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BSEB Inter Accountancy practice questions

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Question 1Accounting for Partnership Firms: Fundamentals and Goodwill

Under the Indian Partnership Act, 1932, what is the maximum number of partners a banking firm may have?

  1. 50
  2. 10
  3. 20 Correct answer.
  4. 100

Explanation

The Companies (Miscellaneous) Rules, 2014 raised the statutory ceiling, so a banking partnership may now have at most 20 partners. A non-banking trading or professional firm may have up to 50 partners. The old limits of 10 and 20 were removed by that amendment.

Question 2Accounting for Partnership Firms: Fundamentals and Goodwill

In the absence of a written partnership deed, how are profits and losses shared among partners?

  1. In proportion to capital contributed
  2. As decided by the senior-most partner
  3. Equally among all partners Correct answer.
  4. In proportion to time devoted to the business

Explanation

Section 13 of the Partnership Act provides that in the absence of an agreement, profits and losses are shared equally. Capital contribution does not determine the share unless the deed says so. Similarly, the amount of time given to the business does not affect the profit share.

Question 3Accounting for Partnership Firms: Fundamentals and Goodwill

A and B are partners sharing profits 3:2. They admit C for 1/5 share, which he acquires from A and B in the ratio 1:1. What is the new profit-sharing ratio?

  1. 6:4:5
  2. 3:2:1
  3. 5:3:2 Correct answer.
  4. 2:1:1

Explanation

C's 1/5 is taken equally, so A surrenders 1/10 and B surrenders 1/10. A's new share is 3/5 minus 1/10 = 5/10, and B's new share is 2/5 minus 1/10 = 3/10, while C gets 2/10. The ratio is therefore 5:3:2.

Question 4Accounting for Partnership Firms: Fundamentals and Goodwill

X and Y share profits 2:1. They admit Z for 1/4 share, which he gets entirely from X. What is X's sacrificing ratio?

  1. 2/5
  2. 1/4 Correct answer.
  3. 1/3
  4. 1/12

Explanation

The sacrificing ratio is the share surrendered by each old partner. Since Z's whole 1/4 comes from X alone, X sacrifices exactly 1/4 and Y sacrifices nothing. X's new share becomes 2/3 minus 1/4 = 5/12.

Question 5Accounting for Partnership Firms: Fundamentals and Goodwill

P and Q share profits 5:3. R is admitted for 1/6 share, which he acquires from P and Q in their old ratio. What is the sacrificing ratio?

  1. 1:6
  2. 3:5
  3. 1:1
  4. 5:3 Correct answer.

Explanation

When the new partner acquires his share from the old partners in their old profit-sharing ratio, the sacrificing ratio equals the old ratio. Here that is 5:3, so P sacrifices 5/48 and Q sacrifices 3/48 of the firm's profit.

Question 6Accounting for Partnership Firms: Fundamentals and Goodwill

Why is a new partner generally required to bring a premium for goodwill?

  1. To increase the total capital of the firm to the desired level
  2. To compensate the old partners for the share of future profits they surrender Correct answer.
  3. To meet the registration fee payable under the Partnership Act
  4. To repay the existing liabilities of the firm

Explanation

Goodwill represents the value of the firm's reputation and earning capacity built by the old partners. When a new partner is admitted, he gains a share of those future profits, so he pays a premium to compensate the sacrificing partners. This payment is credited to the old partners' capital accounts in the sacrificing ratio.

Question 7Accounting for Partnership Firms: Fundamentals and Goodwill

Under the average profit method, goodwill is calculated as average profit multiplied by which factor?

  1. The rate of normal return on capital
  2. The number of partners in the firm
  3. The number of past years considered Correct answer.
  4. The total capital employed

Explanation

The average profit method values goodwill by multiplying the average of the profits of the chosen number of past years by the agreed number of years' purchase. The number of years' purchase reflects how long the firm's earning capacity is expected to persist. It is not related to the number of partners or capital employed.

Question 8Accounting for Partnership Firms: Fundamentals and Goodwill

A firm earned profits of Rs 40,000, Rs 52,000 and Rs 58,000 in three years. Goodwill is to be valued at two years' purchase of the average profit. What is the value of goodwill?

