• Adjustment of distributable profits - class-XII
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Adjustment of distributable profits - class-XII

Description: adjustment of distributable profits
Number of Questions: 35
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Tags: accounting for partnership firms - fundamentals elements of accounts accountancy book keeping and accountancy introduction to partnership accounts of partnership firms - fundamentals partnership accounts (preliminary)
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In the absence of an agreement to the contrary, the partners are :

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Entitled to $6\%$ interest on their capitals only when there are profits

  2. Entitled to $9\%$ interest on their capitals only when there are no profits

  3. Entitled to interest on capital at the bank rate only when there are profits

  4. Not entitled to any interest on their capitals

Show answer
Correct Option: D
Explanation:

Interest on capital is a mode of appropriation of profits to partners. Interest on capital is an income on the capital contributed by the partners. Interest on capital is calculated on time basis having regard to the introduction of fresh capital and withdrawal of capital.

Interest on capital can only be provided if there is a provision to that effect in the partnership deed. If the partnership deed is silent, then interest on capital is not allowed.

The Advance Ruling Authority shall comprise of

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. One member from amongst the officers of Central tax.

  2. One member from amongst the officers of State tax or Union Territory tax as the case may be.

  3. (a) & (b)

  4. None of the above

Show answer
Correct Option: C

Interest on capital will be paid to the partners if provided for in the agreement but only from following _______________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Profits

  2. Reserves

  3. Accumulated Profits

  4. Goodwill

Show answer
Correct Option: A
Explanation:

Interest on Capital: If the partnership deed is silent on interest on partner's capital, then according to the Partnership Act of 1932, no interest on capital should be given to the partners of the firm. However, interest on capital is given only out of the profits, if mutually agreed by all the partners.

Interest on partners capital is___________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. An Expenditure

  2. An appropriation

  3. A Gain

  4. None of these

Show answer
Correct Option: B
Explanation:

Interest on capital account is an appropriation. Appropriation means it is paid only and only if there is profit. It is not a charge and hence, will not be provided if there is loss or if there are profits will be provided only till the extent of profits. 

If there is no partnership deed then interest on capital will be changed at p.a.______.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. 6%

  2. 8%

  3. 9%

  4. NIL

Show answer
Correct Option: D
Explanation:

When there is no partnership deed then interest on capital will not be charged. There will be no interest provided on the capital. 

Nature of Revaluation Account is ___________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Real

  2. Personal

  3. Nominal

  4. None

Show answer
Correct Option: C
Explanation:
The term revaluation is simply means "to determine the value of assets and liabilities again". Revaluation account is prepared either at the time of retirement of a partner or admitting a partner. All the assets and liabilities are revalued and the differential amount is to be debited or credited in Revaluation Account.
Revaluation Account is Nominal In nature. If the liabilities increases and assets are decreasing, the difference amount to be debited to revaluation account as it is a loss for the firm.
If there is an Increase in Assets and Decrease in the value of Liabilities, the differential amount to be credited to revaluation account as it is a Profit for the firm.

A, a partner in a firm, is driving Rs.500 regularly on the 16th of every month. He will have to pay interest at the given rate in a year on Rs.6000 for the total period of __________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. 5 months

  2. 6 months

  3. 7 months

  4. 12 months

Show answer
Correct Option: B
Explanation:

When a partner withdraws cash from the firm for domestic use, the withdrawal of cash is termed as drawings. If the partnership deed has a provision of charging interest on drawings, the firm may charge interest on drawings from partners. Interest on drawing is a gain for the firm. It is calculated at the agreed rate. The amount of interest on drawings will be credited to Profit and Loss Appropriation Account and will be debited to partner’s capital account/current account (Individually). 

