Accounting for Partnership: Basic Concepts Test 50

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Accounting for Partnership: Basic Concepts Test 50

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Weekly Quiz Competition

Question 1
1 / -0

In which of the following case Garner v. Murray rule is NOT applicable?
1. Only one partner is solvent
2. All partners are insolvent
3. When partnership deed provides a specific method to be followed in case of insolvency of a partner
Select the correct answer from the options giiven below :-

A
1 Only

B
1 & 2 only

C
3 only

D
1, 2 & 3

Solution

Garner Vs Murray rule states that only one partner being insolvent other solvent pays the loss in capital ratio.
As per this statement, all the options are not under Garner Vs Murray rule.
The first option is not applicable because in this case only one partner is solvent and there must be at least two solvent partners.
The second option is again not applicable because here partners are insolvent and there is no partner to pay the loss of insolvency.
The third option doesn't go with the rule because the firm has used its own methods for insolvency rather than using Garner vs Murray rule.
Question 2
1 / -0

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:

A
Debit Y by Rs 10,800 and Z by Rs 5,400 and Credit X by Rs 16,200.

B
Debit Z by Rs 10,800 and Y by Rs 5,400 and Credit X by Rs 16,200.

C
Debit X by Rs 10,800 and Z by Rs 5,400 and Credit Y by Rs 16,200.

D
Debit Z by Rs 10,800 and X by Rs 5,400 and Credit Y by Rs 16,200.

Solution

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 $$Rs16,200$$
Question 3
1 / -0

X, Y & Z are partners. X withdraws fixed some at the beginning of each month. Rate of interest of drawing is 10% p.a. Interest and drawing credited to Profit & Loss Appropriation A/c is Rs. 650. Calculate the monthly drawing of partners X.

A
Rs. 1,550 per month

B
Rs. 1,200 per month

C
Rs. 1,000 per month

D
Rs. 1,150 per month

Solution

Interest on drawings is the amount charged by firm from its partners when partners withdraw some amount for their personal use.
Interest on drawings can be calculated using the formula given below:
$$Interest\quad on\quad drawings=\quad Drawings\quad amount\times Rate\quad of\quad interest\times Average\quad Period$$
Given items are rate of interest as 10% p.a. and these drawings are made at beginning of every month. The interest on drawings is Rs650
Substitute values in the above equation
$$650=\quad Drawings\quad amount\times \frac { 10 }{ 100 } \times \frac { 6.5 }{ 12 } \\ \frac { 650\times 100\times 12 }{ 10\times 6.5 } =\quad Drawings\quad Amount\\ Rs12,000\quad =\quad Drawings\quad Amount$$
Drawings for the year is $$Rs12,000$$. Hence drawings per month is $$Rs1,000$$.
Question 4
1 / -0

In which of the following cases there is NOT partnership?
(I) A & B buy 100 bales of cotton agreeing to divide these between them.
(II) A & B buy 100 bales of cotton,which they agree to sell for their joint account and to share the profit or loss.
(III) A & B are joint owner of a house. They rent it out to C and divide the net rent equally.
(IV) A is a publisher. He agrees to publish at his own expense a book written by B, and to pay B half the net profits.

A
(I)

B
(III) & (IV)

C
(II), (III) & (IV)

D
(I), (II) & (IV)

Solution

Partnership will only be when there are two or more partners and they carry on a business.
In the first option A & B bought bales of cotton and divided amongst themselves. It is not a partnership because there is no business between A & B, they are buying for self consumption.
In the second option A & B bought bales of cotton and sold it for their joint account. Again it is not a partnership because they both are selling the bales to their joint account which is not a business.
The third option is a partnership because A & B together run a joint and they rent out a land to other party C and shared the profits which is a business.
In the fourth option A publishes book of B and pays off Y. It is not partnership because A & B are not partners and A alone runs his publishing company.
Question 5
1 / -0

A partner claims interest on capital _____________.

A
even if there is loss

B
if there is profit

C
if there is profit and there is an agreement to pay it

D
even if there loss and there is an agreement to pay it

Solution

Interest on capital is the amount received by partners for their invested capitals and it is not a charge against profit. It means that interest is depended upon the profit situation.
A partner can thus claim interest on capital only when it is mentioned in the agreement and firm has enough profits to provide the interest. If the interest in not mentioned in agreement or there is no agreement, partner cannot claim for interest on capital.
Question 6
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Garner v. Murray requires ____________________________________.