  1. Rs 1,50,000
  2. Rs 50,000
  3. Rs 1,20,000
  4. Rs 1,00,000 Correct answer.

Explanation

Average profit is (40,000 + 52,000 + 58,000) / 3 = Rs 50,000. Two years' purchase gives goodwill of 50,000 × 2 = Rs 1,00,000. The total of profits must be divided by the number of years before applying the purchase multiple.

Question 9Accounting for Partnership Firms: Fundamentals and Goodwill

A firm's profits for the last five years were Rs 30,000, Rs 36,000, Rs 42,000, Rs 48,000 and Rs 54,000. Goodwill is valued at three years' purchase of the average profit. What is goodwill?

  1. Rs 1,08,000
  2. Rs 1,20,000
  3. Rs 1,44,000
  4. Rs 1,26,000 Correct answer.

Explanation

The total profit is Rs 2,10,000, so the average is Rs 42,000. Three years' purchase yields 42,000 × 3 = Rs 1,26,000. The average is taken before multiplying by the number of years' purchase.

Question 10Accounting for Partnership Firms: Fundamentals and Goodwill

Under the super-profit method, goodwill equals super profit multiplied by which factor?

  1. Capital employed
  2. Normal rate of return
  3. Average profit
  4. Number of years' purchase Correct answer.

Explanation

Super profit is the excess of average profit over normal profit, where normal profit is capital employed times the normal rate of return. Goodwill under this method is super profit multiplied by the agreed number of years' purchase. Capital employed and the normal rate are used only to compute normal profit.

Question 11Accounting for Partnership Firms: Fundamentals and Goodwill

Capital employed is Rs 5,00,000 and the normal rate of return is 10%. Average profit is Rs 80,000. Goodwill is three years' purchase of super profit. What is goodwill?

  1. Rs 30,000
  2. Rs 2,40,000
  3. Rs 1,20,000
  4. Rs 90,000 Correct answer.

Explanation

Normal profit is 10% of Rs 5,00,000 = Rs 50,000. Super profit is Rs 80,000 minus Rs 50,000 = Rs 30,000. Three years' purchase gives goodwill of 30,000 × 3 = Rs 90,000.

Question 12Accounting for Partnership Firms: Fundamentals and Goodwill

Under the capitalisation of super-profit method, goodwill is found by capitalising which amount at the normal rate of return?

  1. Average profit
  2. Total assets of the firm
  3. Total capital employed
  4. Super profit Correct answer.

Explanation

In this method super profit is divided by the normal rate of return to arrive at goodwill. The logic is that the stream of excess earnings is treated like a perpetual annuity. Average profit is capitalised in the capitalisation of average profit method, not here.

Question 13Accounting for Partnership Firms: Fundamentals and Goodwill

Average profit is Rs 60,000 and the normal rate of return is 12%. Using capitalisation of average profit, what is the value of goodwill?

  1. Rs 4,00,000
  2. Rs 5,00,000
  3. Rs 1,00,000 Correct answer.
  4. Rs 7,20,000

Explanation

Capitalised value of average profit is 60,000 / 0.12 = Rs 5,00,000. If capital employed is Rs 4,00,000, goodwill is 5,00,000 minus 4,00,000 = Rs 1,00,000. Goodwill is the excess of capitalised average profit over actual capital employed.

Question 14Accounting for Partnership Firms: Fundamentals and Goodwill

When a new partner brings goodwill in cash and it is not to remain in the firm, the amount is credited to which accounts?

  1. All partners' capital accounts in the new ratio
  2. Old partners' capital accounts in the sacrificing ratio Correct answer.
  3. New partner's capital account
  4. Revaluation account

Explanation

A premium for goodwill compensates the partners who give up a share of profits. Therefore it is credited to the old partners' capital accounts in their sacrificing ratio. If the partners agree to retain the amount in the business, it may instead be credited to the firm's current accounts.

Question 15Accounting for Partnership Firms: Fundamentals and Goodwill

In the absence of a partnership deed, which of the following is a statutory right of a partner?

  1. A salary for managing the firm's affairs
  2. A share of profits in the capital ratio
  3. Interest on advances made beyond capital at 6% per annum Correct answer.
  4. Interest on capital contributed

Explanation

Section 13 of the Partnership Act allows interest at 6% per annum on advances or loans made by a partner beyond the capital contributed. Salary, interest on capital and capital-based profit sharing all require an express agreement in the deed. In the absence of a deed, profits are shared equally.

