TS Grewal Class 12 Accountancy Chapter 2 - Partnership Firms Fundamentals
CBSE Class 12 Accountancy - All Questions with Complete Solutions
1
Question
Define Partnership.
Answer
Partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.
2
Question
State any two essential features or characteristics of partnership other than minimum number of partners and profit sharing.
Answer
Two essential features or characteristics of partnership (other than minimum number of partners and profit sharing) are:
3
Question
Does partnership firm has a separate legal entity? Give reason in support of your answer.
Answer
No, a partnership firm does not have a separate legal entity from its partners.
Reason: The private assets of the partners can be used to meet the liabilities of the firm if the firm's assets are not sufficient.
4
Question
What is the maximum number of partners that a partnership firm can have? Name the Act that provides for the maximum number of partners in a partnership firm.
Answer
A partnership firm can have a maximum of 50 partners as per Section 464 of the Companies Act, 2013, read with Rule 10 of the Companies (Miscellaneous) Rules, 2014.
5
Question
Ritesh and Hitesh are childhood friends. Ritesh is a consultant whereas Hitesh is an architect. They contributed equal amounts and purchased a building for ₹2 crores. After a year, they sold it for ₹3 crores and shared the profits equally. Are they doing the business in partnership? Give reason in support of your answer.
Answer
No, they are not in partnership.
Reason: Partnership requires the business to be conducted on a regular basis and for sharing profits, whereas in this example, it was only a one-time activity.
6
Question
A group of 40 people want to form a partnership firm. They want your advice regarding the maximum number of persons that can be there in a partnership firm and name of the Act under whose provision it is given.
Answer
The maximum number of partners in a partnership firm can be 50, as per Section 464 of the Companies Act, 2013, read with Rule 10 of the Companies (Miscellaneous) Rules, 2014.
7
Question
Is there any restriction on maximum number of partners? If yes, name the Act under which it is prescribed.
Answer
Yes, there is a restriction: the Central Government prescribes a maximum of 50 partners in a firm, as per Rule 10 of the Companies (Miscellaneous) Rules, 2014.
8
Question
Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not exist?
Answer
Yes, in the absence of a partnership deed, a new partner can be admitted only with the consent of all existing partners; therefore, any one partner has the right not to allow admission of a new partner.
9
Question
State any two rights of a partner besides profits of business, participating in business and right to be consulted about affairs of the business.
Answer
10
Question
What is a Partnership Deed?
Answer
A Partnership Deed is a written agreement between partners that defines the terms of partnership and is used to avoid or settle possible disputes.
11
Question
Why is it considered better to make a partnership agreement in writing?
Answer
It is better to have a partnership agreement in writing (as a Partnership Deed) because it acts as a legal document defining relationships among partners and helps to avoid and settle possible disputes.
12
Question
X and Y are partners. Y wants to admit his son K into business. Can K become the partner of the firm? Give reason.
Answer
No, K cannot become the partner of the firm unless all existing partners consent.
Reason: As per Section 31(1) of the Indian Partnership Act, 1932, a new partner can be admitted only with the consent of all existing partners, unless otherwise agreed.
13
Question
Pratibha, partner of a firm, has advanced loan to the firm of ₹1,00,000. The firm does not have a Partnership Deed. Will Pratibha get interest on the loan? If yes, at which rate and why?
Answer
Yes, Pratibha will get interest on the loan at 6% per annum. In the absence of a partnership deed, the interest on partners' loans is paid at 6% p.a., and it is treated as a charge against profits.
14
Question
Neha, a partner, owns a building in which the firm carries its business. The firm pays her ₹10,000 as rent of the building. To which account rent will be debited?
Answer
The rent paid to Neha is to be debited to the Profit and Loss Account, because it is an expense of the firm.
15
Question
What is meant by 'Fixed Capital of a Partner'?
Answer
Fixed Capital of a partner means the capital remains unchanged unless additional capital is introduced or a withdrawal is made from the existing capital.
16
Question
What is meant by 'Fluctuating Capital of a Partner'?
Answer
'Fluctuating Capital of a Partner' refers to the method of maintaining capital accounts where all transactions related to a partner (such as their share of profit/loss, drawings, interest on capital or drawings, salary, etc.) are recorded in their Capital Account, causing the balance to change with every transaction.
17
Question
Distinguish between 'Fixed Capital Account' and 'Fluctuating Capital Account' on the basis of credit balance.
Answer
A Fixed Capital Account always shows a credit (positive) balance, while a Fluctuating Capital Account may show either a debit (negative) or credit (positive) balance.
18
Question
A firm maintains a Capital Account and a Current Account for each partner. What is the term used when this method of maintaining Capital Accounts is followed?
Answer
When a firm maintains both a Capital Account and a Current Account for each partner, the method is called the Fixed Capital Account Method.
19
Question
Give two items which may appear on the debit side of a Partner's Current Account.
Answer
Items that may appear on the debit side of a Partner's Current Account:
20
Question
State the two methods of maintaining Capital Accounts of partners.
Answer
The two methods of maintaining Capital Accounts of partners are:
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21
Question
Amit and Sumit entered into a partnership on 1st April 2023 and invested Rs. 1,50,000 and Rs. 2,50,000 respectively as capital. The Partnership Deed provided for interest on capital @ 10% p.a. It also provided that Capital Accounts shall be maintained following the Fixed Capital Accounts Method. The firm earned a net profit of Rs. 1,00,000 for the year ended 31st March 2024. Pass the Journal entry for interest on capital.
Answer
Working Note - Calculation of Interest on Capital:
Interest on Amit's Capital = Rs. 1,50,000 × 10% = Rs. 15,000
Interest on Sumit's Capital = Rs. 2,50,000 × 10% = Rs. 25,000
Journal Entry:
Interest on Capital Account Dr. Rs. 40,000
To Amit's Capital Account Rs. 15,000
To Sumit's Capital Account Rs. 25,000
(Being interest on capital allowed @10% p.a. as per partnership deed)
22
Question
Kamal and Kapil are partners having fixed capitals of Rs. 5,00,000 each as on 1st April 2023. Kamal introduced further capital of Rs. 1,00,000 on 1st January 2024 whereas Kapil withdrew Rs. 1,00,000 on 1st January 2024 out of capital. Interest on capital is to be allowed @ 10% p.a. The firm earned a net profit of Rs. 6,00,000 for the year ended 31st March 2024. Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation Account.
Answer
Calculation of Interest on Capital:
Kamal's Interest:
1st April to 31st December: Rs. 5,00,000 × 10% × 9/12 = Rs. 37,500
1st January to 31st March: Rs. 6,00,000 × 10% × 3/12 = Rs. 15,000
Total Interest on Kamal's Capital = Rs. 52,500
Kapil's Interest:
1st April to 31st December: Rs. 5,00,000 × 10% × 9/12 = Rs. 37,500
1st January to 31st March: Rs. 4,00,000 × 10% × 3/12 = Rs. 10,000
Total Interest on Kapil's Capital = Rs. 47,500
Journal Entry:
Interest on Capital Account Dr. Rs. 1,00,000
To Kamal's Capital Account Rs. 52,500
To Kapil's Capital Account Rs. 47,500
(Being interest allowed @10% p.a. on respective capitals)
23
Question
Simran and Reena are partners sharing profits in the ratio of 3:2. Their capital as on 1st April, 2023 were Rs. 2,00,000 each whereas Current Account had balance of Rs. 50,000 and Rs. 25,000 respectively. Interest on capital is to be allowed @5% p.a. Net profit of the firm for the year ended 31st March, 2024 was Rs. 3,00,000. Pass the Journal entries for interest on capital and distribution of profit. Also prepare Profit and Loss Appropriation Account for the year.
Answer
Calculation of Interest on Capital:
Interest on Simran's Capital = Rs. 2,00,000 × 5% = Rs. 10,000
Interest on Reena's Capital = Rs. 2,00,000 × 5% = Rs. 10,000
Calculation of Partners' Share in Profit:
Profit available for distribution = Rs. 3,00,000 - Rs. 20,000 = Rs. 2,80,000
Simran's Share = Rs. 2,80,000 × 3/5 = Rs. 1,68,000
Reena's Share = Rs. 2,80,000 × 2/5 = Rs. 1,12,000
Journal Entries:
Interest on Capital A/c Dr. Rs. 20,000
To Simran's Current A/c Rs. 10,000
To Reena's Current A/c Rs. 10,000
Profit and Loss Appropriation Account:
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Interest on Capital: | By Net Profit | 3,00,000 | |
| Simran | 10,000 | ||
| Reena | 10,000 | ||
| To Profit transferred to: | |||
| Simran's Current A/c | 1,68,000 | ||
| Reena's Current A/c | 1,12,000 | ||
| Total | 3,00,000 | Total | 3,00,000 |
24
Question
Anita and Ankita are partners sharing profit equally. Their capital, maintained following Fluctuating Capital Accounts Method, as on 1st April, 2023 were Rs. 5,00,000 and Rs. 4,00,000 respectively. Partnership Deed provided to allow interest on capital @10% p.a. The firm earned net profit of Rs. 2,00,000 for the year ended 31st March, 2024. Pass the Journal entry for interest on capital.
Answer
Calculation of Interest on Capital:
Interest on Anita's Capital = Rs. 5,00,000 × 10% = Rs. 50,000
Interest on Ankita's Capital = Rs. 4,00,000 × 10% = Rs. 40,000
Journal Entry:
Interest on Capital A/c Dr. Rs. 90,000
To Anita's Capital A/c Rs. 50,000
To Ankita's Capital A/c Rs. 40,000
(Being interest on capital allowed @10% p.a.)
25
Question
Ashish and Aakash are partners sharing profits in the ratio of 3:2. Their Capital Accounts had credit balances of Rs. 5,00,000 and Rs. 6,00,000 respectively as on 31st March, 2024 after debit of drawings during the year of Rs. 1,50,000 and Rs. 1,00,000 respectively. Net profit for the year ended 31st March, 2024 was Rs. 5,00,000. Interest on capital is to be allowed @ 10% p.a. Pass the journal entry for interest on capital and prepare Profit and Loss Appropriation Account.
Answer
Calculation of Opening Capital:
Ashish's Opening Capital = Rs. 5,00,000 + Rs. 1,50,000 = Rs. 6,50,000
Aakash's Opening Capital = Rs. 6,00,000 + Rs. 1,00,000 = Rs. 7,00,000
Calculation of Interest on Capital:
Interest on Ashish's Capital = Rs. 6,50,000 × 10% = Rs. 65,000
Interest on Aakash's Capital = Rs. 7,00,000 × 10% = Rs. 70,000
Journal Entry:
Interest on Capital A/c Dr. Rs. 1,35,000
To Ashish's Capital A/c Rs. 65,000
To Aakash's Capital A/c Rs. 70,000
26
Question
Naresh and Sukesh are partners with capitals of Rs. 3,00,000 each as on 31st March, 2023. Naresh had withdrawn Rs. 50,000 against capital on 1st October, 2022 and also Rs. 1,00,000 besides the drawings against capital. Sukesh also had drawings of Rs. 1,00,000. Interest on capital is to be allowed @ 10% p.a. Net profit for the year was Rs. 2,00,000, which is yet to be distributed. Pass the journal entries for interest on capital and distribution of profit.
Answer
Calculation of Opening Capital:
Naresh's Opening Capital = Rs. 3,00,000 + Rs. 50,000 = Rs. 3,50,000
Sukesh's Opening Capital = Rs. 3,00,000
Interest on Capital:
Naresh: Rs. 3,50,000 × 10% × 6/12 + Rs. 3,00,000 × 10% × 6/12 = Rs. 32,500
Sukesh: Rs. 3,00,000 × 10% = Rs. 30,000
Journal Entry:
Interest on Capital A/c Dr. Rs. 62,500
To Naresh's Capital A/c Rs. 32,500
To Sukesh's Capital A/c Rs. 30,000
27
Question
On 1st April, 2013, Jay and Vijay entered into partnership for supplying laboratory equipment to government schools situated in remote and backward areas. They contributed capitals of Rs. 80,000 and Rs. 50,000 respectively and agreed to share the profits in the ratio of 3:2. The partnership Deed provided that interest on capital shall be allowed at 9% per annum. During the year the firm earned a profit of Rs. 7,800. Showing your calculations clearly, prepare 'Profit and Loss Appropriation Account' of Jay and Vijay for the year ended 31st March, 2014.
Answer
Calculation of Interest on Capital:
Jay's Interest = Rs. 80,000 × 9% = Rs. 7,200
Vijay's Interest = Rs. 50,000 × 9% = Rs. 4,500
Total Interest Required = Rs. 11,700
Since profit (Rs. 7,800) is less than total interest required (Rs. 11,700), interest will be allowed in the ratio of their capitals:
Jay's Interest = Rs. 7,800 × 80,000/1,30,000 = Rs. 4,800
Vijay's Interest = Rs. 7,800 × 50,000/1,30,000 = Rs. 3,000
Profit and Loss Appropriation Account:
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Interest on Capital: | By Net Profit | 7,800 | |
| Jay | 4,800 | ||
| Vijay | 3,000 | ||
| Total | 7,800 | Total | 7,800 |
28
Question
A and B are partners in the ratio of 3:2. The firm maintains Fluctuating Capital Accounts and the balance of the same as on 31st March 2020 amounted to Rs. 1,60,000 and Rs. 1,40,000 for A and B respectively. Their drawings during the year were Rs. 30,000 each. As per Partnership Deed, interest on capital @ 10% p.a. on opening capitals had been provided to them. Calculate the opening capital of partners given that their profit was Rs. 90,000. Show your working clearly.
Answer
Calculation of Total Opening Capital:
Total Opening Capital = Closing Capital + Drawings - Profit
Total Opening Capital = (Rs. 1,60,000 + Rs. 1,40,000) + (Rs. 30,000 + Rs. 30,000) - Rs. 90,000
Total Opening Capital = Rs. 2,70,000
Distribution of Opening Capital:
A's Opening Capital = Rs. 2,70,000 × 3/5 = Rs. 1,62,000
B's Opening Capital = Rs. 2,70,000 × 2/5 = Rs. 1,08,000
Interest on Capital:
A's Interest = Rs. 1,62,000 × 10% = Rs. 16,200
B's Interest = Rs. 1,08,000 × 10% = Rs. 10,800
29
Question
Following is the extract of the Balance Sheet of Neelkant and Mahadev as on 31st March, 2024. During the year, Mahadev's drawings were Rs. 30,000. Profits during the year ended 31st March, 2024 is Rs. 10,00,000. Calculate interest on capital @ 5% p.a. for the year ending 31st March, 2024.
Answer
Calculation of Interest on Capital:
Since Current Accounts are given in the Balance Sheet, the Capital Accounts are fixed.
Interest on Neelkant's Capital = Rs. 10,00,000 × 5% = Rs. 50,000
Interest on Mahadev's Capital = Rs. 10,00,000 × 5% = Rs. 50,000
Note: Interest on capital is calculated on fixed capital balances when current accounts are maintained separately.
30
Question
From the following Balance Sheet of Long and Short, calculate interest on capital @ 8% p.a. for the year ended 31st March, 2024. During the year, Long withdrew Rs. 40,000 and Short withdrew Rs. 50,000. Profit for the year was Rs. 1,50,000 out of which Rs. 1,00,000 was transferred to General Reserve.
Answer
Important Points:
1. Interest on capital is calculated on opening capital balances only.
2. In the absence of any profit sharing ratio, it will be taken as equal (1:1).
Calculation:
Interest is calculated at 8% p.a. on the opening capital balances of Long and Short as shown in the balance sheet.
The calculations would be based on the specific capital amounts given in the balance sheet extract.
31
Question
Amit and Bramit started business on 1st April, 2023 with capitals of Rs. 15,00,000 and Rs. 9,00,000 respectively. On 1st October, 2023, they decided that their capitals should be Rs. 12,00,000 each. The necessary adjustments in capitals were made by introducing or withdrawing by cheque. Interest on capital is allowed @ 8% p.a. Compute interest on capital for the year ended 31st March, 2024.
Answer
Capital Adjustments:
Amit: Withdrew Rs. 15,00,000 - Rs. 12,00,000 = Rs. 3,00,000
Bramit: Introduced Rs. 12,00,000 - Rs. 9,00,000 = Rs. 3,00,000
Interest on Capital Calculation:
Amit:
1st April to 30th September: Rs. 15,00,000 × 8% × 6/12 = Rs. 60,000
1st October to 31st March: Rs. 12,00,000 × 8% × 6/12 = Rs. 48,000
Total for Amit = Rs. 1,08,000
Bramit:
1st April to 30th September: Rs. 9,00,000 × 8% × 6/12 = Rs. 36,000
1st October to 31st March: Rs. 12,00,000 × 8% × 6/12 = Rs. 48,000
Total for Bramit = Rs. 84,000
32
Question
Moli and Bholi contribute Rs. 20,000 and Rs. 10,000 respectively towards capital. They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2:3 and the net profit for the year is Rs. 1,500. Show distribution of profits: (i) Where there is no agreement except for interest on capitals; and (ii) Where there is an agreement that the interest on capital as a charge.
Answer
Interest on Capital:
Moli: Rs. 20,000 × 6% = Rs. 1,200
Bholi: Rs. 10,000 × 6% = Rs. 600
Total Interest Required = Rs. 1,800
(i) Where there is no agreement except for interest on capitals:
Since net profit (Rs. 1,500) is less than total interest (Rs. 1,800), interest will be allowed proportionally:
Moli: Rs. 1,500 × 1,200/1,800 = Rs. 1,000
Bholi: Rs. 1,500 × 600/1,800 = Rs. 500
(ii) Where interest on capital is a charge:
Interest allowed in full: Moli Rs. 1,200, Bholi Rs. 600
Remaining loss = Rs. 1,500 - Rs. 1,800 = Rs. (300)
Loss distribution in ratio 2:3:
Moli's share of loss: Rs. 300 × 2/5 = Rs. 120
Bholi's share of loss: Rs. 300 × 3/5 = Rs. 180
33
Question
Shiv, Moha and Gopal are partners sharing profits and losses in the ratio of 2:2:1 respectively. A is entitled to a commission of 10% on the net profit. Net profit for the year is Rs. 1,10,000. Determine the amount of commission payable to A.
Answer
Calculation of Commission:
Commission to A = 10% of Net Profit
Commission to A = 10% of Rs. 1,10,000
Commission to A = Rs. 11,000
Note: Since the commission is stated as 10% on net profit (not after charging commission), it is calculated directly on the given net profit amount.
34
Question
Abha, Bobby, and Vineet are partners sharing profits and losses equally. As per Partnership Deed, Vineet is entitled to a commission of 10% on the net profit after charging such commission. Net Profit before charging commission is Rs. 2,20,000. Determine the amount of commission payable to Vineet.
Answer
Calculation of Commission:
Let Commission = C
Commission = 10% of (Net Profit after Commission)
C = 10% of (2,20,000 - C)
C = 0.10 × (2,20,000 - C)
C = 22,000 - 0.10C
C + 0.10C = 22,000
1.10C = 22,000
C = Rs. 20,000
Alternative Method:
Commission = Net Profit × Rate/(100 + Rate)
Commission = Rs. 2,20,000 × 10/(100 + 10)
Commission = Rs. 2,20,000 × 10/110 = Rs. 20,000
35
Question
A, B, C, and D are partners in a firm sharing profits as 4:3:2:1. The firm earned net profit of Rs. 1,80,000 for the year ended 31st March, 2024. As per the Partnership Deed, they are to charge commission @ 20% of the profit after charging such commission which they will share as 2:3:2:3. You are required to show appropriation of profits among the partners.
Answer
Calculation of Commission:
Commission = Rs. 1,80,000 × 20/(100 + 20) = Rs. 1,80,000 × 20/120 = Rs. 30,000
Profit after commission = Rs. 1,80,000 - Rs. 30,000 = Rs. 1,50,000
Distribution of Commission (in ratio 2:3:2:3):
A: Rs. 30,000 × 2/10 = Rs. 6,000
B: Rs. 30,000 × 3/10 = Rs. 9,000
C: Rs. 30,000 × 2/10 = Rs. 6,000
D: Rs. 30,000 × 3/10 = Rs. 9,000
Distribution of Remaining Profit (in ratio 4:3:2:1):
A: Rs. 1,50,000 × 4/10 = Rs. 60,000
B: Rs. 1,50,000 × 3/10 = Rs. 45,000
C: Rs. 1,50,000 × 2/10 = Rs. 30,000
D: Rs. 1,50,000 × 1/10 = Rs. 15,000
Total Distribution:
A: Rs. 6,000 + Rs. 60,000 = Rs. 66,000
B: Rs. 9,000 + Rs. 45,000 = Rs. 54,000
C: Rs. 6,000 + Rs. 30,000 = Rs. 36,000
D: Rs. 9,000 + Rs. 15,000 = Rs. 24,000
36
Question
X and Y are partners in a firm. X is entitled to salary of Rs. 10,000 per month and commission of 10% of the net profit after partners' salaries but before charging commission. Y is entitled to a salary of Rs. 25,000 p.a. and commission of 10% of the net profit after charging all commission and partners' salaries. Net profit before providing for partners' salaries and commission for the year ended 31st March, 2023 was Rs. 4,20,000, show distribution of profit.
Answer
Calculation of Salaries:
X's Salary = Rs. 10,000 × 12 = Rs. 1,20,000
Y's Salary = Rs. 25,000
Total Salaries = Rs. 1,45,000
Calculation of Commissions:
Profit after salaries = Rs. 4,20,000 - Rs. 1,45,000 = Rs. 2,75,000
X's Commission = 10% of Rs. 2,75,000 = Rs. 27,500
Profit after X's commission = Rs. 2,75,000 - Rs. 27,500 = Rs. 2,47,500
Y's Commission = Rs. 2,47,500 × 10/110 = Rs. 22,500
Remaining Profit Distribution:
Total appropriations = Rs. 1,45,000 + Rs. 27,500 + Rs. 22,500 = Rs. 1,95,000
Remaining profit = Rs. 4,20,000 - Rs. 1,95,000 = Rs. 2,25,000
X's share in remaining profit = Rs. 2,25,000 × 1/2 = Rs. 1,12,500
Y's share in remaining profit = Rs. 2,25,000 × 1/2 = Rs. 1,12,500
Final Distribution:
X: Salary Rs. 1,20,000 + Commission Rs. 27,500 + Profit Share Rs. 1,12,500 = Rs. 2,60,000
Y: Salary Rs. 25,000 + Commission Rs. 22,500 + Profit Share Rs. 1,12,500 = Rs. 1,60,000
37
Question
Ram and Mohan, two partners, drew for their personal use Rs. 1,20,000 and Rs. 80,000. Interest is chargeable @ 6% p.a. on the drawings. What is the amount of interest chargeable from each partner?
Answer
Calculation of Interest on Drawings:
Assuming drawings were made evenly throughout the year (average period = 6 months):
Interest on Ram's drawings = Rs. 1,20,000 × 6% × 6/12 = Rs. 3,600
Interest on Mohan's drawings = Rs. 80,000 × 6% × 6/12 = Rs. 2,400
Total interest on drawings = Rs. 6,000
Note: Interest on drawings is calculated using the formula: Amount × Rate × Time/12, where time is the average period for which the amount was withdrawn.
38
Question
Brij and Mohan are partners in a firm. They withdrew Rs. 48,000 and Rs. 36,000 respectively during the year evenly in the middle of every month. According to the partnership agreement, interest on drawings is to be charged @ 10% p.a. Calculate interest on drawings of the partners using the appropriate formula.
Answer
Calculation of Interest on Drawings:
For withdrawals in the middle of every month, average period = 6 months
Interest on Brij's drawings = Rs. 48,000 × 10% × 6/12 = Rs. 2,400
Interest on Mohan's drawings = Rs. 36,000 × 10% × 6/12 = Rs. 1,800
Formula Used: Interest = Amount × Rate × Average Period/12
Where Average Period for middle of every month = 6 months
39
Question
Dev withdrew Rs. 10,000 on the 15th day of every month. Interest on drawings was to be charged @ 12% per annum. Calculate interest on Dev's Drawings.
Answer
Calculation of Interest on Drawings:
Total withdrawal for the year = Rs. 10,000 × 12 = Rs. 1,20,000
For withdrawals on 15th of every month, average period = 5.5 months
Interest on Dev's drawings = Rs. 1,20,000 × 12% × 5.5/12 = Rs. 6,600
Note: When amount is withdrawn on 15th of every month, the average period is calculated as 5.5 months from the middle of the financial year.
40
Question
One of the partners in a partnership firm has withdrawn Rs. 9,000 at the end of each quarter, throughout the year. Calculate interest on drawings at the rate of 6% per annum.
Answer
Calculation of Interest on Drawings:
Total withdrawal for the year = Rs. 9,000 × 4 = Rs. 36,000
For withdrawals at the end of each quarter, average period = 4.5 months
Interest on drawings = Rs. 36,000 × 6% × 4.5/12 = Rs. 810
Formula: Interest = Total Drawings × Rate × Average Period/12
Where Average Period for end of each quarter = 4.5 months
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41
Question
A and B are partners sharing profits equally. A drew regularly Rs. 4,000 in the beginning of every month for six months ended 30th September, 2023. Calculate interest on drawings @ 5% p.a. for a period of six months ended 30th September, 2023.
Answer
Calculation of Interest on Drawings:
Interest is chargeable on drawings at 5% p.a.
Interest on A's drawings = Rs. 4,000 × 6 × 5/100 × 3.5/12 = Rs. 350
Note:
When a partner withdraws an equal amount at the beginning of every month for the first six months, then interest on drawings is calculated for 3.5 months (average period).
42
Question
A and B are partners sharing profits equally. A drew regularly Rs. 4,000 at the end of every month for six months ended 30th September, 2023. Calculate interest on drawings @ 5% p.a. for a period of six months ended 30th September, 2023.
Answer
Calculation of Interest on Drawings:
Interest is chargeable on drawings at 5% p.a.
Interest on A's drawings = Rs. 4,000 × 6 × 5/100 × 2.5/12 = Rs. 250
Note:
When a partner withdraws an equal amount at the end of every month for the first six months, then interest on drawings is calculated for 2.5 months (average period).
43
Question
B and C are partners sharing profits equally. C regularly withdrew Rs. 5,000 per month in the beginning of the month for six months ended 30th September 2023. Calculate interest on drawings @ 12% p.a. for the year ended 31st March 2024.
Answer
Calculation of Interest on Drawings:
Interest is chargeable on drawings at 12% p.a.
Interest on C's drawings = Rs. 5,000 × 6 × 12/100 × 9.5/12 = Rs. 2,850
Note:
Since withdrawals were made from April to September (6 months) at the beginning of each month, and the year ends on 31st March 2024, the average period for interest calculation is 9.5 months.
44
Question
Calculate interest on drawings of Sanjay @ 10% p.a. for the year ended 31st March, 2024, in each of the following alternative cases:
- Case 1: If he withdrew Rs. 7,500 in the beginning of each quarter.
- Case 2: If he withdrew Rs. 7,500 at the end of each quarter.
- Case 3: If he withdrew Rs. 7,500 during the middle of each quarter.
Answer
| Case | Timing | Average Period | Calculation | Interest Amount |
|---|---|---|---|---|
| Case 1 | Beginning of quarter | 6.5 months | Rs. 7,500 × 4 × 10/100 × 6.5/12 | Rs. 1,625 |
| Case 2 | End of quarter | 4.5 months | Rs. 7,500 × 4 × 10/100 × 4.5/12 | Rs. 1,125 |
| Case 3 | Middle of quarter | 5.5 months | Rs. 7,500 × 4 × 10/100 × 5.5/12 | Rs. 1,375 |
45
Question
The capital accounts of Tisha and Divya showed credit balances of Rs. 10,00,000 and Rs. 7,50,000 respectively after taking into account drawings and net profit of Rs. 5,00,000. The drawings of the partners during the year ended 31st March, 2024 were:
- (i) Tisha withdrew Rs. 25,000 at the end of each quarter
- (ii) Divya's drawings were Rs. 50,000 during the year
Calculate interest on partners' Capitals @ 10% p.a. and interest on partners' drawings @ 6% p.a. for the year ended 31st March 2024.
Answer
Calculation of Opening Capital:
Tisha's Opening Capital:
Opening Capital = Closing Capital + Drawings - Profit Share
Opening Capital = Rs. 10,00,000 + Rs. 1,00,000 - Rs. 2,50,000 = Rs. 8,50,000
Divya's Opening Capital:
Opening Capital = Rs. 7,50,000 + Rs. 50,000 - Rs. 2,50,000 = Rs. 5,50,000
| Partner | Opening Capital | Interest on Capital @ 10% | Drawings | Interest on Drawings @ 6% |
|---|---|---|---|---|
| Tisha | Rs. 8,50,000 | Rs. 85,000 | Rs. 1,00,000 | Rs. 2,700 |
| Divya | Rs. 5,50,000 | Rs. 55,000 | Rs. 50,000 | Rs. 1,500 |
Note:
Interest on Tisha's drawings (Rs. 25,000 × 4 × 6/100 × 4.5/12) = Rs. 2,700
Interest on Divya's drawings (Rs. 50,000 × 6/100 × 6/12) = Rs. 1,500
46
Question
A, B, and C are partners. During the year ended 31st March 2023, each of the partners withdrew Rs. 10,000 regularly. A withdrew in the beginning of the first 6 months of the year, B withdrew in the middle of the month for the first 6 months of the year and C withdrew at the end of the month for the first 6 months. Calculate interest on drawings @ 6% p.a. for the year ended 31st March 2023.
Answer
| Partner | Timing of Withdrawal | Average Period | Calculation | Interest on Drawings |
|---|---|---|---|---|
| A | Beginning of month | 3.5 months | Rs. 10,000 × 6 × 6/100 × 3.5/12 | Rs. 1,050 |
| B | Middle of month | 3 months | Rs. 10,000 × 6 × 6/100 × 3/12 | Rs. 900 |
| C | End of month | 2.5 months | Rs. 10,000 × 6 × 6/100 × 2.5/12 | Rs. 750 |
47
Question
Calculate the amount of Manan's monthly drawings for the year ended 31st March, 2024, in the following alternative cases when Partnership Deed allows interest on drawings @ 10% p.a.:
- (i) If interest on drawings is Rs. 1,950 and he withdrew a fixed amount in the beginning of each month.
- (ii) If interest on drawings is Rs. 2,400 and he withdrew a fixed amount in the middle of each month.
- (iii) If interest on drawings is Rs. 2,750 and he withdrew a fixed amount at the end of each month.
Answer
| Case | Timing | Interest Given | Average Period | Calculation | Monthly Drawings |
|---|---|---|---|---|---|
| (i) | Beginning | Rs. 1,950 | 6.5/12 | 1,950 ÷ (12 × 10/100 × 6.5/12) | Rs. 3,000 |
| (ii) | Middle | Rs. 2,400 | 5.5/12 | 2,400 ÷ (12 × 10/100 × 5.5/12) | Rs. 4,364 |
| (iii) | End | Rs. 2,750 | 4.5/12 | 2,750 ÷ (12 × 10/100 × 4.5/12) | Rs. 6,111 |
48
Question
Calculate the amount of Shiv's quarterly drawings for the year ended 31st March 2024, in the following alternative cases when Partnership Deed allows interest on drawings @ 12% p.a.:
- (i) If interest on drawings is Rs. 1,500 and he withdrew a fixed amount in the beginning of each quarter.
- (ii) If interest on drawings is Rs. 1,200 and he withdrew a fixed amount in the middle of each quarter.
- (iii) If interest on drawings is Rs. 900 and he withdrew a fixed amount at the end of each quarter.
Answer
| Case | Timing | Interest Given | Average Period | Calculation | Quarterly Drawings |
|---|---|---|---|---|---|
| (i) | Beginning | Rs. 1,500 | 7.5/12 | 1,500 ÷ (4 × 12/100 × 7.5/12) | Rs. 5,000 |
| (ii) | Middle | Rs. 1,200 | 6/12 | 1,200 ÷ (4 × 12/100 × 6/12) | Rs. 5,000 |
| (iii) | End | Rs. 900 | 4.5/12 | 900 ÷ (4 × 12/100 × 4.5/12) | Rs. 5,000 |
49
Question
Piyush, Harmesh, and Atul are partners. Each partner regularly withdrew Rs. 20,000 per month as given below:
- a) Piyush withdrew in the beginning of the month
- b) Harmesh withdrew in the middle of the month
- c) Atul withdrew at the end of the month
Interest on drawings charged for the year ended 31st March 2023 was Rs. 15,600, Rs. 14,400, and Rs. 13,200 respectively. Determine the rate of interest charged on drawings.
Answer
| Partner | Timing | Total Drawings | Average Period | Interest Charged | Rate of Interest |
|---|---|---|---|---|---|
| Piyush | Beginning | Rs. 2,40,000 | 6.5/12 | Rs. 15,600 | 12% |
| Harmesh | Middle | Rs. 2,40,000 | 5.5/12 | Rs. 14,400 | 13.09% |
| Atul | End | Rs. 2,40,000 | 4.5/12 | Rs. 13,200 | 14.67% |
Formula Used:
Rate = (Interest ÷ Total Drawings ÷ Average Period) × 100
50
Question
Calculate the Rate of interest on Drawings of Mohan in the following cases:
- a) If he withdrew Rs. 6,000 in the beginning of each quarter for the year ended 31st March 2023 and interest on drawings is Rs. 1,500.
- b) If he withdrew Rs. 6,000 at the end of each quarter for the year ended 31st March 2023 and interest on drawings is Rs. 900.
- c) If he withdrew Rs. 6,000 per quarter for the year ended 31st March 2023 and interest on drawings is Rs. 1,200.
Answer
| Case | Timing | Total Drawings | Average Period | Interest | Rate Calculation | Rate |
|---|---|---|---|---|---|---|
| a) | Beginning | Rs. 24,000 | 7.5/12 | Rs. 1,500 | 1,500 ÷ (24,000 × 7.5/12) | 10% |
| b) | End | Rs. 24,000 | 4.5/12 | Rs. 900 | 900 ÷ (24,000 × 4.5/12) | 10% |
| c) | Middle | Rs. 24,000 | 6/12 | Rs. 1,200 | 1,200 ÷ (24,000 × 6/12) | 10% |
51
Question
Amit and Vijay started a partnership business on 1st April 2022. Capital invested by them were Rs. 2,00,000 and Rs. 1,50,000 respectively. The partnership deed provided as follows:
- (a) Interest on Capital be allowed @ 10% p.a.
- (b) Amit to get a salary of Rs. 2,000 per month and Vijay Rs. 3,000 per month.
- (c) Profits are to be shared in the ratio of 3 : 2.
Net Profit for the year ended 31st March 2023 was Rs. 2,16,000. Interest charged on drawings was Rs. 2,200 for Amit and Rs. 2,500 for Vijay. Prepare Profit and Loss Appropriation Account.
Answer
Profit and Loss Appropriation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) | |
|---|---|---|---|---|
| By Net Profit | 2,16,000 | To Interest on Capital: | ||
| Amit @ 10% | 20,000 | |||
| Vijay @ 10% | 15,000 | |||
| By Interest on Drawings: | To Salary: | |||
| Amit | 2,200 | Amit (2,000 × 12) | 24,000 | |
| Vijay | 2,500 | Vijay (3,000 × 12) | 36,000 | |
| To Profit transferred to: | ||||
| Amit's Capital (3/5) | 75,420 | |||
| Vijay's Capital (2/5) | 50,280 | |||
| Total | 2,20,700 | Total | 2,20,700 | |
Working:
Profit available for distribution = Rs. 2,16,000 + Rs. 4,700 - Rs. 35,000 - Rs. 60,000 = Rs. 1,25,700
52
Question
A and B are partners sharing profits and losses in the ratio of 3:1. On 1st April, 2023, their capitals were: A Rs. 5,00,000 and B Rs. 3,00,000. During the year ended 31st March, 2024 they earned a net profit of Rs. 5,00,000. The terms of partnership are:
- (a) Interest on capital is to be allowed @ 6% p.a.
- (b) A will get a commission @ 2% on net sales.
- (c) B will get a salary of Rs. 5,000 per month.
- (d) B will get commission of 5% on profits after deduction of all expenses including such commission.
Partners' drawings for the year were: A Rs. 80,000 and B Rs. 60,000. Net Sales for the year was Rs. 30,00,000. Prepare Profit and Loss Appropriation Account and Partners' Capital Accounts.
Answer
Working Notes:
A's Commission = 2% of Rs. 30,00,000 = Rs. 60,000
B's Commission = 5% of (Rs. 5,00,000 - Rs. 90,000 - Rs. 60,000 - Rs. 60,000 - B's Commission)
Let B's Commission = x
x = 5% of (2,90,000 - x)
x = 14,500 - 0.05x
1.05x = 14,500
x = Rs. 13,810 (approx.)
Profit and Loss Appropriation Account
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
|---|---|---|---|
| To Interest on Capital: | By Net Profit | 5,00,000 | |
| A @ 6% | 30,000 | ||
| B @ 6% | 18,000 | ||
| To B's Salary | 60,000 | ||
| To A's Commission | 60,000 | ||
| To B's Commission | 13,810 | ||
| To Profit transferred to: | |||
| A's Capital (3/4) | 2,34,143 | ||
| B's Capital (1/4) | 78,047 | ||
| Total | 5,00,000 | Total | 5,00,000 |
Partners' Capital Accounts
| Particulars | A | B | Particulars | A | B |
|---|---|---|---|---|---|
| To Drawings | 80,000 | 60,000 | By Balance b/d | 5,00,000 | 3,00,000 |
| To Balance c/d | 7,44,143 | 4,09,857 | By Interest on Capital | 30,000 | 18,000 |
| By Salary | - | 60,000 | |||
| By Commission | 60,000 | 13,810 | |||
| By Share of Profit | 2,34,143 | 78,047 | |||
| Total | 8,24,143 | 4,69,857 | Total | 8,24,143 | 4,69,857 |
Short Answer Type Questions
1
Question
Mention the items that may appear on the credit side of the Capital Account of a Partner when the capitals are fluctuating.
Answer
Items that may appear on the credit side of the Capital Account when capitals are fluctuating:
- Credit opening balance
- Additional Capital
- Interest on Capital
- Commission
- Partner's Salary
- Share of Profit
2
Question
Mention the items that may appear on the debit side of the Capital Account of a Partner when the capitals are fluctuating.
Answer
Items that may appear on the debit side of the Capital Account when capitals are fluctuating:
- Debit Opening Balance
- Drawings against Capital
- Drawings against Profit
- Interest on Drawings
- Share of Loss
3
Question
List any four items appearing on the Profit and Loss Appropriation Account.
Answer
Four items appearing on the debit side of the Profit and Loss Appropriation Account:
- Net Loss Transferred from Profit and Loss Account
- Interest on Capital
- Partners' Salaries
- Partners' Commission
4
Question
State any four features of a Partnership.
Answer
Four essential features/characteristics of a Partnership:
- Two or More Persons: There must be at least two persons with contractual capacity to form a partnership. The maximum number of partners cannot exceed 50 as per Companies Act, 2013.
- Agreement: Partnership comes into existence by an agreement, either written or oral. The written agreement among partners is known as Partnership Deed.
- Lawful Business: A partnership is formed to carry on a lawful business with the objective of earning profit. Business includes trade, vocation, and profession.
- Profit-sharing: The agreement between partners must be to share profits or losses of the business. It is the essence of partnership relationship.
5
Question
List any four contents of a Partnership Deed.
Answer
Four contents of a Partnership Deed include:
- Description of the Partners: Names, description, and addresses of all the partners in the firm.
- Description of the Firm: Name and address of the partnership firm.
- Principal Place of Business: Address of the principal place of business where the firm operates.
- Nature of Business: Nature and type of business that the firm shall carry on.
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6
Question
What are the main components of a Company's Balance Sheet according to Schedule III of the Companies Act, 2013?
Answer
The main components of a Company's Balance Sheet according to Schedule III are:
1. EQUITY AND LIABILITIES
- Shareholders' Funds (Share Capital and Reserves & Surplus)
- Non-Current Liabilities (Long-term Borrowings, Deferred Tax Liabilities, etc.)
- Current Liabilities (Short-term Borrowings, Trade Payables, etc.)
2. ASSETS
- Non-Current Assets (Property, Plant & Equipment, Intangible Assets, Investments)
- Current Assets (Inventories, Trade Receivables, Cash & Cash Equivalents)
7
Question
Distinguish between Current Assets and Non-Current Assets with examples.
Answer
| Basis | Current Assets | Non-Current Assets |
|---|---|---|
| Time Period | Expected to be realized within 12 months or operating cycle | Expected to be held for more than 12 months |
| Liquidity | Highly liquid and easily convertible to cash | Less liquid, difficult to convert to cash quickly |
| Purpose | Used for day-to-day operations | Used for long-term business operations |
| Examples | Cash, Bank, Inventories, Trade Receivables, Prepaid Expenses | Land, Building, Plant & Machinery, Goodwill, Patents |
8
Question
Explain the concept of 'Reserves and Surplus' in a Company's Balance Sheet. Give examples.
Answer
Reserves and Surplus represent the accumulated profits and other surpluses of a company that are retained in the business for future use.
Components of Reserves and Surplus:
1. Capital Reserves:
- Securities Premium Reserve
- Capital Redemption Reserve
- Profit on revaluation of assets
2. Revenue Reserves:
- General Reserve
- Retained Earnings (Surplus in P&L)
- Specific Reserves (Investment Fluctuation Reserve)
3. Other Items:
- Money received against share warrants
- Share application money pending allotment
Exercise Questions
1
Question
Prepare a Balance Sheet of ABC Ltd. from the following information as on 31st March, 2024:
Equity Share Capital: ₹10,00,000
General Reserve: ₹2,50,000
Retained Earnings: ₹1,75,000
12% Debentures: ₹5,00,000
Trade Payables: ₹1,25,000
Land & Building: ₹8,00,000
Plant & Machinery: ₹6,50,000
Inventories: ₹2,75,000
Trade Receivables: ₹1,50,000
Cash & Bank: ₹1,75,000
Answer
ABC Ltd.
Balance Sheet as on 31st March, 2024
(Amount in ₹)
| Particulars | Amount |
|---|---|
| I. EQUITY AND LIABILITIES | |
| (1) Shareholders' Funds | |
| Share Capital | 10,00,000 |
| Reserves and Surplus | 4,25,000 |
| (2) Non-Current Liabilities | |
| Long-term Borrowings | 5,00,000 |
| (3) Current Liabilities | |
| Trade Payables | 1,25,000 |
| TOTAL | 20,50,000 |
| II. ASSETS | |
| (1) Non-Current Assets | |
| Property, Plant and Equipment | 14,50,000 |
| (2) Current Assets | |
| Inventories | 2,75,000 |
| Trade Receivables | 1,50,000 |
| Cash and Cash Equivalents | 1,75,000 |
| TOTAL | 20,50,000 |
2
Question
State the objectives of preparing financial statements of a company.
Answer
The main objectives of preparing financial statements are:
To provide financial information: Show the financial position and performance of the company
For decision making: Help stakeholders make informed economic decisions
Legal compliance: Meet statutory requirements under Companies Act, 2013
Performance evaluation: Assess profitability, liquidity, and efficiency
Transparency and accountability: Provide clear information to shareholders and stakeholders
3
Question
What is the difference between Gross Profit and Net Profit? Explain with examples.
Answer
| Basis | Gross Profit | Net Profit |
|---|---|---|
| Definition | Revenue from operations minus Cost of Goods Sold | Gross Profit minus all operating and non-operating expenses |
| Formula | Sales - Cost of Goods Sold | Gross Profit - Operating Expenses - Finance Costs - Tax |
| Purpose | Shows efficiency in production/trading activities | Shows overall profitability after all expenses |
| Example | Sales: ₹5,00,000 COGS: ₹3,00,000 Gross Profit: ₹2,00,000 | Gross Profit: ₹2,00,000 Expenses: ₹1,20,000 Net Profit: ₹80,000 |
4
Question
Explain the treatment of Preliminary Expenses in the Balance Sheet of a company.
Answer
Preliminary Expenses are the expenses incurred before the incorporation of a company and during its formation.
Examples of Preliminary Expenses:
- Legal fees for incorporation
- Registration fees
- Printing of Memorandum and Articles of Association
- