PARTNERSHIP ACCOUNTING IMPORTANT QUESTIONS with ANSWERS

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QUESTION
1

Define
Partnership.

Answer:

A 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.

Answer: Sacrificing 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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