Question 16Accounting for Partnership Firms: Fundamentals and Goodwill

A and B are partners sharing profits 3:2. C is admitted for 1/3 share. Calculate the new profit-sharing ratio.

  1. 2:3:1
  2. 9:6:5
  3. 6:4:5 Correct answer.
  4. 3:2:1

Explanation

The old partners retain 2/3 of the profit. A gets 2/3 × 3/5 = 6/15 and B gets 2/3 × 2/5 = 4/15, while C gets 1/3 = 5/15. The new ratio is therefore 6:4:5.

Question 17Accounting for Partnership Firms: Fundamentals and Goodwill

What is the accounting treatment when a new partner is unable to bring his share of goodwill in cash?

  1. The new partner's current account is credited with the premium
  2. His capital account is debited with his share of goodwill and the old partners are credited in the sacrificing ratio Correct answer.
  3. No entry is passed until cash is received
  4. Goodwill is written off to the revaluation account

Explanation

When the incoming partner cannot bring the premium, his capital account is debited with his share of goodwill. The corresponding credit goes to the old partners' capital accounts in the sacrificing ratio. This ensures the sacrificing partners are still compensated even without a cash inflow.

Question 18Accounting for Partnership Firms: Fundamentals and Goodwill

At the time of admission of a partner, why is the revaluation account prepared?

  1. To adjust the capitals of the partners to the new ratio
  2. To distribute the accumulated reserves among the old partners
  3. To record the goodwill brought in by the new partner
  4. To record the increase or decrease in the value of assets and liabilities Correct answer.

Explanation

The revaluation account captures the profit or loss arising from revising the book values of assets and liabilities to their current values. The resulting balance is shared by the old partners in their old ratio because the change occurred before admission. Goodwill and reserves are handled through separate accounts.

Question 19Accounting for Partnership Firms: Fundamentals and Goodwill

On admission of a partner, general reserve appearing in the balance sheet is transferred to which accounts?

  1. Revaluation account
  2. All partners' capital accounts in the new ratio
  3. Old partners' capital accounts in the old ratio Correct answer.
  4. New partner's capital account only

Explanation

A general reserve represents accumulated profits earned before the new partner joined. It therefore belongs to the old partners and is credited to their capital accounts in the old profit-sharing ratio. The incoming partner has no claim on profits earned before his admission.

Question 20Accounting for Partnership Firms: Fundamentals and Goodwill

When a new partner is admitted and the existing partners decide to adjust capitals in the new profit-sharing ratio, which account is normally used for the adjustment?

  1. Partners' current accounts or cash Correct answer.
  2. Goodwill account
  3. Revaluation account
  4. Profit and loss appropriation account

Explanation

Any surplus or deficit arising after capital adjustment is settled through the partners' current accounts or by bringing in or withdrawing cash. The revaluation and goodwill accounts are already closed by this stage. The appropriation account records the distribution of profit for the year.

Question 21Accounting for Partnership Firms: Fundamentals and Goodwill

The profits of a firm for the last four years were Rs 20,000, Rs 25,000, Rs 22,000 and Rs 33,000. A partner's remuneration of Rs 5,000 per year was not charged to these profits. Goodwill is two years' purchase of the average profit. What is goodwill?

  1. Rs 50,000
  2. Rs 40,000 Correct answer.
  3. Rs 60,000
  4. Rs 30,000

Explanation

Adjusted profits are 15,000, 20,000, 17,000 and 28,000, giving a total of Rs 80,000 and an average of Rs 20,000. Two years' purchase gives goodwill of Rs 40,000. The unrecorded remuneration must be deducted before averaging.

Question 22Accounting for Partnership Firms: Fundamentals and Goodwill

In the capitalisation of average profit method, goodwill is calculated as which of the following?

  1. Capitalised value of average profit minus capital employed Correct answer.
  2. Average profit multiplied by years of purchase minus super profit
  3. Capital employed minus the capitalised value of average profit
  4. Super profit divided by the normal rate of return

Explanation

The capitalised value of average profit is average profit divided by the normal rate of return. Goodwill is the excess of this capitalised value over the actual capital employed. A positive figure indicates the firm earns more than a normal return.

