 00,000, ₹ 1, 50,000 and ₹ 1, 00,000 respectively. As per the provisions of the Partnership Deed:
1) Arun was entitled to a salary of ₹ 2,500 p.m.
2) Partners were entitled to interest on capital @ 10% p.a.
The net profit for the year ended 31st March 2021, ₹ 1, 50,000 were distributed among the partners without providing for the above items.

Question. What is the amount of interest on capital Varun?
a) ₹ 20,000
b) ₹ 15,000
c) ₹ 10,000
d) ₹ 30,000

Question. What is the amount of distributable profit for the partners after providing salary and interest on capital to the partners?
a) ₹ 50,000 each
b) ₹ 25,000 each
c) ₹ 10,000 each
d) ₹ 15,000 each

Question. Arun’s Capital A/c will be credited with Rs…………….for giving the adjustment to the above omissions.
a) Rs 20,000
b) Rs15,000
c) Rs 25,000
d) Rs10,000

Question. Capital Account/Accounts of …………………… will be debited to give the effect of the above adjustments.
a) Varun
b) Tarun and Arun
c) Arun and Varun
d) Varun and Tarun

Read the hypothetical text and answer the following questions.

A B and C are partners in a firm. Their capitals are ₹ 30,000, ₹ 20,000 and ₹ 10,000 re-spectively. As per the partnership deed,
i) C is to be allowed remuneration of ₹ 3,000 p.a.
ii) Interest on capital @ 5% p.a.
iii) Profits should be distributed in the ratio of 2:2:1.
Ignoring the above terms, a net profit of ₹ 18,000 was distributed among the partners equally.

Question. How much interest on capital is to be credited to partner A?
a) ₹ 1,500
b) ₹ 1,000
c) ₹ 900
d) ₹ 800

Question. How much profit is to be credited to Partner B after all adjustments?
a) ₹ 2,400
b) ₹ 4,800
c) ₹ 1,000
d) ₹ 1,200

Question. What is the total profit to be credited to A, B, and C after all adjustments?
a) ₹ 12,000
b) ₹ 8,000
c) ₹ 9,000
d) ₹ 10,000

Question. What is the amount of the past adjustment entry?
a) ₹ 350
b) ₹ 450
c) ₹ 250
d) ₹ 55

Read the hypothetical text and answer the following questions.

A, B, and C are partners in a firm. Their capitals are ₹ 30,000, ₹ 20,000 and ₹ 10,000 respectively. As per the partnership deed,
i) C is to be allowed remuneration of ₹ 3,000 p.a.
ii) Interest on capital @ 5% p.a.
iii) Profits should be distributed in the ratio of 2:2:1.
Ignoring the above terms, a net profit of ₹ 18,000 was distributed among the partners equally.

Question. How much interest on capital is to be credited to partner A?
a) ₹ 1,500
b) ₹ 1,000
c) ₹ 900
d) ₹ 800

Question. How much profit is to be credited to Partner B after all adjustments?
a) ₹ 2,400
b) ₹ 4,800
c) ₹ 1,000
d) ₹ 1,200

Question. What is the total profit to be credited to A, B, and C after all adjustments?
a) ₹ 12,000
b) ₹ 8,000
c) ₹ 9,000
d) ₹ 10,000

Question. What is the amount of the past adjustment entry?
a) ₹ 350
b) ₹ 450
c) ₹ 250
d) ₹ 55

Read the hypothetical text and answer the following questions.

A, B and C are partners in a firm sharing profits and losses in the ratio of 2:2:1. Their capitals (Fixed) are ₹ 1, 00,000, ₹ 80,000, and ₹ 70,000 respectively. For the year 2018-19, interest on capital was to be credited to them @ 9% p.a. instead of 12%

Question. What was the net amount that should be credited to partner B?
a) ₹ 1,500
b) ₹ 2,400
c) ₹ 1,800
d) ₹1,200

Question. What was the net amount that should be credited to partner C?
a)₹ 1,800
b) ₹ 2,000
d) ₹ 2,100
d) ₹ 1,700

Question. What was the amount that was debited to partner B?
a) ₹ 1,500
b) ₹ 2,000
c) ₹ 3,000
d) ₹ 4,000

Question. What was the number of past adjustment entries?
a)₹ 400
b) ₹ 300
c) ₹ 600
d) ₹ 500

Read the hypothetical text and answer the following questions.

