CBSE Test Paper 04

Ch-2 Fundamentals of partnership and Goodwill

1. Match the following

1.Average Profit Internally generated goodwill
2.Purchase Goodwill Acquired by making payment
3.Generated Goodwill Normal business profits
a. 1.(a) , 2. (b), 3. (c)
b. 1.(c) , 2. (b), 3. (a)
c. 1.(b) , 2. (c), 3. (a)
d. 1.(b) , 2. (b), 3. (a)
2. What is the status of partnership from an accounting viewpoint
a. a separate business entity.
b. None of these
c. Both a separate business entity and Not separate from the owners
d. Not separate from the owners.
3. Indian Partnership Act year is
a. 1932
b. 1935
c. 1933
d. 1934
4. A and B are partners sharing profit and losses in the ratio of 3:5. On 1st July, 2012 A
and B advanced loan to the business of Rs. 40,000 and Rs.20,000 respectively at the
agreed @ 5% p.a. Calculate Interest on loan. When accounting books are closed on
31st December every year and partnership deed allows interest on loan to the
partners.
a. A= Rs.1,000 and B= Rs. 500
b. A= ₹1,500 and B=₹500
c. A= ₹1,000 and B= ₹1500
d. A= ₹2,000 and B= ₹500
5. When a partner withdraws Rs.4000 at the beginning of each quarter, the interest on
his drawings @ 6% p.a. will be Rs.:
a. 480

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 b. 240
c. 600
d. 960

6. Give any two Features/Characteristics/Elements of the partnership.

7. Is a sleeping partner liable for the acts of other partners?

8. Give any two Differences between Capital Account and Current Account.

9. How does the factor location affect the goodwill of a firm?

10. What is purchased goodwill?

11. A, B and C entered into a partnership on 1st April 2006 to share profits & losses in the
ratio of 4:3:3. A, however, personally guaranteed that C's share of profit after charging
interest on Capital @ 5% p.a. would not be less than Rs. 40,000 in any year. The
Capital contributions were: A, Rs. 3,00,000; B, Rs. 2,00,000 and C, Rs. 1,50,000. The
profit for the year ended on 31st March, '2007 amounted to Rs. 1,60,000. show the
Profit & Loss Appropriation Account.

12. A, B and C were partners. They started business in one of the remote tribal areas of
Odisha. They were interested in the development of the tribal community by
providing good education and health. On 31st March, 2013, after making adjustments
for profits and drawings their capitals were A Rs 4,00,000, B Rs 3,00,000 and C Rs
2,00,000. The drawings of the partners were A Rs 4,000 per month, B Rs 3,000 per
month and C Rs 2,000 per month. The profit of the firm for the year ended 31st March,
2013 was Rs 6,00,000. Subsequently it was found that the interest on capital @ 6% per
annum due, had been omitted.
Showing your working notes clearly, pass necessary adjustment entry for the above.
Also, identify any two values highlighted in the above question.

13. A and B were partners sharing profits and losses in the ratio of 3 : 2, They admit C for
1/5th share and guarantee that his share of profits will not be less than Rs 10,000.
Total profits of the firm were Rs 40,000. Calculate share of profits for each partner.

14. A, B and C are partners in a firm. The Partnership Deed provides for the following :

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 a. Interest on Capital @ 10% p.a. and on Drawings at 12% p.a. (on the average basis).
b. Remaining profit will be distributed according to the Capital Ratio.

Capital Balance on Jan. 1, 2008 stood in the books Rs 1,00,000, Rs 80,000 and Rs 50,000
respectively. Net Profit for the year 2008 was Rs 62,000. Partners’ Drawings were Rs
18,000, Rs 15,000 and Rs 12.000 respectively.
At the end of the year, it was found that an Interest on Capital @ 12% p.a. was allowed
instead of 10% and Interest on Drawings were charged @ 10% instead of 12%.
Divisible profit was distributed according to the Capital Ratio.
You are required to show the correct distribution of profits and the Adjustment Entry
to rectify the above errors.

15. Anand, Bhaskar and Dinkar are partners in a firm. On 1st April, 2011, the balance in
their capital accounts stood at Rs 10,00,000, Rs 8,00,000 and Rs 6,00,000 respectively.
They shared profits in the proportion of 5 : 4 : 3 respectively. Partners are entitled to
interest on capital @ 10% per annum and salary to Bhaskar @ Rs 4,000 per month and
a commission of Rs 16,000 per quarter to Dinkar as per the provisions of the
partnership deed.
Anand’s share of profit (excluding interest on capital) is guaranteed at not less than Rs
1,90,000 p.a. Bhaskar’s share of profit (including interest on capital but excluding
salary) is guaranteed at not less than Rs 2,45,000 p.a. Any deficiency arising on that
account shall be met by Dinkar. The profits of the firm for the year ended 31st March,
2012 amounted to Rs 8,32,000. Prepare ‘Profit and Loss Appropriation Account’ for the
year ended 31st March, 2012.

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 CBSE Test Paper 04
Ch-2 Fundamentals of partnership and Goodwill

Answer

1. b. 1.(c) , 2. (b), 3. (a), Explanation:

i. Average Profit means normal business profits (average of previsous years
profits).
ii. Purchased Goodwill is acquired by making extra payment on purchase of a
running business.
iii. Self Generated Goodwill is internally generated goodwill which is not shown
in the books of accounts.

2. a. a separate business entity. Explanation: There are two main views. One is from
the accounting point of view, according to that, status of partnership is different
i.e.. it has a separate business entity. From the point of view of law, it has no
separate business entity. Partners and firm are one.

3. a. 1932, Explanation: In India, Partnership Act, 1932 is followed by all the

partnership firms. Specially in the absence of partnership deed, all provisions
of Partnership Act, 1932 will be applicable.

4. a. A= Rs.1,000 and B= Rs. 500, Explanation: Calculation of Interest on loan:

Interest on A’s Loan = 40,000 × 5/100 × 6/12 = 1,000
Interest on B’s Loan = 20,000 × 5/100 × 6/12 = 500

5. c. 600, Explanation: When drawing is made in the beginning of each quarter and
per annum word is given with the rate of interest, in such a case, first step is to
find out the average period and then interest. In this question time period is 7.5
months and total drawings are 16,000 (4,000 × 4 quarters) Hence, Interest on
drawings will be = 16,000 ×7.5/12 × 6/100 = Rs. 600.
6. Two or more persons: There should be at least two or more persons to start a
partnership business.
Sharing of profits: Partnership is the relation between persons who have agreed to
share the profits. All profits of partnership business should be distributed among the
partners.
7. Yes, a sleeping partner is also liable for the acts of other partners. By virtue of the

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 partnership agreement, every partner is liable for the acts of other partners and other
partners are also liable by the acts of a particular partner. But in case of Limited
Liability Partnership sleeping partners are commonly protected from unlimited
personal liability for any debts or obligations of the partnership business because
they don't actively participate in the business activities and their purpose is only to
earn the profit. In such cases sleeping partner's liability usually does not extend
beyond the amount of their capital investment.
8.

Basis Capital Account Current Account

Capital Accounts is Prepared

in all conditions whether the Current Account is Prepared only
Existence
Capitals are fixed or when capitals are fixed
Fluctuating

Capital Account records the Current Account records the

amount invested and transactions such as drawings,
Transactions amount permanently interest on capital, interest on
withdrawn by a partner in a drawings, salary, commission, profit
firm. or loss, etc.

9. The value of the business will be more if it is located in a convenient or prominent

locality. A location is said to be favourable when customers can easily approach the
business.
10. Purchased goodwill refer to the money paid to purchase the asset or business over
the total value of the assets and liabilities.

11. Profit and Loss Appropriation Account

for the year ending on 31st March 2007

Particulars Amount Particulars Amount

Rs. Rs.

To Interest on Capital By Net Profit 1,60,000

A 15,000

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 B 10,000

C 7,500 32,500

To Profit transferred to Capital

A (51,000 - 1,750) 49,250

B (1,27,500 x 3/10) 38,250

C (38,250 + 1,750) 40,000 1,27,500

1,60,000 1,60,000

12. Adjusting Journal Entry

Amount Amount
Date Particulars L/F
(Dr) (Cr)

C's Capital A/c Dr 6,720

To A's Capital A/c(Being the necessary

6,720
adjustment entry passed)

Working Note

Adjustment table

B Total
Particulars A (Rs) C (Rs)
(Rs) (Rs)

Amount to be Credited
I. 14,880 8,160 1,440 24,480
Interest on Capital @ 6%

II. Amount to be Debited

Rs 24,480 in Profit Sharing Ratio i.e.,

8,160 8,160 8,160 24,480
1:1:1

6,720 6,720
III. Net Effect (I - II) ------- --------
(Cr) (Dr)

Calculation of Opening Capitals and Interest:Interest on capital is allowable only if

there is enough profits to cover it up otherwise not as well as it should be cleared to

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 all that partners shall not be entitled any interest on capital, unless specifically given
or written in the partnership agreement. Interest on capital introduced by the
partners is calculated on the basis of time of contribution and it should also be
considered the introduction of fresh capital by any partner as well as drawings made
by the partners. It is important to note here that, the interest on capital provided to a
partner is a compensation given to him for his/her investment in the firm foregoing
the alternative risk free/risky investment available with even higher return. Interest
on capital is necessary to partners because they always not share the profit on the
basis of capital contribution ratio rather sometime equally even through the capital
contribution is unequal. So, it equalizes the weight to maintain a parity the interest on
capital plays a vital role among partners.
Opening Capital = Closing Capital + Drawings - Share of Profits
Accordingly, opening capital of
A = 4,00,000 + (4,000 12) - (6,00,000 ) = Rs 2,48,000
B = 3,00,000 + (3,000 12) - (6,00,000 ) = Rs 1,36,000
C = 2,00,000 + (2,000 12) - (6,00,000 ) = Rs 24,000
Interest on Capital = A = 2,48,000 = Rs 14,880
B = 1,36,000 = Rs 8,160
C = 24,000 = Rs 1,440 Values highlighted in the above question are:
i. Development of remote tribal area, by providing employment opportunities.
ii. Equity, even though capital contributions are unequal, still the partners are
sharing profits equally, thereby promoting harmony and brotherhood.

13. Profit and Loss Appropriation Account

Particulars (Rs) Particulars (Rs)

To A's Capital A/c By Net Profit as per P&L

19,200 40,000
A/c

Less : Deficiency borne (1,200) 18,000

To B's Capital A/c

12,800

Less : Deficiency borne (800) 12,000

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 To C's Capital A/c 8,000

Add: Deficiency recover from A 1,200

Add: Deficiency recover from B 800 10,000

40,000 40,000

14. Statement showing the adjustment of wrong distribution of profits

A(Rs) B(Rs) C(Rs)

Profits already distributed as follows:

12,000 9,600 6,000
Interest on Capital @ 12%

Add : Share of Profit : Rs 36,650 distributed in the ratio of 10

15,935 12,748 7,967
:8:5

27,935 22,348 13,967

Less : Interest on Drawings @ 10% on the average basis 900 750 600

Present position after wrong distribution 27,035 21,598 13,367

Distribution of profit as per agreement : Interest on Capital

10,000 8,000 5,000
@ 10%

Add : Share of profit : Rs 41,700 distributed in the ratio of 10

18,131 14,504 9,065
:8:5

28,131 22,504 14,605

Less : Interest on Drawings @ 12% 1,080 900 720

Correct position 27,051 21,604 13,345

Final Adjustments (+) 16 (+) 6 (-) 22

Rectifying Journal entry

Particulars L. F. Dr. (Rs) Cr. (Rs)

C's Capital A/c Dr. 22

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 To A's Capital A/c 16

To B's Capital A/c 6

(Being agreement entry passed for rectifying errors.)

15. Profit and Loss Appropriation Account

Particulars (Rs) Particulars (Rs)

To Interest on Capital By Net profit 8,32,000

Anand 1,00,000

Bhaskar 80,000

Dinkar 60,000 2,40,000

To Salary (Bhaskar) 48,000

To Commission (Dinkar) 64,000

To Profit transferred to :

Anand 2,00,000

Bhaskar 1,60,000

Add : Deficiency borne by Dinkar 5,000 1,65,000

Dinkar 1,20,000

Less : Deficieny 5,000 1,15,000

8,32,000 8,32,000

Working Note:

Guarantee to Bhaskar = Rs 2,45,000

Amount Received (Interest on Capital + Profit) = Rs 2.40.000

Deficiency borne by Dinkar = Rs 5,000

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