CMA INTERMEDIATE: PAPER 5 – FINANCIAL ACCOUNTING

ACCOUNTING FOR PARTNERSHIP: BASIC CONCEPTS
A. State whether each of the following statements is True or False?
1.      A partnership is an association of two or more persons.                   True
2.      Partnership means the relationship between persons who have agreed to share the profit of a business carried on by all or by any one acting for all.            True
3.      Maximum number of partners in a partnership business is 100.                  True
4.      The business of the partnership firm can be conducted even by one partner acting for all. True
5.      Partnership arises from contract not from status. True
6.      It is necessary to have a partnership agreement in writing. False
7.      Liability of partner in a partnership firm is limited.              False

8.      The right to share a profit is full proof of one being a partner. False
9.      Where interest on capital is allowed and profits are insufficient for interest, such insufficient profit is distributed equally.                 False, Profit is distributed in capital ratio
10.  A partnership can be formed only for a legal business.                    True
11.  Usually interest on Partner’s Capital is paid, only out of profits. True
12.  When a partner is given guarantee by another partner, loss on such guarantee will be born by all the other partners.                     True, in their agreed ratio
13.  A partner can carry a competing business.                False
14.  Interest on partner’s capital is debited to Partners Capital Account.            False, Credit
15.  Interest on partner’s capital is debited to Profit and Loss Appropriation Account.   True
16.  It is necessary to have a Partnership Deed in written form.             True
17.  In the absence of any agreement regarding profit sharing ratio, profit or loss must be shared equally.             True
18.  Interest on capital is a charge against profits.                       False
19.  Interest on capital, partner’s salaries and partner’s commission is an appropriation of profit. True
20.  Interest on partner’s loan is a charge against profit.                        True
21.  Interest on partner’s capital is allowed @ 6% p.a.    False
22.  Under fixed capital method an addition to capital will be shown in partner’s capital account. False
23.  In case of fixed capital, a partner’s Capital Account always shows a credit balance.          True
24.  Partner’s current account may show both debit and credit balance.                        True
25.  Rent on the partner’s property is a charge against profit.                True
26.  Interest on a partner’s loan shall be paid even if there are losses in the firm. True
27.  Usually interest on capital is paid only out of profits. True
28.  In the absence of any agreement regarding profit sharing ratio, profit or loss must be shared equally. True
29.  In the absence of partnership deed, no interest is charged on drawings.     True
B. Fill in the blank with appropriate word or words:
1.      The member of a partnership is collectively known as Firm.
2.      Members of a partnership business are individually known as partners.
3.      Partnership firm is governed by the Indian Partnership Act, 1932.
4.      1. Sec. 4 (3/4/5) of the Indian Partnership Act 1932 defines a partnership.
5.      A partnership is an Association of two or more partners.   
6.      Liability of a partner is Unlimited.
7.      Registration of a partnership firm is Voluntary.
8.      A new partner can be admitted into the firm only when all partners are Agree.
9.      The document which contains the terms and conditions of partnership is called Partnership is called Partnership Deed.
10.  In the absence of a specific agreement, interest on capital is paid only out of profit.
11.  A partner acts as an agent for a firm.
12.  Partners are mutual Agents for each other.
13.  In absence of Partnership agreement interest on partner’s loan/Advance will be calculated at 6% p.a. (5% / 6% / 8%)
14.  The partner who does not participate actively in partnership business is knows as nominal (nominal / inactive) partner.
15.  Interest on Partner’s loan is to be credited to his loan account.      
16.  Partner’s loan is paid before payment of partner’s capital.
17.  Interest on Partner’s capital is credited to his capital account.       
18.  Interest on Partner’s drawings is debited to his capital account.
19.  Minimum number of partners is Two and the maximum is 100 for a firm.
20.  In case of fixed capital, interest on partner’s capital is credited to Partner’s Current Account.
21.  If drawings are made with equal amount in the beginning of the every month for whole year, interest on drawings is to be calculated for an average period of 6.5 months.
22.  If drawing made with equal amount at the end of every month for whole year, interest on drawings is to be calculated for an average period of 5.5 months.
23.  If drawings are made with equal amount in the middle of the every month for whole year, interest on drawings is to be calculated for an average period of 6 months.
24.  In case of fixed capital, partner’s capital account always shows a credit balance.
25.  When partner’s capital account is fixed then partner’s current account is prepared.
C. Choose the correct alternative:
1. Partnership:
(a) Increases individual risk,
(b) Decreases individual risk,
(c) Does not involves any individual risk,
2. In the absence of any agreement partners share profits and losses:
(a) In the ratio of Capital;
(b) Equally;
(c) Time devoted to the business;
3. In the absence of any agreement, interest on partner’s loan:
(a) Shall be allowed @ 5%.
(b) shall be allowed @6%.
(c) Should not be allowed at all.
4. In the absence of any agreement, partners,
(a) Shall be allowed salaries
(b) Shall not be allowed salaries
(c)  Shall be allowed salaries to those who work for the business.
5. Unless otherwise agreed upon, the partner’s capitals should be:
(a) Fixed
(b) Fluctuating
(c) Any of the above two methods.
6. Rate of interest allowed on partner’s capital is
a)      6%
b)      5%
c)      6% p.a.
d)     None of the above.
7. In the absence of partnership deed, partners are not entitled to receive:
a)      Salaries.
b)      Commission.
c)      Interest on Capital.
d)     All of the above.
8. The balance of partner capital account will be reduced with
a)      Salaries.
b)      Interest on Drawings.
c)      Interest on Capital.
d)     All of the above.
9. In case of fixed capital, interest on partner’s capital is credited to:
a)      Partners Current Account.
b)      Partners Capital Account.
c)      Profit and Loss Appropriation A/c
d)      None of the above.
10. If an equal amount is drawn at the end of each month for 6 months, then interest on drawing is calculated on total drawings for an average period of
a)      3 months.
b)     2.5 months.
c)      5.5 months.
d)      7.5 months.
11. If an equal amount is drawn in the beginning of each month for 6 months, then interest on drawing is calculated on total drawings for an average period of
a)      3 months.
b)      2.5 months.
c)      3.5 months.
d)      7.5 months.
12. If an equal amount is drawn in the middle of each month for 6 months, then interest on drawing is calculated on total drawings for an average period of
a)      3 months.
b)      2.5 months.
c)      5.5 months.
d)      7.5 months.
13. Interest on capital is credited to:
(a) Partner’s Capital Accounts;
(b) Profit & Loss Account;
(c) Interest Account.
14. Current Account of the partners should be opened when –
(a) Capitals are fluctuating;
(b) Capitals are fixed;
(c)  Capital is either fixed or fluctuating.
15. Interest on Capital is an:
(a) Charge against profits;
(b) Appropriation of profits.
(c) None of the two.
16. Interest on partner’s capital is paid:
(a) Out of profits;
(b) Out of capital;
(c) None of the above two.
17. In the absence of any agreement interest on partner’s capital is calculated
(a) @6%
(b) @5%
(c) At no rate.
18. Interest on capital is generally calculated on:
(a) Opening capital;
(b) Closing capital;
(c) Average capital.
19. Current Account of a partner may show:
(a) Credit balance
(b) Debit balance
(c) Either of the two.
20. In a partnership firm on partner can be admitted without the consent of
(a) Majority of existing partners.
(b)Senior most partners.
(c) All the existing partners.
21. A and B are partners. C is admitted into the firm for 1/3rd share of profit with a guaranteed profit of Rs. 10,000 p.a. The firm’s net profit during a year is Rs. 24,000. If A is the guarantor, how much profit would be given to A.?
a)      Rs. 24,000
b)      Rs. 8,000
c)      Rs. 6,000
d)     Rs. 2,000.
22. A and B are partners. Their profit sharing ratio is 3: 2. Salary payable to A and B is Rs. 2,000 and Rs. 3,000 respectively. The firm’s net profit during a year is Rs. 4,000. The amount of net profit shared by A and B is:
a)      Rs. 2,000 and Rs. 2,000
b)      Rs. 2,400 and Rs. 1,600
c)      Rs. 1,600 and Rs. 2,400
d)      None of the above.
23. Manager is entitled to a commission of 10% of net profits after charging such commission. The firm’s net profit during a year is Rs. 11,000. The amount of Manager’s commission will be:
a)      Rs. 1,000
b)      Rs. 1,100
c)      Rs. 11,000
d)      None of the above.
24. A and B are partners. C is admitted into the firm for 1/3rd share of profit with a guaranteed profit of Rs. 10,000 p.a. The firm’s net profit during a year is Rs. 24,000. What amount would be given to C as his share of profit?
a)      Rs. 24,000
b)      Rs. 8,000
c)      Rs. 10,000
d)      None of the above
25. Fluctuating Capital Account is credited with:
a)      Interest on Capital.
b)      Profit of the year.
c)      Remuneration to the partners.
d)     All of those.
26. Interest on Partners capital is:
a)      An expenditure.
b)     An appropriation.
c)      A gain.
d)      None of these.

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