X and Y started business on 1St April 2020 with a capital of ₹ 5,00,000 each. As per the partnership Deed, both X and Y are to get a monthly salary of ₹ 10,000 each, and interest on capital is ₹ 50,000 each. Interest in drawings is as follows X: ₹ 3,000 and Y: ₹ 5,000.
During the year, the firm incurred a loss of ₹ 2,00,000.

Question. What is the amount to be transferred to the Profit and Loss Appropriation Account?
a) ₹ 5,00,000
b) ₹ 2,00,000
c) ₹ 3,00,000
d) ₹ 1,50,000

Question. What is the total amount of salary to be credited to the Partners’ capital account?
a) ₹ 1,20,000
b) ₹ 2,40,000
c) ₹ 1,80,000
d) No salary will be given

Question. What amount of loss is to be transferred to the capital account of both partners?
a) ₹ 1,92,000
b) ₹ 2,00,000
c) ₹ 1,96,000
d) ₹ 1,80,000

Question. What is the share of loss of X?
a) ₹ 1,00,000
b) ₹ 96,000
c) ₹ 98,000
d) ₹ 90,000

SHORT ANSWER TYPE QUESTIONS

Question. Gupta is a partner in a firm. He drew regularly ₹ 8,00 at the beginning of every month for the six months ending 31st March 2022. Calculate interest on drawings @15% p.a.
Answer.Interest on drawings Rs.240

Question. X and Y are partners in the firm sharing profits and losses in the ratio of 3:2 with capitals of ₹ 10,00,000 and ₹ 5,00,000 respectively. As per the partnership deed, they are to be allowed interest on capital @ 8% p.a. The net profit for the year ended 31st March 2021 before providing for interest on capital amounted to ₹ 45,000. Show the distribution of profit.
Answer.Interest on capital allowed to X Rs.30,000 and Y Rs.15,000
(Insufficient profit. Hence 45,000 is distributed among the partners in the ratio of 2:1)

Question. Aman, Babita, and Suresh are partners in a firm. Their profit-sharing ratio is 2:2:1. How-ever, Suresh is guaranteed a minimum amount of ₹ 10,000 as a share of profit every year. Any deficiency arising on that account shall be met by Babita. The profits for the two years ending 31st March 2020 and 2021 were ₹ 40,000 and ₹ 60,000 respectively. Prepare Profit and Loss Appropriation Account for the two years.
Answer.
For the year ending 31st March 2020
Aman :40,000*2/5 = 16,000
Babitha : 40,000*2/5 =16,000
Suresh : 40,000*1/5 = 8,000
Deficiency of Suresh Rs.2,000 will be bore by Babitha
For the year ending 31st march 2021
Aman :60,000*2/5 = 24,000
Babitha : 60,000*2/5 =24,000
Suresh : 60,000*1/5 = 12,000
Suresh share of profit is more than the guaranteed amount , no adjustment is needed.

Question.W, X, and Y were partners sharing profits and losses in the ratio of 2:2: 1. X was guaranteed a profit of ₹ 10,00,000. The firm earned a profit of ₹ 17,50,000 for the year ended 31st March 2020.Pass Journal entries for the year ended 31st march 2020.
Answer.Profit and loss A/C Dr 17,50,000
To profit and Loss Appropriation A/C 17,50,000
profit and Loss Appropriation A/C 17,50,000
To W’s capital A/C 5,00,000
To X’s capital A/C 10,00,000
To Y’s capital A/C 2,50,000

Question. A, B, and C are partners in a firm sharing profits and losses in the ratio of 2:3:5. Their fixed capitals were 15,00,000, 30,00,000, and 60,00,000 respectively. For the year ended 31st march 2021 interest on capital was credited to them at @12% instead of 10%. Pass neces-sary adjusting journal entry.
Answer.

Question. The goodwill of the firm is valued at 4 years purchase of average profit of five years. The profits for the last five years were:
Year Profit
2013-14 : 2,00,000
2014-15 : (3,00,000)
2015-16 : 4,50,000 ( including an abnormal gain of ₹ 50,000)
2016-17 : 3,50,000 (after charging an abnormal loss of ₹ 90,000)
2017-18 : 2,60,000
Calculate the amount of goodwill.
Answer.Goodwill Rs.8,00,000