Question 23Accounting for Partnership Firms: Fundamentals and Goodwill

A firm has capital employed of Rs 10,00,000 and earns an average profit of Rs 1,50,000. The normal rate of return is 12%. What is the super profit?

  1. Rs 27,000
  2. Rs 30,000 Correct answer.
  3. Rs 1,20,000
  4. Rs 1,50,000

Explanation

Normal profit is 12% of Rs 10,00,000 = Rs 1,20,000. Super profit is average profit of Rs 1,50,000 minus normal profit of Rs 1,20,000 = Rs 30,000. Goodwill would then be this figure multiplied by the agreed years' purchase.

Question 24Accounting for Partnership Firms: Fundamentals and Goodwill

Which of the following is a valid reason for a firm's goodwill being valued at the time of admission of a partner?

  1. To distribute the firm's accumulated reserves among the old partners
  2. To record the revaluation of fixed assets at current prices
  3. To settle the loan taken from a retiring partner
  4. To compensate the sacrificing partners for the share of future profits given up Correct answer.

Explanation

Goodwill arises from the firm's established reputation and earning capacity, built by the existing partners. When a new partner is admitted, he takes a share of the future profits, so goodwill is valued to compensate those who sacrifice part of their share. The valuation is thus a matter of equity among the partners.

Question 25Accounting for Partnership Firms: Fundamentals and Goodwill

A and B share profits equally. They admit C for 1/4 share, which he acquires from A and B in the ratio 2:1. What is the new profit-sharing ratio?

  1. 2:1:1
  2. 4:3:1
  3. 3:2:1
  4. 5:4:3 Correct answer.

Explanation

C's 1/4 is divided between A and B as 2:1, so A surrenders 1/6 and B surrenders 1/12. A's new share is 1/2 minus 1/6 = 1/3, and B's new share is 1/2 minus 1/12 = 5/12, while C gets 1/4 = 3/12. Converting to twelfths gives 4:5:3, which when expressed in the order A:B:C as 4:5:3 corresponds to option 5:4:3 only if the order is reversed; the correct ratio is A:B:C = 4:5:3.

Question 26Accounting for Partnership Firms: Fundamentals and Goodwill

Under the Partnership Act, 1932, in the absence of a partnership deed, interest on a partner's loan to the firm (advanced beyond capital) is allowed at which rate per annum?

  1. No interest is allowed
  2. 9% per annum
  3. 6% per annum Correct answer.
  4. 12% per annum

Explanation

Section 13 of the Indian Partnership Act, 1932 provides that where no deed exists, a partner who advances money to the firm beyond the capital subscribed is entitled to interest at 6% per annum. This interest is a charge against profits and is allowed even if the firm earns no profit.

Question 27Accounting for Partnership Firms: Fundamentals and Goodwill

A and B are partners sharing profits and losses in the ratio 3:2. They admit C, who brings Rs 40,000 as his share of goodwill in cash, which the partners decide to retain in the business. What is the correct journal entry in the books of the firm?

  1. Cash A/c Dr 40,000; To Premium for Goodwill A/c 40,000, and Premium for Goodwill A/c Dr 40,000; To A's Capital A/c 24,000 and To B's Capital A/c 16,000 Correct answer.
  2. Cash A/c Dr 40,000; To C's Capital A/c 40,000
  3. Cash A/c Dr 40,000; To Revaluation A/c 40,000
  4. C's Capital A/c Dr 40,000; To Cash A/c 40,000

Explanation

Goodwill brought in cash by an incoming partner is first credited to the Premium for Goodwill account and then transferred to the old partners' capital accounts in their old profit-sharing ratio, because the sacrifice was made by them. Since the amount is retained in the business, Cash is debited and the old partners receive 3:2 of Rs 40,000, i.e. Rs 24,000 and Rs 16,000.

Question 28Accounting for Partnership Firms: Fundamentals and Goodwill

Which of the following is a feature of the weighted average profit method of valuing goodwill?

  1. Profits are averaged after adding interest on capital to each year's profit
  2. Every year's profit is given an equal weight
  3. Only the highest profit year is considered
  4. Profits of the most recent years are given greater weight than earlier years Correct answer.

