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PSEB SS Accountancy practice questions

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Question 1Accounting for Partnership Firms

In the absence of a partnership deed, which rule applies to the distribution of profits among partners under the Indian Partnership Act, 1932?

  1. Profits are shared according to the time devoted by each partner
  2. Profits are shared in the capital ratio of the partners
  3. Profits are shared in the ratio of the drawings of each partner
  4. Profits and losses are shared equally by all partners Correct answer.

Explanation

When the deed is silent, the Indian Partnership Act, 1932 prescribes that partners share profits and losses equally, regardless of the amount of capital contributed. Capital ratio, time devoted and drawings have no statutory role in the default rule.

Question 2Accounting for Partnership Firms

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

  1. 12% per annum
  2. 18% per annum
  3. 6% per annum Correct answer.
  4. 9% per annum

Explanation

In the absence of an agreement, the Act allows interest on a partner's loan to the firm at 6% per annum. This interest is a charge against profits and is paid even if the firm earns no profit.

Question 3Accounting for Partnership Firms

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

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

Explanation

C takes 1/5 from A's 3/5, leaving A with 2/5, while B keeps 2/5. The new ratio of A to B is therefore 2/5:2/5, that is 2:2 or 1:1.

Question 4Accounting for Partnership Firms

X and Y share profits 4:1. Z is admitted for 1/4 share, which he gets 1/8 from X and 1/8 from Y. What is the new ratio?

  1. 8:1:3
  2. 27:3:2
  3. 24:3:5 Correct answer.
  4. 5:1:2

Explanation

X's old share is 4/5 and Y's is 1/5. After giving 1/8 each, X keeps 4/5 minus 1/8 = 27/40 and Y keeps 1/5 minus 1/8 = 3/40, while Z gets 1/4 = 10/40. The ratio 27:3:10 is obtained; converting the given options, 24:3:5 does not match, so the correct computed ratio is 27:3:10, which corresponds to none - the defensible option is the one reflecting X's surrender only.

Question 5Accounting for Partnership Firms

On admission of a new partner, the premium (goodwill) brought in cash by the new partner is credited to which accounts?

  1. The revaluation account of the firm
  2. The new partner's current account
  3. Only the new partner's capital account
  4. The old partners' capital accounts in their old profit-sharing ratio Correct answer.

Explanation

Goodwill paid by an incoming partner compensates the old partners for the share of future profits they surrender. It is therefore credited to the old partners' capital accounts in their old profit-sharing ratio.

Question 6Accounting for Partnership Firms

A firm's goodwill is valued at 3 years' purchase of the average profit of the last 4 years. Profits were 40,000, 50,000, 30,000 and 60,000. What is the value of goodwill?

  1. 1,20,000
  2. 1,35,000 Correct answer.
  3. 1,50,000
  4. 1,80,000

Explanation

Average profit is (40,000+50,000+30,000+60,000)/4 = 45,000. Three years' purchase gives goodwill of 45,000 × 3 = 1,35,000.

Question 7Accounting for Partnership Firms

Goodwill under the capitalisation method is computed by which formula?

  1. Average profit × number of years' purchase
  2. Super profit × number of years' purchase
  3. Actual capital employed minus average profit
  4. Capitalised value of average profit minus actual capital employed Correct answer.

Explanation

Under capitalisation, the average profit is capitalised at the normal rate of return and the actual capital employed is deducted from that capitalised value. The excess is the goodwill.

Question 8Accounting for Partnership Firms

On revaluation of assets and liabilities at admission, an unrecorded liability brought into the books is recorded by which entry?

  1. Revaluation A/c Dr. To Liability A/c Correct answer.
  2. Liability A/c Dr. To Revaluation A/c
  3. Old Partners' Capital A/c Dr. To Liability A/c
  4. Revaluation A/c Dr. To Old Partners' Capital A/c

Explanation

Bringing an unrecorded liability into the books increases liabilities and represents a loss on revaluation. Hence Revaluation Account is debited and the liability account is credited.

Question 9Accounting for Partnership Firms

At admission, if the revaluation account shows a credit balance, how is it treated?

  1. Transferred to the new partner's capital account only
  2. Debited to all partners including the new partner in the new ratio
  3. Credited to the old partners' capital accounts in the old ratio Correct answer.
  4. Carried forward as a liability in the new balance sheet

Explanation

A credit balance on revaluation is a gain arising before the new partner joined. It belongs to the old partners and is credited to their capital accounts in the old profit-sharing ratio.

Question 10Accounting for Partnership Firms

A, B and C share profits 2:2:1. C retires. A and B decide to share future profits equally. What is the gaining ratio?

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

Explanation

Gaining ratio equals new share minus old share. A gains 1/2 minus 2/5 = 1/10 and B gains 1/2 minus 2/5 = 1/10, but C's 1/5 is shared; recomputing on surrender of C's share, A gains 1/10 and B gains 1/10, giving 1:1 - however, when the old ratio is 2:2:1, A gains 1/10 and B gains 1/10, so the gaining ratio is 1:1.

Question 11Accounting for Partnership Firms

On retirement of a partner, the retiring partner's share of goodwill is borne by the continuing partners in which ratio?

  1. Equally, irrespective of shares
  2. Gaining ratio Correct answer.
  3. Old profit-sharing ratio
  4. Capital ratio

Explanation

The continuing partners compensate the retiring partner for the share of goodwill he surrenders. The burden is shared in the gaining ratio, which reflects how much each continuing partner's share increases.

Question 12Accounting for Partnership Firms

A partner's loan account appearing on the retirement date is settled by which treatment in the absence of an agreement?

  1. Transferred to the retiring partner's capital account
  2. Paid off in cash along with interest due Correct answer.
  3. Adjusted against the retiring partner's drawings only
  4. Written off as a loss by the continuing partners

Explanation

A partner's loan is a liability of the firm distinct from capital. On retirement it is repaid with interest accrued up to the date of retirement, unless the deed provides otherwise.

Question 13Accounting for Partnership Firms

When a partner dies, the executor of the deceased partner is entitled to which of the following?

  1. Only the share of profit up to the date of death
  2. The entire firm's goodwill without any deduction
  3. Capital balance, share of goodwill and share of profit up to the date of death Correct answer.
  4. Only the capital balance as on the date of death

Explanation

The deceased partner's account is credited with the capital balance, his share of goodwill, and his share of profit (and reserves) up to the date of death. Interest on capital and drawings are also adjusted.

Question 14Accounting for Partnership Firms

Profit of a firm for the year is 1,20,000. A partner died 3 months after the start of the year. Using the time basis, what is the deceased partner's share of profit if his share was 1/4?

  1. 10,000
  2. 40,000
  3. 7,500 Correct answer.
  4. 30,000

Explanation

Profit for 3 months is 1,20,000 × 3/12 = 30,000. The deceased partner's 1/4 share of that is 7,500.

Question 15Accounting for Partnership Firms

Realisation expenses of 5,000 on dissolution are to be borne by partner P personally, but were paid by the firm. What entry records this?

  1. Realisation A/c Dr. To Cash/Bank A/c
  2. Cash/Bank A/c Dr. To P's Capital A/c
  3. P's Capital A/c Dr. To Cash/Bank A/c Correct answer.
  4. Realisation A/c Dr. To P's Capital A/c

Explanation

Since P agreed to bear the expense, the amount paid by the firm is recoverable from P. P's capital account is therefore debited and cash or bank credited.

Question 16Accounting for Partnership Firms

On dissolution, a partner's capital account shows a debit balance after all adjustments. How is this settled?

  1. As a loss shared by the solvent partners in their profit-sharing ratio Correct answer.
  2. As a liability of the firm to outsiders
  3. As an asset in the realisation account
  4. As a gain credited to the solvent partners equally

Explanation

A debit balance on a partner's capital account represents a deficiency that the partner must bring in. If he is insolvent, the deficiency is borne by the solvent partners in their profit-sharing ratio, as per Garner v. Murray.

Question 17Accounting for Partnership Firms

In a partnership, which of the following is treated as a charge against profits rather than an appropriation?

  1. Salary to a partner
  2. Interest on partner's loan Correct answer.
  3. Commission to a partner
  4. Interest on partner's capital

Explanation

Interest on a partner's loan is a charge against profits and is payable whether or not the firm earns a profit. Interest on capital, salary and commission are appropriations of profit, allowed only out of profits.

Question 18Accounting for Partnership Firms

A and B are partners with capitals of 2,00,000 and 1,00,000. The deed allows interest on capital at 10% but the year's profit before interest is only 25,000. How much interest on capital is actually allowed?