When money is withdrawn at the middle of month:

Date Amount Period
15,Jan 2016 1000 11.5
15,Feb 2016 1000 10.5
15,march 2016 1000 9.5
15,April 2016 1000 8.5
15,May 2016 1000 7.5
15,June ,2016 1000 6.5
15, July, 2017 1000 5.5
15,august,2016 1000 4.5
15,sep ,2016 1000 3.5
15, Oct ,2016 1000 2.5
15, Nov ,2016 1000 1.5 
15,Dec ,2016 1000 .5
12000 72

When money is withdrawn in the middle of the month, the average period is calculated as under:

Average Period = Total of months/12

= 72 months/12

= 6 months

OR,
Max. Period of Drawing + Min. Period of Drawing
Average Period = 2

= 11.5 + 0.5 = 12 = 6 months

A, B and C are partners in a firm. Though there is no provision in the partnership deed for interest on capital, this has been provided in the account @ 10% p.a. for the two years ended on 31 Dec., 2013. Their fixed capitals on which interest was calculated were throughout A Rs. 15,000, B Rs. 12,000 and C Rs. 9,000. Their profit sharing ratios were 2007 - 5:3:2 and 2008 - 2: 2: 1. The necessary adjustment entry will be made as:

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. C's current a/c Dr. 360

    To A's current a/c 240

    To B's current a/c 120

  2. A's current a/c Dr. 240

    B's current a/c Dr. 120

    To C's current a/c 360

  3. A's current a/c Dr. 120

    B's current a/c Dr. 240

    To C's current a/c 360

  4. C's current a/c Dr. 360

    To A's current a/c  120

    To B's current a/c 240

Show answer
Correct Option: A

Which of the following transactions is of capital nature?

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Purchase of a truck by a company

  2. Replacement of old types and tubes

  3. Yearly premium to insure the truck

  4. Cost of repair of the truck

Show answer
Correct Option: A
Explanation:

Capital expenditure is a money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Hence, Purchase of a truck by a company is a capital expenditure.

 Amount realization from the sale of private estate of partners is used first to pay off ___________________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Debts of the firm

  2. Private debts of the partner

  3. Wife's loan

  4. Bank loan of the firm

Show answer
Correct Option: A
Explanation:

  • Assets of the firm and the capital contributed by the partners to set-off losses of the firm will be applied in the following order–
  1. Third party debts will be paid first
  2. Next, loan amount taken by firm from any partner will be repaid to that partner
  3. Capital contributed by each partner will be repaid to him in the capital contribution ratio
  4. Balance amount will be shared among the partners in their profit sharing ratios.

In the Realisation Account prepared on the dissolution of a firm, debit side is more than the credit side. It indicates ____________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. there is a profit

  2. there is a loss

  3. liabilities are more then assets

  4. assets are more than liabilities

Show answer
Correct Option: B
Explanation:

The main purpose to open Realisation Account is to ascertain the profit or loss due to the realisation of assets and liabilities at the time of dissolution of firm. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the Partner's Capital Accountin their profit sharing ratio.

In case of insolvency of a partner, any balance in reserve fund or profit and loss accounts is distributed to all the partners ______________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Equally

  2. In the profit sharing ratio

  3. In the ratio of capitals

  4. In sacrificing ratio

Show answer
Correct Option: B
Explanation:

In general, unless otherwise agreed upon, the partnership is dissolved upon the insolvency of a partner. In some cases, partnership agreements are made to ensure that if a partner becomes insolvent, there are clear guidelines on how the partnership continues.

The following rules shall be observed subject to agreement by the partners:

  • All the losses of the company including deficiencies of capital shall be paid out of profits first, then out of the capital and lastly if necessary by the partners individually in proportions to which they are entitled to share profits.
  • All the assets of the company including all the sums contributed by the partners shall be applied in the following manner:
  • In paying all the debts of the firm to the third parties
  • in paying each partner rateable what is due to him from the firm for advances as distinguished from capital
  • in paying to each partner rateable what is due to him on account of capital
  • The residue shall be divided among the partners in the proportions in which they were entitled to share profits.