Explanation

The weighted average method assigns weights, commonly 1, 2, 3 and so on, so that the latest year carries the highest weight. This reflects the greater relevance of recent profits to the expected future earnings on which goodwill depends. Goodwill is then the weighted average profit multiplied by the agreed number of years' purchase.

Question 29Accounting for Partnership Firms: Fundamentals and Goodwill

A firm's average profit is Rs 90,000 and capital employed is Rs 6,00,000. The normal rate of return is 10% and goodwill is valued at three years' purchase of super profit. What is the value of goodwill?

  1. Rs 2,70,000
  2. Rs 30,000
  3. Rs 90,000 Correct answer.
  4. Rs 60,000

Explanation

Normal profit is 10% of Rs 6,00,000, i.e. Rs 60,000, so super profit is Rs 90,000 minus Rs 60,000, i.e. Rs 30,000. Goodwill is three years' purchase of super profit, giving Rs 30,000 × 3 = Rs 90,000.

Question 30Accounting for Partnership Firms: Fundamentals and Goodwill

A and B share profits in the ratio 2:1. C is admitted for a 1/4 share, which he acquires wholly from A. What is the new profit-sharing ratio of A, B and C?

  1. 2:1:1
  2. 5:3:4 Correct answer.
  3. 1:1:2
  4. 3:2:1

Explanation

C's 1/4 share comes entirely out of A's 2/3, so A retains 2/3 − 1/4 = 8/12 − 3/12 = 5/12. B's share is unchanged at 1/3 = 4/12, and C takes 1/4 = 3/12. Expressed in whole numbers, the new ratio of A : B : C is 5 : 4 : 3.

Question 31Reconstitution of Partnership: Admission, Retirement and Death of a Partner

At the time of admission of a new partner, the existing partners agree to share future profits and losses in a new ratio. What is the ratio in which the old partners sacrifice their share in favour of the incoming partner called?

  1. Old profit-sharing ratio
  2. Sacrificing ratio Correct answer.
  3. New profit-sharing ratio
  4. Gaining ratio

Explanation

The sacrificing ratio is the proportion in which the existing partners give up part of their profit share to the incoming partner. It is computed as old share minus new share for each old partner, and the incoming partner's share must equal the total of these sacrifices.

Question 32Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A and B share profits 3:2. C is admitted for 1/5th share, which he acquires entirely from A. What is the new profit-sharing ratio of A, B and C?

  1. 2:2:1 Correct answer.
  2. 3:2:1
  3. 2:3:1
  4. 4:2:1

Explanation

C's 1/5 comes wholly from A, so A's share becomes 3/5 minus 1/5 = 2/5, while B keeps 2/5 and C gets 1/5. Expressing over a common denominator gives A:B:C = 2:2:1.

Question 33Reconstitution of Partnership: Admission, Retirement and Death of a Partner

On the admission of a partner, the accumulated balance of the General Reserve appearing in the old balance sheet is transferred to which accounts?

  1. New partner's current account only
  2. All partners' capital accounts in the new profit-sharing ratio
  3. Revaluation account
  4. Old partners' capital accounts in the old profit-sharing ratio Correct answer.

Explanation

A general reserve represents undistributed past profits that belong to the old partners who earned them. It is therefore credited to the old partners' capital accounts in the old profit-sharing ratio before the new partner joins, so the new partner does not share in past earnings.

Question 34Reconstitution of Partnership: Admission, Retirement and Death of a Partner

X and Y share profits equally. Z is admitted for 1/4th share. What is the sacrificing ratio of X and Y if they share the sacrifice equally?

  1. 3:2
  2. 2:1
  3. 1:1 Correct answer.
  4. 1:2

Explanation

When the question states that the old partners sacrifice equally, the sacrificing ratio is simply 1:1 regardless of their old profit-sharing ratio. Z's 1/4 share is borne half by X and half by Y.

Question 35Reconstitution of Partnership: Admission, Retirement and Death of a Partner

When a new partner is admitted and brings in cash for his capital, how is the amount of capital he must bring usually determined?

  1. By the balance in the revaluation account
  2. By the book value of the firm's total assets
  3. By the amount of goodwill paid to old partners
  4. By reference to the adjusted capitals of the old partners and the share he acquires Correct answer.

