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 sharingprofit 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

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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
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 remotetribal areas of Odisha. They were interested in the
development of the tribal community by providing good education and
health. On 31st March, 2013, after makingadjustments 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

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 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 sharingprofits 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 :
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% insteadof 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 theircapital 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

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 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.

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 normalbusiness profits (average of previsous
years profits).
ii. Purchased Goodwill is acquired by makingextra 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:

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 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 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 earnthe profit. In such cases
sleeping partner's liabilityusually does not extend beyond the
amount of their capital investment.
8.
Basis Capital Account Current Account

Capital Accounts is
Prepared in all Current Account is
Existence Prepared only when capitals
conditions whether
are fixed
the

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 Capitals are fixed or
Fluctuating

Capital Account records Current Account records

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permanently withdrawn interest on drawings, salary,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

9. The value of the business will be

more if it is locatedin 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.
By Net
To Interest on Capital 1,60,000
Profit
A 15,000

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

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 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

6,720
necessary adjustment entry passed)

Working Note

Adjustment table
A B C Total
Particulars
(Rs) (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 thereis enough profits to cover it up
otherwise not as well as it should be clearedto all that partners
shall not be entitled any interest on capital,unless specifically
given or writtenin 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/herinvestment in the firm foregoing the alternative risk
free/risky investment available with even higher return. Interest on capital is

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 necessary to partners because they always not share the profit
on the basis of capital contribution ratio rather sometime equallyeven
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 = ClosingCapital + 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 remotetribal area, by providing employment opportunities.
ii. Equity, even thoughcapital 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

19,200 per P&L 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

1,200
from A
Add: Deficiency recover
800 10,000
from B

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
900 750 600
the average basis
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
L. Dr. Cr.
Particulars
F. (Rs) (Rs)
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 C's Capital A/c Dr. 22

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)

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

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

5,000 1,65,000
Dinkar

Dinkar 1,20,000

Less : Deficieny 5,000 1,15,000

8,32,000 8,32,000

Working Note:

Rs
Guarantee to Bhaskar =
2,45,000

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

Deficiency borne by Dinkar = Rs 5,000

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