The interest on partners capital accounts is to be credited to _______________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Interest Account

  2. Profit and Loss Account

  3. Drawing Account

  4. Partner's Capital Account

Show answer
Correct Option: D
Explanation:

Interest on partner's capital is an amount at an agreed rate of interest which is credited to a partner based on the amount of capital contributed by him/her.

Interest on partner's capital is an expense to the firm and hence debited to profit and loss appropriation A/c. On the other hand it is an income for partners and hence credited to partner's capital A/c.

Partnership created for a particular adventure or a particular undertaking is called __________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Particular partnership

  2. Limited partnership

  3. Partnership at will

  4. Fixed partnership

Show answer
Correct Option: A
Explanation:

A partnership can be formed for carrying on continuous business, or it can be formed for one particular venture or undertaking. If the partnership is formed only to carry out one business venture or to complete one undertaking such a partnership is known as a particular partnership.

The transferee of a share of a partner's interest in a firm is called ____________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. senior partner

  2. active partner

  3. sub partner

  4. dormant partner

Show answer
Correct Option: C
Explanation:

A Sub-partner is a partner in a partnership firm who agrees to share his profits in a partnership firm with an outsider to the firm. A sub-partner does not hold any right against the firm nor is liable to any debts caused by the firm.

X and Y are two partners sharing profit and loss in the ratio 2:1. They decided to share profit and loss in future in the ratio of 3:2 If the goodwill of the firm is valued Rs. 60,000, how the adjustment in profit sharing ratio will be affected?

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Y pay X Rs. 4,000

  2. X pay Y Rs. 4,000

  3. X pay Y Rs. 6,000

  4. Y pay X Rs. 6,000

Show answer
Correct Option: A
Explanation:

Earlier goodwill was distributed in ratio 2:1 between X and Y

i.e. 60000  as  40000 - X & 20000 - Y.
Now , X = 60000 * 3/5 = 36000 ; Y = 60000 * 2/5 = 24000.
hence, X will pay 4000 to Y.

X, a partner of X and Y Associates draw Rs, 4000 every month at the mid of the month for six months. Calculate interest on drawing at 5%.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Rs. 300

  2. Rs. 295

  3. Rs. 285

  4. Rs. 310

Show answer
Correct Option: A
Explanation:

So here,

4000 per month x 6 month = 24,000
then,
24,000 x 6% = 1,200 for year
then, 1,200 x 6/12 = 600 for 6 month
so, at the mid of month the interest on drawing is Rs.300.

Rent paid to a partner is charged to ______.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. profit and loss adjustment A/c

  2. revaluation A/c

  3. profit and loss appropriation A/c

  4. profit and loss A/c

Show answer
Correct Option: D
Explanation:

 Rent paid by a firm is such an expenditure which is incurred irrespective of any partner. It is not directly related to the partner. As rent is an expenditure the same is debited to profit and loss account. 

Profit and losses of the firm are to be shared equally ____________________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. When the partnership deed is silent about it

  2. As per Partnership Act in the absence of anything in the partnership deed to the contrary

  3. Both the circumstances

  4. None of the situations

Show answer
Correct Option: C
Explanation:

b'P&L of the firm are to be shared equally as per the partnership act and also in the absence of anything in the partnership deed to the contrary.'

Partnership firm is not liable for the acts of the firm done ____________________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. in individual/personal capacity by a partner

  2. without concurrence of all the partners

  3. without concurrence of majority partners

  4. not mentioned in partnership deed

Show answer
Correct Option: A

Interest on advance money provided by the Partner can be paid from ____________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. profits

  2. out of capital

  3. both (a) and (b)

  4. from the money provided by Central Government

Show answer
Correct Option: C

Which of the following statements is not true?