Question. The capital of the firm of Anuj and Benu is ₹ 10,00,000 and the market rate of interest is 15%. The annual salary of the partners is ₹ 60,000 each. The profit for the last three years were ₹ 2,80,000, ₹ 3,80,000, and ₹ 4,20,000. Goodwill of the firm is to be valued on the basis of two years’ purchases of the last three years’ average super profits. Calculate the goodwill of the firm.
Answer.Goodwill Rs.1, 80,000

Question. A firm earned profits of ₹ 80,000, ₹ 1,00,000, ₹ 1,20,000 and ₹ 1,80,000 during 2010-11, 2011-12, 2012-13 and 2013-14 respectively. The firm has a capital investment of ₹5,00,000. A fair rate of return on investment is 15% pa. Calculate goodwill of the firm
based on three years’ purchase of average super profits of last four yours.
Answer.Goodwill Rs. 1,35,000

Question. A Firm’s average profits are 70,000. It includes an abnormal profit of 5,000. Capital invested in the business is 5,50,000 and the normal rate of return is 10%. Calculate goodwill at four times the super profit.
Answer.Goodwill Rs.40,000

Question. The average profit of a firm is ₹ 48,000. The total assets of the firm are ₹ 8,00,000. The value of other liabilities is ₹ 5,00,000. The average rate of return in the same business is 12%.Calculate goodwill from 22capitalization of average profits method.
Answer.Goodwill Rs.1,00,000 (capital employed = Asset-Liabilities)

LONG ANSWER TYPE QUESTIONS

Question. A and B started a partnership business on 1st April 2021. They contributed ₹ 6,00,000 and ₹ 4,00,000 respectively, as their capitals. The terms of the partnership agreement are as under:
(i) Interest on capital and drawings @ 6% per annum.
(ii) B is to get a monthly salary of ₹ 2,500.
(iii) Sharing of profit or loss will be in the ratio of their capital contribution.
The profit for the year ended 31st March 2022, before making the above appropriations was ₹ 2,07,400. The drawings of A and B were ₹ 48,000 and ₹ 40.000 respectively. Interest on drawings amounted to ₹ 1,500 for A and ₹ 1,100 for B.
Prepare profit and loss appropriation accounts and partner’s capital accounts assuming that their capitals are fluctuating.
Answer.Divisible profit Rs.1,20,000.
Capital balance : A ‘s capital Rs. 6,58,500 B’s capital Rs. 4,60,900

Question. Y and Z are partners with capitals of ₹ 25,000 and ₹ 15,000 respectively on 1st April 2020. Each partner is entitled to 9% p.a. interest on his capital. Z is entitled to a salary of ₹ 6,000 p.a. together with a commission of 6% of Net Profit remaining after deducting interest on capital and salary and after charging his commission. The profits for the year ended 31st March 2021 before making any of the above-mentioned adjustments amount to ₹ 30,800. Prepare Partner’s Capital Accounts:
(1) when capitals are fixed, and
(2) when capitals are fluctuating.
Answer.Divisible profit of Rs.20,000
When capitals are fixed: current a/c balance Y Rs.12,250( cr ) Z Rs. 18,550(cr)
When capitals are fluctuating: capital accounts Y Rs. 37,250 (cr) Z Rs.33,550(cr)

Question. The capital accounts of Alka and Archana showed a credit balance of Rs.4,00,000 and 3,00,000 respectively, after taking into account drawings and a net profit of RS.2,00,000. The drawings of the partners during the year 2018-19 were
a. Alka withdrew Rs.10,000 at the end of each quarter
b. Archana’s drawings were
31st May 2018 Rs.8,000
1st November 2018 Rs. 7,000
1st February 2019 Rs. 5,000
Calculate interest on partner’s capitals@10% p a and interest on partners’ drawings @ 6% p a for the year ended 31st March 2019.
Answer.Interest on capital: Alka Rs.34,000 Archana Rs.22,000
Interest on drawings: Alka 40,000*6/100*4.5/12 = 900/-
Archana 1,25,000*6/100*1/12 =625/-

Question. Lata and Mamata are partners with capitals of ₹3,00,000 and ₹ 2,00,000 respectively sharing profits as Lata 70% and Mamata 30%. During the year ended 31st March 2021, they earned a profit of ₹ 2,26,440 before allowing interest on the partner’s loan. The terms of the part-nership are as follows:
(i) Interest on Capital is to be allowed @ 7% p.a.
(ii) Lata is to get a salary of ₹ 2,500 per month.
(iii) Interest on Mamata’s Loan account of 80,000 for the whole year.
(iv) Interest on drawings of partners at 8% per annum. Drawings being Lata ₹36,000 and Mamata ₹ 48,000.
(v) 1/10th of the distributable profit should be transferred to General Reserve.
Prepare the Profit and Loss Appropriation Account.
Answer.Share of profit : Lata Rs.1,00,800 Mamata Rs.43,200
( interest on drawings will be calculated for an average period of 6 months.
Transfer to general reserve will be 10% of Rs.1,60,000)