A
That all praters should bring in cash equal to their respective shares of the loss on realization

B
That all partners should bring in cash equal to their respective shares of the loss on realization and deficiency of insolvent partner should be borne by solvent partners in their profit sharing ratio

C
That all partners including insolvent partner should bring in cash equal to their respective share of the loss on realization and deficiency of insolvent partner should be borne by solvent partner should be borne by solvent partners in their last agreed capital ratio

D
That the solvent partners should bring in cash equal to their respective shares of the loss on realization and that the solvent partners should bear the loss arising due to insolvency of a partner in their last agreed capital ratio and

Solution

Indian partnership act 1932 is so wide that it covers almost every aspect in a partnership and issue of insolvency has been solved usinh Garner Vs Murray rule.
This rule requires that there must be at least two solvent partners to bring in the cash required to cover up the loss due to insolvency of a single partner and that loss has to be shared by solvent partners in their capital ratio since it is a type of capital loss.

Question 7

1 / -0

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?

3,000

6,000

9,000

2,000

Solution

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 appropriation X's capital a/c 3,000 Y's capital a/c 6,000	2,000 2,000 9,000	By p/l a/c By interest on drawings a/c (Y)	10,000 3,000

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

Question 8
1 / -0

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:

A
Debit Z and Credit X with Rs 5,400

B
Debit X and Credit Z with Rs 5,400

C
Debit Y and Credit X with Rs 5,400

D
Debit X and Credit Y with Rs 5,400

Solution

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
$$Gaining Partner's Capital A/c Dr.\\ \quad To\quad Sacrificing Partner's Capital A/c$$
Hence, X is credited with $$Rs5,400$$ and Z has to be debited with $$Rs5,400$$
Question 9
1 / -0

The essential elements of a partnership __________________.

A
must co-exist before a partnership can come into existence

B
may be brought in within a reasonable time of a partnership coming into existence

C
may be brought in any time either during the creation of partnership or even thereafter before a partnership can come into existence, but they must coexist within one year of a partnership coming into existence

D
none of the above

Solution

Generally when a business is set up all rules and regulations are stated before starting the working.
Hence, the essential elements of partnership like name, address, number of partners and various inforrmation regarding partnership must be presented before the inaugration of partnerrship firm.
Question 10
1 / -0

A partnership cannot be formed _______.

A
for carrying on a business

B
for carrying on a profession

C
for carrying on charitable activities

D
none of these

Solution

Partnership none other than a business run by two or more person under an agreeement. And basic requirement of every business is profit and so do a partnership firm.
The only activity which doesn't earns a business profit is charity activity. Hence, business carried on for charitable activites cannot be called a partnership as it doesn't earns the business any profit. Since, charity activities are meant for benefits of people without own benefit.

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	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

Accounting for Partnership: Basic Concepts Test 50

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Accounting for Partnership: Basic Concepts Test 50

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SHARING IS CARING

Question 1

1 Only

1 & 2 only

3 only

1, 2 & 3

Solution

Question 2

Debit Y by Rs 10,800 and Z by Rs 5,400 and Credit X by Rs 16,200.

Debit Z by Rs 10,800 and Y by Rs 5,400 and Credit X by Rs 16,200.

Debit X by Rs 10,800 and Z by Rs 5,400 and Credit Y by Rs 16,200.

Debit Z by Rs 10,800 and X by Rs 5,400 and Credit Y by Rs 16,200.

Solution

Question 3

Rs. 1,550 per month

Rs. 1,200 per month

Rs. 1,000 per month

Rs. 1,150 per month

Solution

Question 4

(I)

(III) & (IV)

(II), (III) & (IV)

(I), (II) & (IV)

Solution

Question 5

even if there is loss

if there is profit

if there is profit and there is an agreement to pay it

even if there loss and there is an agreement to pay it

Solution

Question 6

That all praters should bring in cash equal to their respective shares of the loss on realization

That all partners should bring in cash equal to their respective shares of the loss on realization and deficiency of insolvent partner should be borne by solvent partners in their profit sharing ratio

That all partners including insolvent partner should bring in cash equal to their respective share of the loss on realization and deficiency of insolvent partner should be borne by solvent partner should be borne by solvent partners in their last agreed capital ratio

That the solvent partners should bring in cash equal to their respective shares of the loss on realization and that the solvent partners should bear the loss arising due to insolvency of a partner in their last agreed capital ratio and

Solution

Question 7

3,000

6,000

9,000

2,000

Solution

Question 8

Debit Z and Credit X with Rs 5,400

Debit X and Credit Z with Rs 5,400

Debit Y and Credit X with Rs 5,400

Debit X and Credit Y with Rs 5,400

Solution

Question 9

must co-exist before a partnership can come into existence

may be brought in within a reasonable time of a partnership coming into existence

may be brought in any time either during the creation of partnership or even thereafter before a partnership can come into existence, but they must coexist within one year of a partnership coming into existence

none of the above

Solution

Question 10

for carrying on a business

for carrying on a profession

for carrying on charitable activities

none of these

Solution

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