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. It is not true that all partners can have limited liability in a limited partnership

  2. Capital contributions do not have to be equal from each partner

  3. A minor has a right to access and inspect books of accounts of partnership firm in which he is partner

  4. Interest on capital is a reward for the different amounts of work partners may perform

Show answer
Correct Option: D
Explanation:

Interest will be allowed to each partner on the capital contributed by him . Interest on capital of the partners is calculated for the relevant period for which the amount of capital has been used in the business. Capital introduced or withdrawn by a partner during the accounting year has to be taken for the purpose of calculation and definitely is not a reward for the partners.

In the absence of a Partnership deed or agreement, a partner is entitled to interest on loans or advances__________. 

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. @ $6$% p.a.

  2. @ $9$% p.a.

  3. at the bank rate

  4. @ $12$% p.a.

Show answer
Correct Option: A

Is rent paid to a partner an appropriation of profits?

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Yes.

  2. No. 

  3. If partner's contribution as capital is maximum. 

  4. If partner is a working partner. 

Show answer
Correct Option: B
Explanation:

Partner's rent unless provided in the deed has to be treated as a charge against profit and so it is transferred to profit and loss a/c. Rent paid by a firm is such an expenditure which is incurred irrespective of any partner the rent paid is debited to P/L account instead of Appropriation account.'

At the time of dissolution which payment will be made in priority ?

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Capital to partners

  2. Loan provided by partner

  3. Fluctuating capital account

  4. None of the above

Show answer
Correct Option: B
Explanation:

Payment of partner's loan is made before payment of capital because capitals are paid off only if any balance is left after payment of all the liabilities. loan provided by partner is a liability for the firm. A separate Partner's loan account is prepared for payment. Following entry is passed on payment :
Partner's loan A/c Dr.
   To Bank/Cash A/c 

One of the partner contributed Rs.30,000 in the firm-How much interest he will get on the capital contributed ________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Nill

  2. 6% of 30,000

  3. 5% of 30,000

  4. Income of the above

Show answer
Correct Option: A
Explanation:

Partners usually introduce some amount time to time as the capital in firm and the only reaosn behind it is to expand the business.

Since the partner has introduced Rs30,000 as additonal capital and firms does not pays interest on such amounts. The only situation when interest has to be paid is the time when a loan has been taken by the firm from any of its partner.
 

A partner claim interest on capital _____________.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. even if there is loss

  2. if there is profit

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

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

Show answer
Correct Option: C
Explanation:

Interest on capital is the amount received by partners for their invested capitals and it 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 ahs enough profits to provide the interest. If the intereest in not mentioned in agreement or there is no agreement, partner cannot claim for interest on capital.

Where a partner is entitled to interest on capital subscribed by him, such interest will be payable ___________. 

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. only out of profit

  2. only out of capital

  3. out of profits or out of capital

  4. none of these

Show answer
Correct Option: A
Explanation:

Where a partner is entitled to interest on capital subscribed by him, such interest will be payable only out of profit. Interest on capital is an appropriation and hence will be provided only out of profits. 

Interest on capital will be paid to the partners if provided for in the agreement but only from __________. 

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. profits

  2. reserves

  3. accumulated profits

  4. goodwill

Show answer
Correct Option: A
Explanation:

Interest on capital will be paid to the partners if provided for in the agreement but only from profits. Interest on capital is an appropriation and not a charge against profit hence, is provided only to the extent of profits. 

When the Interest on drawings is charged to partners, Interest on Drawing Account is credited, and Partner's Capital Account is debited. It is called __________. 

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. an opening entry

  2. a closing entry

  3. an adjusting entry

  4. an transfer entry

Show answer
Correct Option: C
Explanation:

When the Interest on drawings is charged to partners, Interest on Drawing Account is credited, and Partner's Capital Account is debited. It is called as an adjusting entry. Adjusting entries are usually done at the end of the year for incomes and expenses. 

When the Interest on capital is allowed to partners, Interest on Capital Account is debited and Partner's Capital Account is credited. It is called _____________. 