Question. Ajay and Vijay are partners sharing profits and losses in the ratio of 3:2. Ajay is a nonwork-ing partner and contributes Rs.20,00,000 as his capital. Vijay is a working partner of the firm. The partnership deed provides for interest on capital of @8%. Pa and salary to the working partner @8000 per month. Profits before providing interest on capital and partner’s salary for the year ended 31st march 2021 was Rs. 80,000. Show the distribution of profit.
Answer.

Question. P and Q were partners in the firm sharing profits in the 3:1 ratio. Their respective fixed capitals were ₹ 10,00,000 and ₹ 6,00,000. The partnership deed provided interest on capital @ 12% p.a. The partnership deed further provided that interest on capital will be allowed fully even if it will result in a loss to the firm. The net profit of the firm for the year ended 31st March 2018 was ₹ 1,50,000.
Pass necessary journal entries in the books of the firm allowing interest on capital and division of profit/loss among the partners.
Answer.Net loss transferred to current Account : P Rs.31,500 Q Rs.10,500

Question. Ankur and Bobby were into business for providing software solutions in India. They were sharing profits and losses in the ratio of 3:2. They admitted Rohit for 1/5th share in profits. Rohit is guaranteed a minimum profit of Rs.2,00,000 for the year. Any deficiency in Rohit share is to be borne by Ankur and Bobby in the ratio 4:1. Losses for the year were RS.1,00,000. Pass necessary journal entries.
Answer.Ankur’s capital A/C  Dr 48,000
Bobby’s capital A/C              Dr 32,000
Rohit’s capital A/C                Dr 20,000
To profit and Loss A/C                              1,00,000
Ankur’s capital A/C               Dr 1,76,000
Bobby’s capital A/C               Dr 44,000
To Rohit’s capital A/C                               2,20,000

Question. Rohit, Raman, and Raina are partners in a firm. Their capital accounts on 1st April, 2019, stood at ₹ 2,00,000, ₹ 1,20,000 and ₹ 1,60,000 respectively. Each partner withdrew ₹ 15,000 during the financial year 2019-20.
As per the provisions of their partnership deed:
(a) Interest on capital was to be allowed @5% per annum.
(b) Interest on drawings was to be charged @4% per annum.
(c) Profits and losses were to be shared in the ratio of 5:4:1.
The net profit of ₹ 72,000 for the year ended 31st March 2020, was divided equally amongst the partners without providing for the terms of the deed.
You are required to pass a single adjustment entry to rectify the error (show workings clearly).
Answer.Raina’s capital A/C Dr 11,410
To Rohit’s capital A/C 10,150
To Ramana’s capital A/C 1,260

Question. The goodwill of the firm is valued at rs.1,35, 000 at three years purchase of the super profit. Determine the missing values.
Average profit = 3,60,000/3= Rs.1,20,000
Normal profit= ________*15/100 =?
Super profit = ?
Answer.Goodwill = super profit* no. of years purchase
1,35,000 = super profit*3
Then super profit =1,35,000/3= 45,000
Super profit = average profit-normal profit
45,000 = 1,20,000-normal profit
Then Normal profit =1,20,000-45,000 = 75,000
Normal profit = capital employed*rate/100
75,000 = capital employed *15/100
Then capital employed 75,000*100/15 =5,00,000

Question. The capitals of X, Y, AND Z as of 31st march 2021 amounted to Rs. 1,50,000, 5,50,000 and 11,00,000 respectively. Divisible profit amounting to Rs.3,00,000 for the year ended 31st March 2021 was distributed in the ratio of 4:1:1 after allowing interest on capital @10% p a. During the year each partner withdrew Rs. 50,000 per month at the beginning of each month. The partnership deed was silent as to profit sharing ratio and interest on drawings but provided for interest on capital @12 p.a.
Showing your workings, pass necessary adjusting entries to rectify the above error.
Answer.X’s capital A/C Dr 1,10,000
To Y’s capital A/C 50,000
To Z’s capital A/C 60,000