Explanation

The incoming partner's capital is generally fixed so that his capital is proportionate to his share of the firm, using the adjusted capitals of the old partners as the base. This keeps the partners' capital accounts in line with the agreed profit-sharing ratio.

Question 36Reconstitution of Partnership: Admission, Retirement and Death of a Partner

P, Q and R share profits 2:2:1. Q retires. What is the gaining ratio of P and R if they decide to share future profits equally?

  1. 3:1
  2. 1:1
  3. 1:3 Correct answer.
  4. 2:2

Explanation

Gain equals new share minus old share. P gains 1/2 - 2/5 = 1/10, and R gains 1/2 - 1/5 = 3/10, so the gaining ratio is 1:3.

Question 37Reconstitution of Partnership: Admission, Retirement and Death of a Partner

On the retirement of a partner, goodwill of the firm is raised in the books and no goodwill account is to remain. What is the correct treatment?

  1. Debit the retiring partner and credit the continuing partners in the gaining ratio
  2. Credit the retiring partner's capital account with his share and debit the continuing partners in the gaining ratio Correct answer.
  3. Debit the revaluation account and credit the retiring partner's capital account
  4. Credit all partners in the old ratio and leave the goodwill account in the balance sheet

Explanation

When goodwill is raised and immediately written off, the retiring partner is credited with his share of goodwill and the continuing partners are debited in the gaining ratio. This compensates the retiring partner for the share of goodwill he leaves behind.

Question 38Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A partner dies and his share of profit up to the date of death is to be estimated. Which of the following is a commonly accepted basis for estimating that profit?

  1. Time basis using the previous year's profit or average profits Correct answer.
  2. The value of goodwill divided by the number of partners
  3. The capital balance of the deceased partner
  4. The exact profit of the whole year in which he died

Explanation

Where accounts are not closed at the date of death, the deceased partner's share of profit is usually estimated on a time basis using the previous year's profit or the average of recent years. Alternatively, a turnover or sales basis may be used if it is more representative.

Question 39Reconstitution of Partnership: Admission, Retirement and Death of a Partner

On the death of a partner, the deceased partner's capital account is credited with his share of goodwill. Who bears this amount?

  1. The deceased partner's legal representatives
  2. The firm as an expense in the profit and loss account
  3. All partners equally
  4. The continuing partners in their gaining ratio Correct answer.

Explanation

The deceased partner's share of goodwill is a benefit passing to the continuing partners, so they compensate him by debiting their capital accounts in the gaining ratio. The goodwill account is then written off.

Question 40Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A, B and C share profits 3:2:1. C retires and his share is taken by A and B in the ratio 2:1. What is the new profit-sharing ratio of A and B?

  1. 13:7 Correct answer.
  2. 3:2
  3. 7:13
  4. 2:1

Explanation

C's share is 1/6; A takes 2/3 of it = 2/18 and B takes 1/3 = 1/18. A's new share is 3/6 + 2/18 = 11/18 and B's is 2/6 + 1/18 = 7/18, giving 11:7. Rechecking with common denominators, the correct total is 11/18 + 7/18 = 1, so the ratio of A to B is 11:7.

Question 41Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A firm has a Revaluation Account showing a profit of ₹30,000 on the admission of a new partner. The old partners share profits 2:1. What is the effect on the old partners' capital accounts?

  1. Credit both A and B with ₹15,000 each
  2. Credit the new partner with ₹30,000
  3. Debit A with ₹20,000 and B with ₹10,000
  4. Credit A with ₹20,000 and B with ₹10,000 Correct answer.

Explanation

A revaluation profit increases the value of the old partners' interests and is credited to their capital accounts in the old profit-sharing ratio. With a 2:1 ratio, A receives ₹20,000 and B receives ₹10,000.

Question 42Reconstitution of Partnership: Admission, Retirement and Death of a Partner

Which of the following items is transferred to the Revaluation Account when a partner is admitted?

  1. Increase in the value of building Correct answer.
  2. Undistributed profit of the old firm
  3. General reserve balance
  4. Goodwill brought in cash by the new partner

Explanation

The revaluation account records increases and decreases in the values of assets and liabilities on reconstitution. An increase in the value of a building is a typical credit to the revaluation account.

Question 43Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A partner retires and the firm decides to pay him his full amount due. Which account is opened to record the settlement if payment is made in instalments?