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. an opening entry

  2. a closing entry

  3. an adjusting entry

  4. an transfer entry

Show answer
Correct Option: C
Explanation:

When the interest on capital is allowed to partners, interest on capital Account is debited and partner's capital Account is credited. It is called as an adjusting entry. Adjusting entries are usually done at the end of the year for incomes and expenses. 

A and B are partners A's capital is Rs. 10,000 and B's capital is Rs. 6,000. Interest on capital is payable @ 6% p.a. B is entitled to a salary of Rs. 300 per month. Profit to the year before interest and salary to B is Rs. 8,000. Profits between A and B will be divided:

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Rs. 1,720 to A and Rs.1,720 to B

  2. Rs. 2000 to A and Rs.1440 to B

  3. Rs. 1440 to A and Rs.2000 to B

  4. None

Show answer
Correct Option: A
Explanation:
Profit after interest and remuneration :-
= Profit before interest and remuneration - Interest - remuneration
= Rs-8,000 - (600 + 360) - (3,600)
= Rs-3,440.

Distributing profit is equal ratio among partners = Rs-3,440 / 2
                                                                                = Rs-1,720 to each partner. 
Working notes:-
Interest on capital = Capital x rate of interest 
A:-
= 10,000 x 6/100
= Rs-600
B:-
= 6,000 x 6/100
= Rs-360. 
B's remuneration = Rs-300 x 12
                             = Rs-3,600

X and Y are partners with the capital of Rs. 50,000 and Rs. 30,000 respectively. Interest payable on capital is 10% p.a. Find the interest on capital for both the partners when the profits earned by the firm is Rs. 4,800?

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Rs. 5,000 and Rs. 3,000. 

  2. Rs. 3,000 and Rs. 1,800. 

  3. No interest will be paid to the partners.

  4. None of the above. 

Show answer
Correct Option: B
Explanation:
Interest on capital = capital x rate
X :-
= 50,000 x 10/100
= RS-5,000. 
Y:-
= 30,000 x 10/100
= RS-3,000.

Apportioned in the ratio of interest to be allowed to the extent of profits available:-
X:-
= 5,000
-------------- x 4,800
 8,000
= RS-3,000.
Y:-
= 3,000 
------------- x 4,800
  8,000
= RS-1,800.

M and N are partners in a firm. M has given a loan of Rs. 8,000 to the firm on 1st July, 2017. The partnership deed is silent upon the question of provision of interest on partner's loan. Compute the amount of interest payable on the loan advanced by M to the firm, assuming the books are closed on 31st March each year.

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Rs. 460

  2. Rs. 360

  3. Rs. 560

  4. Rs. 480

Show answer
Correct Option: B
Explanation:

Amount of loan given by M to the firm (on 1st July, 2017) = Rs. 8,000
Period (from 1st July, 2017 to 31st March, 2018) = 9 months
Interest rate = 6% p.a.
Interest on M's loan = 8,000 x 6/100 x 9/12 = 360

A and B are partners having capital of Rs. 5,000 and Rs. 6,000 respectively. Interest on capital is given @ 5% p. a. Profits for the year before the appropriation is Rs. 4.600 provide interest on capital out of profits. Interest allocated to partners is:

book keeping and accountancy partnership accounts (preliminary) adjustment of distributable profits final accounts of partnership firms profit-loss appropriation account

  1. Rs. 3,000 and Rs. 2,500

  2. Rs. 2,090 and Rs. 2,509

  3. Rs. 2,500 and Rs. 2,091

  4. Rs. 600 and Rs. 300

Show answer
Correct Option: B
Explanation:
Interest on capital = capital x rate
A :-
= 50,000 x 5/100
= RS-2,500.
B:-
= 60,000 x 5/100
= RS-3,000.

Apportioned in the ratio of interest to be allowed to the extent of profits available:-
A:-
= 2,500
-------------- x 4,600
   5,500
= RS-2,090.
B:-
= 3,000 
------------- x 4,600
  5,500
= RS-2,509.
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