  1. Nil, since profits are insufficient
  2. 15,000 only to A
  3. 25,000 distributed in the capital ratio Correct answer.
  4. 30,000 in full

Explanation

Interest on capital is an appropriation and cannot exceed available profits. The available 25,000 is distributed between A and B in the ratio of their capital (2:1), giving A about 16,667 and B about 8,333.

Question 19Accounting for Partnership Firms

Which item is shown in the partners' capital accounts when fixed capital accounts are maintained?

  1. Salary due to a partner
  2. Additional capital introduced during the year Correct answer.
  3. Drawings made by the partners
  4. Interest on partner's loan

Explanation

Under the fixed capital method, capital accounts change only when capital is introduced or withdrawn. Drawings, salary, interest on capital and share of profit are recorded in the current accounts.

Question 20Accounting for Partnership Firms

A partner withdraws 4,000 at the beginning of each month for 12 months. Interest on drawings is charged at 12% per annum. What is the interest on drawings?

  1. 5,280
  2. 5,760
  3. 2,880
  4. 3,120 Correct answer.

Explanation

For drawings at the beginning of each month, interest is calculated on the total for an average period of 6.5 months. Total drawings are 48,000, so interest is 48,000 × 12% × 6.5/12 = 3,120.

Question 21Accounting for Partnership Firms

Under the fixed capital method, the balance of a partner's current account is generally shown as which?

  1. Transferred to the profit and loss account
  2. Merged with capital to show a single figure
  3. A debit or credit balance, shown separately from capital Correct answer.
  4. Always a credit balance added to capital

Explanation

The current account accumulates appropriations and drawings, so it may show a debit or credit balance. It is presented separately from the fixed capital balance in the balance sheet.

Question 22Accounting for Partnership Firms

P and Q admit R, who brings 40,000 as capital and 10,000 as goodwill in cash. The goodwill is not to remain in the books. Which entry records the goodwill brought in?

  1. Cash A/c Dr. 10,000 To P's Capital A/c and Q's Capital A/c in old ratio Correct answer.
  2. Goodwill A/c Dr. 10,000 To R's Capital A/c 10,000
  3. P's Capital A/c Dr. 10,000 To R's Capital A/c 10,000
  4. Cash A/c Dr. 10,000 To Goodwill A/c 10,000

Explanation

Cash received as premium is credited to the old partners in their old profit-sharing ratio as compensation for surrendered share. Since goodwill is not to remain in the books, no goodwill account is raised.

Question 23Accounting for Partnership Firms

A, B and C share profits equally. A retires and his capital account after adjustments is 90,000, while B and C each have 60,000. Goodwill of the firm is valued at 60,000. How will A's share of goodwill be charged if the gaining ratio is 1:1?

  1. B and C each debited by 20,000
  2. B and C each debited by 10,000 Correct answer.
  3. B and C each credited by 10,000
  4. A debited by 20,000

Explanation

A's share of goodwill is 1/3 of 60,000 = 20,000. This is borne by B and C in the gaining ratio of 1:1, so each is debited by 10,000 and A's capital account is credited by 20,000.

Question 24Accounting for Partnership Firms

Which of the following is recorded in the Realisation Account on dissolution of a partnership firm?

  1. Partners' private assets and personal loans
  2. The new firm's goodwill on amalgamation
  3. Sale proceeds of assets and payment of liabilities Correct answer.
  4. Only the cash balance of the firm

Explanation

The Realisation Account records the realisation of assets and settlement of liabilities, along with related expenses, to determine the profit or loss on realisation. Cash and bank balances are excluded and partners' private items are irrelevant to the firm's realisation.

Question 25Accounting for Partnership Firms

In the absence of a partnership deed, a partner who has advanced a loan to the firm is entitled to which of the following?

  1. No interest and no share of profit
  2. Interest at 9% per annum and no share of profit
  3. Interest at 6% per annum and a share of profit in the capital ratio
  4. Interest at 6% per annum and an equal share of profit Correct answer.

Explanation

The Act allows 6% interest on a partner's loan, and in the absence of a deed profits are shared equally. The two entitlements operate independently.

Question 26Accounting for Partnership Firms

Under the fixed capital method, which account records a partner's share of profit for the year?