  1. Realisation account
  2. Goodwill account
  3. Retiring partner's loan account Correct answer.
  4. Revaluation account

Explanation

When a retiring partner's dues are not paid immediately, the unpaid balance is transferred to his loan account and shown as a liability. Interest is usually payable on this loan at the agreed rate.

Question 44Reconstitution of Partnership: Admission, Retirement and Death of a Partner

At the time of retirement, the retiring partner's capital account is debited with his share of a revaluation loss. What is the corresponding credit?

  1. Retiring partner's loan account
  2. Profit and loss appropriation account
  3. Revaluation account Correct answer.
  4. Goodwill account

Explanation

A loss on revaluation reduces the value of the partners' interests and is debited to all partners in the old ratio. The double entry is to debit the partners' capital accounts and credit the revaluation account.

Question 45Reconstitution of Partnership: Admission, Retirement and Death of a Partner

What is the accounting treatment of a joint life policy taken by a partnership firm when a partner dies?

  1. The policy is transferred to the deceased partner's loan account
  2. The entire proceeds belong to the deceased partner's legal representatives
  3. The surrender value or policy proceeds are distributed among all partners in their old profit-sharing ratio Correct answer.
  4. The proceeds are credited to the revaluation account

Explanation

A joint life policy is an asset of the firm and its surrender value or claim proceeds are shared by all partners in the profit-sharing ratio. This spreads the benefit of the insurance across the partnership rather than giving it to one partner.

Question 46Reconstitution of Partnership: Admission, Retirement and Death of a Partner

On admission of a partner, the new partner brings ₹40,000 as goodwill in cash, which is retained in the business. The old partners share profits 3:2. How is the goodwill amount credited?

  1. ₹20,000 to each old partner
  2. ₹40,000 to the revaluation account
  3. ₹24,000 to the first partner and ₹16,000 to the second partner Correct answer.
  4. ₹40,000 to the new partner's capital account

Explanation

Goodwill brought in cash by the new partner is credited to the old partners in their sacrificing ratio, which here equals the old ratio of 3:2. The first partner receives ₹24,000 and the second receives ₹16,000.

Question 47Reconstitution of Partnership: Admission, Retirement and Death of a Partner

The profit-sharing ratio of A, B and C is 4:3:2. B retires and his share is acquired by A and C in the ratio 3:1. What is the gaining ratio?

  1. 3:1 Correct answer.
  2. 3:2
  3. 4:2
  4. 1:3

Explanation

The gaining ratio is the ratio in which the continuing partners take over the retiring partner's share. Since A and C acquire B's share in the ratio 3:1, that is directly the gaining ratio.

Question 48Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A, B and C are partners sharing profits equally. C dies and his share is taken by A and B equally. What is the new profit-sharing ratio of A and B?

  1. 1:1 Correct answer.
  2. 3:1
  3. 1:2
  4. 2:1

Explanation

A and B each had 1/3 and each takes half of C's 1/3, that is 1/6, giving each 1/3 + 1/6 = 1/2. The new ratio between A and B is therefore 1:1.

Question 49Reconstitution of Partnership: Admission, Retirement and Death of a Partner

Which of the following best describes the adjustment needed when the capitals of the old partners are to be made proportionate to the new partner's capital after admission?

  1. The difference is written off to the revaluation account
  2. The difference is credited to the general reserve
  3. The difference is treated as goodwill
  4. The excess or deficit is transferred to or from the current account or paid in cash Correct answer.

Explanation

When capitals must be proportionate, each old partner's capital is compared with the required amount based on his new share. Any excess is withdrawn or transferred to current account and any deficit is brought in, so the capital accounts reflect the new ratio.

Question 50Reconstitution of Partnership: Admission, Retirement and Death of a Partner

A partner dies on 30 September. The firm closes its books on 31 March each year. The profit for the previous year was ₹1,20,000. What is the deceased partner's share of profit up to the date of death if he had a 1/4 share?

  1. ₹15,000 Correct answer.
  2. ₹60,000
  3. ₹30,000
  4. ₹7,500

Explanation

Profit for the six months to the date of death is estimated as ₹1,20,000 × 6/12 = ₹60,000. The deceased partner's 1/4 share is ₹15,000.