Partnership Class Quiz

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Questions and Answers

What is the definition of a partnership?

  • A business structure where all partners have unlimited liability.
  • A relationship between two or more individuals who have agreed to share profits from a business. (correct)
  • A business owned by one person.
  • A legal entity separate from its owners.

If a partnership deed is silent regarding the rate of interest on capital, the interest is paid at a rate of 6% per annum.

True (A)

What is the document called that outlines the agreement between partners in a partnership firm?

Partnership Deed

In the absence of a partnership deed, partners are not entitled to receive a _________ from the firm.

<p>salary</p> Signup and view all the answers

Match the following terms related to partnership firms with their corresponding descriptions:

<p>Partnership Deed = A written agreement between partners outlining the terms of the partnership Interest on Capital = Payment made to partners based on their capital contribution Interest on Drawings = Charge levied on partners for withdrawing funds from the firm Fixed Capital Account Method = Capital account method where the capital contribution remains fixed throughout the accounting period Fluctuating Capital Account Method = Capital account method where capital contributions can change throughout the accounting period</p> Signup and view all the answers

What is the total amount of salary paid to A?

<p>₹ 4,800 (A)</p> Signup and view all the answers

The interest on drawings is calculated at 5% per annum.

<p>True (A)</p> Signup and view all the answers

What is the meaning of goodwill in the context of a business?

<p>Goodwill refers to the positive reputation, brand image, and customer loyalty of a business. It is the intangible asset that attracts customers and generates extra profits.</p> Signup and view all the answers

Goodwill results in an increase in both ______ and ______ of the enterprise.

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What is the profit-sharing ratio of X and Y before Z's admission?

<p>5:3 (A)</p> Signup and view all the answers

Z's admission will result in a new profit-sharing ratio of 5:3:4.

<p>False (B)</p> Signup and view all the answers

What is the total capital brought in by Z for his share in the firm?

<p>30,000</p> Signup and view all the answers

The goodwill of the firm is valued at ______ years’ purchase of the average super profits.

<p>3</p> Signup and view all the answers

Match the following items with their respective amounts after adjustments related to Z's admission:

<p>Machinery = 30,000 Furniture = 32,000 Stock = 13,000 Provident Fund = 11,000 Creditors = 8,000</p> Signup and view all the answers

Based on the given information, how is Z's share of goodwill calculated?

<p>Z's share of goodwill is calculated as 1/4 of the total goodwill of the firm. (B)</p> Signup and view all the answers

The average profits of the last four years are ₹12,000.

<p>False (B)</p> Signup and view all the answers

The average profit of the firm in the content example is ₹______.

<p>2,78,000</p> Signup and view all the answers

What is the amount of the average super profits used to calculate the goodwill of the firm?

<p>8,000</p> Signup and view all the answers

What is the goodwill of the firm based on the given information?

<p>₹8,34,000</p> Signup and view all the answers

In the second example, the average profit for calculating goodwill is determined using the last 5 years' profits.

<p>False (B)</p> Signup and view all the answers

What is the average profit for the second example, where X and Y are partners and are taking Z into partnership?

<p>₹90,000 (B)</p> Signup and view all the answers

The goodwill of the firm in the second example is calculated as ______ times the average profit.

<p>200%</p> Signup and view all the answers

In the second example, what is the amount of depreciation to be charged on the motorbike purchased on April 1, 2023?

<p>₹10,000</p> Signup and view all the answers

Match the following terms with their respective definitions:

<p>Goodwill = The excess of the purchase price of a business over the fair value of its net assets. Average Profit = The sum of profits over a specified period divided by the number of periods. Abnormal Loss = A loss that is unusual and unexpected, and is not likely to occur again. Abnormal Gain = A gain that is unusual and unexpected, and is not likely to occur again.</p> Signup and view all the answers

The motorbike purchased on April 1, 2023, is a relevant factor in calculating goodwill in the second example.

<p>False (B)</p> Signup and view all the answers

What was the total amount of liabilities for the firm on March 31st, 2023?

<p>₹ 1,32,000 (D)</p> Signup and view all the answers

The creditors received the entire amount due to them in cash.

<p>False (B)</p> Signup and view all the answers

What was the total amount realized from the sale of investments?

<p>₹ 14,400</p> Signup and view all the answers

The total amount realized from the debtors was ______ less than the amount due from them.

<p>10%</p> Signup and view all the answers

Match the following assets with their respective realization amounts:

<p>Plant and Machinery = ₹ 35,100 Debtors = ₹ 37,800 Stock = ₹ 7,000 Investments = ₹ 14,400</p> Signup and view all the answers

Which of the following is NOT a characteristic of a company?

<p>Unlimited liability (D)</p> Signup and view all the answers

A company can issue shares at a discount.

<p>False (B)</p> Signup and view all the answers

What are the two primary types of shares issued under the Companies Act 2013?

<p>Equity shares and preference shares.</p> Signup and view all the answers

The premium received on the issue of shares is shown on the ______ side of the balance sheet.

<p>liabilities</p> Signup and view all the answers

Match the following terms with their descriptions:

<p>Equity Shares = Shares that provide priority in receiving dividends and capital repayment Preference Shares = Shares that represent ownership and voting rights Debentures = Long-term debt instruments issued by a company promising to repay a principal sum with regular interest payments Shares = Units into which the capital of a company is divided Capital = The total investment made by owners of a company</p> Signup and view all the answers

A private company can have an unlimited number of members.

<p>False (B)</p> Signup and view all the answers

What is the key benefit for shareholders in a company with limited liability?

<p>They are only liable for the amount of capital they have invested in the company, protecting their personal assets from company debts.</p> Signup and view all the answers

Which of these is NOT a typical source of funds for a company?

<p>Donations from Charity Organizations (E)</p> Signup and view all the answers

What type of goodwill is created over a period of time due to the attributes of a running business?

<p>Self Generated Goodwill (C)</p> Signup and view all the answers

Goodwill is considered a physical asset of a business.

<p>False (B)</p> Signup and view all the answers

What is the profit for the year mentioned in the accounting particulars?

<p>₹50,000</p> Signup and view all the answers

According to Lord Eldon, goodwill is the probability that the old customers will resort to the ______ place.

<p>old</p> Signup and view all the answers

How much interest on capital is considered in the given particulars for A?

<p>₹7,200 (D)</p> Signup and view all the answers

Match the following terms related to goodwill with their descriptions:

<p>Self Generated Goodwill = Created by a business over time Purchased Goodwill = Acquired through purchase Intangible Asset = Not physical but has value Valuer = Assesses goodwill value</p> Signup and view all the answers

Self generated goodwill can be recorded in the books of accounts.

<p>False (B)</p> Signup and view all the answers

What is the total amount transferred to A's current account as profit in the accounting particulars?

<p>₹15,090</p> Signup and view all the answers

Flashcards

Partnership

A relation between persons sharing profits of a business run by all or any of them.

Partnership Deed

A written agreement among partners for managing a partnership firm.

Interest on Capital

Rate not allowed if partnership deed is silent; 6% if specified in deed.

Interest on Drawings

No interest is charged on drawings made by partners.

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Salary to Partners

No partner is entitled to salary from the firm unless stated otherwise.

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Interest on Loan

Partner lending money to the firm gets 6% interest unless otherwise agreed.

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Profit-sharing Ratio

Profits and losses shared equally among partners unless stated otherwise.

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Capital Accounts

Separate accounts for each partner reflecting their capital balance.

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Goodwill

An intangible asset representing business reputation and customer connections.

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Self Generated Goodwill

Goodwill created internally through business reputation over time.

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Purchased Goodwill

Goodwill acquired by buying another business or firm.

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Valuation of Goodwill

Determining the monetary value of goodwill, often subjective.

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AS-26

Accounting Standard that governs the treatment of intangible assets including goodwill.

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Intangible Assets

Non-physical assets that add value to a business, like goodwill.

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Customer Connections

Relationship and loyalty between a business and its customers that enhance goodwill.

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Profit beyond Normal Profit

Extra profit earned due to the positive effects of goodwill.

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Realisation Account

An account used to record the realization of assets and settlement of liabilities during a firm’s dissolution.

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Sundry Creditors

Liabilities due to suppliers or creditors for goods and services received.

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Provision for Doubtful Debts

An estimate of receivables that may not be collectible; a risk fund.

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Realisation Expenses

Costs incurred to sell off assets, often deducted from proceeds.

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Debtors

Entities that owe money to the firm for goods or services provided on credit.

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Average Profit Calculation

Total profits over a period divided by the number of years.

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Years of Purchase

The number of years for which average profits are multiplied to determine goodwill.

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Abnormal Loss

Losses that are unusual and not expected in normal operations.

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Abnormal Gain

Unexpected profit due to unusual circumstances.

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Z’s Share of Goodwill

Z’s entitlement to goodwill when entering partnership.

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Valuing Goodwill

Determining the monetary value of a partnership’s goodwill based on average profits.

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Depreciation of Motorbike

Reduction in the value of the motorbike over time, calculated as a percentage.

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Goodwill Valuation

The worth of a business's reputation, calculated by profits over normal expectations.

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Super Profits

Profits exceeding normal expectations or standard rates of return.

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Undervaluation

The situation where an asset is recorded at a lower value than its true worth.

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Liabilities

Financial obligations or debts owed by a business.

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Assets

Resources owned by a business that have economic value.

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Adjustment Entries

Entries made to update the financial records before drawing conclusions.

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Admission of a New Partner

The process of adding a new partner into a business, impacting profit sharing and capital.

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Company

An artificial person created by law with a separate entity and perpetual succession.

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Shares

Units into which the capital of a company is divided.

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Types of Shares

Equity shares and preference shares as defined by Companies Act 2013.

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Preference Shares

Shares that have preferential rights for dividends and return of capital.

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Equity Share

A type of share that represents ownership in a company.

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Limited Liability

The liability of shareholders is limited to the amount unpaid on shares they hold.

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Maximum Members in Private Company

A private company can have a maximum of 200 members.

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Study Notes

Partnership Firms

  • Partnership is a relationship between persons who agree to share profits of a business carried on by all or any of them acting for all.
  • Partnership deed is a written agreement among partners for managing business affairs.
  • If a partnership deed is absent or silent regarding interest on capital: No interest is allowed on capital. If the deed allows interest but does not specify the rate, 6% per annum is charged. Interest is paid only from profits and not from losses during that period.
  • No interest is charged on partners' drawings.
  • Partners are not entitled to salaries.
  • If a partner lends money to the firm, interest at 6% per annum is allowed.
  • Partners share profits and losses equally, unless otherwise stated in a partnership deed.
  • Separate capital accounts are maintained for each partner.

Profit & Loss Appropriation Account

  • Used to show how profit or loss is distributed among the partners.

Salary/Commission to Partners

  • Salary or commission is allowed if the partnership deed permits.
  • Commission can be a percentage of net profit before/after commission.

Multiple Choice Questions

  • In the absence of an agreement, partners are entitled to interest on loans and advances, but not salary or commission.
  • A partnership firm can have a maximum of 100 partners.
  • Partnership deed is also known as "Articles of Partnership".
  • Essential elements of a partnership firm include at least two persons, agreement among all partners, and agreement for a business.

Goodwill

  • Goodwill is the reputation and connections of a business, leading to increased sales and profits.
  • Goodwill can be self-generated or purchased.
  • Self-generated goodwill is due to business attributes, while purchased goodwill is acquired by paying a price for it.
  • Factors affecting goodwill include business location, type, and management efficiency.
  • Goodwill is a subjective asset, and valuation can differ between estimators.

Methods of Valuation of Goodwill

  • Average Profit Method: Goodwill = Average Profit x Number of Years' Purchase.
  • Super Profit Method: Goodwill = Super Profit x Number of Years' Purchase.
  • Capitalisation Method: Goodwill = Average Profit / Normal Rate of Return x Number of Years' Purchase.

Partnership Deed

  • It details the terms and conditions agreed upon by the partners.
  • Acts as evidence in case of future disputes.

Interest on Drawings

  • Interest is calculated on the period from the date of drawings to the date of closing of accounts.
  • Interest is charged at a predetermined rate for each and every withdrawal.

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