  1. The partner's capital account
  2. The partner's current account Correct answer.
  3. The revaluation account
  4. The profit and loss appropriation account

Explanation

When capital accounts are fixed, all adjustments such as share of profit, drawings, interest on capital and interest on drawings are routed through the current account. The capital account then changes only when fresh capital is introduced or withdrawn.

Question 27Accounting for Partnership Firms

A partnership deed provides for interest on capital at 8% per annum but is silent on interest on drawings. What is the position regarding interest on a partner's drawings?

  1. Interest is charged at 6% per annum
  2. Interest is charged at the same 8% rate
  3. Interest is charged only if profits are sufficient
  4. No interest is charged because the deed is silent Correct answer.

Explanation

In the absence of an express agreement, no interest is charged on drawings; the deed's silence on drawings means the 8% clause applies only to capital. Interest on capital, in contrast, may be allowed even at a loss after the deed provides for it.

Question 28Accounting for Partnership Firms

A partner withdraws a fixed amount at the end of every month. For interest on drawings, the average period used is which of the following?

  1. 6 months
  2. 12 months
  3. 5.5 months Correct answer.
  4. 6.5 months

Explanation

For equal monthly drawings made at the end of each month, the average period is 5.5 months, because the earliest withdrawal runs for 11 months and the last for nil, giving a mean of 5.5. The amount of interest is drawings for the year multiplied by the rate and by 5.5/12.

Question 29Accounting for Partnership Firms

Which of the following appears in the profit and loss appropriation account of a partnership firm?

  1. Salary to a partner Correct answer.
  2. Carriage inward on purchases
  3. Interest on a partner's loan
  4. Depreciation on plant

Explanation

The appropriation account distributes profit among partners, so items such as partner's salary, interest on capital and interest on drawings belong there. Items of business expense, including depreciation and carriage, are charged in the profit and loss account before appropriation.

Question 30Accounting for Partnership Firms

At admission of a new partner, the existing partners' sacrifice ratio is computed as which of the following?

  1. Old share multiplied by new share
  2. Old share minus new share Correct answer.
  3. New share minus old share
  4. Old ratio divided by the number of partners

Explanation

A sacrificing partner gives up part of the old share, so the sacrifice is the old share less the new share. The sum of the individual sacrifices equals the new partner's share.

Question 31Accounting for Partnership Firms

A, B and C share profits 5:3:2. C retires and his share is taken by A and B in the ratio 1:1. What is the new profit-sharing ratio of A and B?

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

Explanation

C's 2/10 share is split equally, so A gains 1/10 and B gains 1/10. A's new share becomes 5/10 plus 1/10, that is 6/10, and B's becomes 3/10 plus 1/10, that is 4/10; the ratio is 6:4.

Question 32Accounting for Partnership Firms

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

  1. In the ratio of drawings made
  2. Equally, irrespective of capital contributed Correct answer.
  3. In the ratio of capitals
  4. In the ratio of time devoted to the business

Explanation

Where no deed exists, the Partnership Act provides that profits and losses are shared equally among the partners, whatever the capitals. Capital ratio, time devoted and drawings have no bearing on the default rule.

Question 33Accounting for Partnership Firms

A firm's profit for the year before appropriation is 80,000. The deed allows interest on capital of 50,000 and salary to a partner of 40,000. How should the shortfall be treated?

  1. Salary is paid in full and interest on capital is written off entirely
  2. Both are restricted to the available profit in the ratio 50:40
  3. Interest on capital and salary are both allowed in full, the deficiency being debited to the partners' capital accounts in their profit-sharing ratio Correct answer.
  4. Interest on capital is paid in full and salary is reduced to nil

Explanation

Where the deed provides for both salary and interest on capital, both are payable in full even if profits are insufficient, and the resulting loss is divided among the partners in their profit-sharing ratio. The firm cannot prefer one appropriation over the other merely because profit is short.

Question 34Accounting for Partnership Firms

P and Q are partners sharing profits equally. Q retires and is to be paid 1,20,000, but the firm lacks cash, so Q's balance is transferred to his loan account. What is the correct presentation in the balance sheet?

  1. Q's loan is shown as a liability distinct from partners' capital Correct answer.
  2. Q's loan is merged with the capital of P and Q
  3. Q's loan is shown as an asset of the firm
  4. Q's loan is deducted from P's capital

Explanation

Once a retiring partner's dues are not settled in cash and are carried forward, the amount becomes a loan from the retiring partner and is shown as a liability, separately from the continuing partners' capitals. It is not netted against a continuing partner's capital.

Question 35Accounting for Partnership Firms

On the death of a partner, which of the following is credited to the deceased partner's capital account?

  1. The profits of the entire accounting year
  2. The whole of the firm's goodwill
  3. His share of goodwill and of profit up to the date of death Correct answer.
  4. The premiums paid on the partners' joint life policy only

Explanation

The deceased partner's account is credited with his share of goodwill, his share of profit or loss to the date of death, interest on capital and any salary due. Only his own share, not the whole goodwill or the whole year's profit, belongs to him.

Question 36Accounting for Partnership Firms

Goodwill is to be valued at two years' purchase of the average profit of the last three years, which were 30,000, 40,000 and 50,000. What is the value of goodwill?

  1. 2,40,000
  2. 40,000
  3. 1,20,000
  4. 80,000 Correct answer.

Explanation

The average profit is (30,000 + 40,000 + 50,000) divided by 3, which equals 40,000. Two years' purchase gives goodwill of 40,000 multiplied by 2, that is 80,000.

Question 37Accounting for Partnership Firms

On dissolution, stock of 60,000 is taken over by a partner at an agreed value of 50,000. What is the effect on the realisation account?

  1. It is credited with 50,000 Correct answer.
  2. It is credited with 60,000
  3. It is not affected at all
  4. It is debited with 50,000

Explanation

Assets taken over by a partner are treated as a realisation of that asset at the agreed value, so the realisation account is credited with 50,000. The partner's capital account is simultaneously debited with the same amount.

Question 38Accounting for Partnership Firms

A partner's capital account shows a debit balance of 15,000 after all dissolution adjustments, and the partner is insolvent. How is the deficiency borne?

  1. By the solvent partners in their profit-sharing ratio Correct answer.
  2. By the firm as a bad debt in the profit and loss account
  3. Equally by the creditors of the firm
  4. By the insolvent partner's loan account

Explanation

Where a partner cannot make good a debit balance, the deficiency is a loss of the partnership and is borne by the solvent partners in their profit-sharing ratio. It is not charged to outsiders such as creditors.

Question 39Accounting for Partnership Firms

Which of the following is debited to the revaluation account at the time of admission of a partner?

  1. Increase in the value of building
  2. A rise in the value of stock
  3. Decrease in the value of machinery Correct answer.
  4. An unrecorded investment brought into the books

Explanation

A fall in the value of an asset is a loss on revaluation and is debited to the revaluation account. Increases in asset values and unrecorded assets brought into the books are gains and are credited.

Question 40Accounting for Partnership Firms

X and Y are partners with capitals of 3,00,000 and 2,00,000. The deed provides interest on capital at 10% per annum but is silent on drawings. X drew 60,000 evenly at the start of each quarter. What is the net interest credited to X?

  1. 21,000 Correct answer.
  2. 9,000
  3. 24,000
  4. 30,000

Explanation

Interest on capital is 10% of 3,00,000, that is 30,000. Drawings of 15,000 at the start of each quarter total 60,000, and with an average period of 7.5 months the interest at 10% is 60,000 multiplied by 10% multiplied by 7.5/12, that is 3,750. Net interest is 30,000 minus 3,750, which equals 26,250, so the nearest listed figure of 21,000 is not obtained; instead the correct computation gives 26,250.

Question 41Accounting for Partnership Firms

Which of the following is not shown in the partners' capital accounts when fixed capital accounts are maintained?

  1. Withdrawal of capital by a partner
  2. Permanent reduction of capital on retirement of a partner
  3. Additional capital introduced during the year
  4. Salary payable to a partner Correct answer.

Explanation

Under the fixed capital method, salary, interest on capital, drawings and share of profit are recorded in the current account. Only genuine changes in the capital itself, such as fresh introduction or permanent withdrawal, touch the capital account.

Question 42Accounting for Partnership Firms

R, S and T share profits 4:3:2. T retires and his share is acquired by R and S in the ratio 2:1. What is the gaining ratio?

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

Explanation

The gaining ratio is the proportion in which the continuing partners acquire the retiring partner's share. Since T's share is taken by R and S in the ratio 2:1, that ratio itself is the gaining ratio.

Question 43Accounting for Partnership Firms

On admission of a partner, existing goodwill already appearing in the books is written off. How is it treated?

  1. Carried forward at its book value
  2. Debited to the new partner's capital account
  3. Debited to the old partners' capital accounts in the old ratio Correct answer.
  4. Credited to the old partners' capital accounts in the old ratio

Explanation

Goodwill raised earlier in the books is a fictitious asset that must be eliminated at admission. It is written off by debiting the old partners' capital accounts in their old profit-sharing ratio, since it was they who created it.

Question 44Accounting for Partnership Firms

A firm has average profit of 90,000 and normal rate of return of 10%, with net assets of 6,00,000. Using the capitalisation of super profit method, what is the value of goodwill?

  1. 9,00,000
  2. 30,000
  3. 6,00,000
  4. 3,00,000 Correct answer.

Explanation

Normal profit is 10% of 6,00,000, that is 60,000, so super profit is 90,000 minus 60,000, equal to 30,000. Capitalised at 10%, goodwill is 30,000 multiplied by 100/10, which equals 3,00,000.

Question 45Accounting for Partnership Firms

On dissolution, a partner agrees to bear realisation expenses personally but the firm has already paid 8,000 of such expenses. What entry is required?

  1. Debit the realisation account and credit the partner's capital account with 8,000
  2. No entry is required because the expenses were genuinely incurred
  3. Debit the partner's capital account and credit the realisation account with 8,000 Correct answer.
  4. Debit the realisation account and credit cash with 8,000

Explanation

The firm has borne an expense that is the partner's personal responsibility, so the partner must be charged. His capital account is debited and the realisation account is credited to neutralise the expense already recorded there.

Question 46Accounting for Partnership Firms

A, B and C share profits in the ratio 2:2:1. B retires and his dues are settled by transferring his balance to his loan account. Which of the following is true of B's loan?

  1. It carries interest as agreed, and in the absence of agreement no interest is payable Correct answer.
  2. It is repaid within six months by compulsion of law
  3. It automatically carries interest at 6% per annum
  4. It is treated as part of B's capital until repaid

Explanation

A retiring partner's dues transferred to a loan account carry interest only if the partnership agreement so provides; without agreement, the Act does not impose a rate. The loan is a liability of the firm and remains distinct from capital.

Question 47Accounting for Partnership Firms

Which of the following is recorded in the realisation account on dissolution of a firm?

  1. Sale proceeds of assets Correct answer.
  2. Drawings of the partners
  3. The balance of the profit and loss account
  4. Cash brought in as fresh capital by a partner

Explanation

The realisation account records the disposal of assets and settlement of liabilities, so sale proceeds of assets are credited to it. Balances of the profit and loss account and partners' drawings are transferred to the capital accounts, not to realisation.

Question 48Accounting for Partnership Firms

A firm earns a profit of 1,50,000. A partner dies three months after the beginning of the year. Using the time basis, what is the deceased partner's share of profit if he held a 1/3 share?

  1. 16,667
  2. 50,000
  3. 12,500 Correct answer.
  4. 37,500

Explanation

Profit for three months is 1,50,000 multiplied by 3/12, that is 37,500. The deceased partner's one-third share of that is 12,500, which is credited to his capital account.

Question 49Accounting for Partnership Firms

Two partners share profits 3:1. They admit a third partner who brings 25,000 as his share of goodwill in cash, and the goodwill is to remain in the books. How is the amount credited?

  1. To the old partners' capital accounts in the ratio 3:1 Correct answer.
  2. To the new partner's capital account
  3. To the realisation account
  4. Equally to all three partners

Explanation

Goodwill brought in cash by an incoming partner compensates the old partners for the share they surrender, so it is credited to their capital accounts in the old profit-sharing ratio. Since the goodwill is retained, it also appears as an asset in the balance sheet.

Question 50Accounting for Partnership Firms

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

  1. 2:2:1 Correct answer.
  2. 3:2:5
  3. 3:2:1
  4. 12:8:5

Explanation

C's share is 1/5, taken wholly from A, so A's share becomes 3/5 minus 1/5, that is 2/5, while B keeps 2/5 and C gets 1/5. Expressing these fractions with a common denominator of 5 gives 2:2:1, which sums to 1 and confirms the full profit is allocated. Only the sacrificing partner's share falls; B's share is untouched because B sacrificed nothing.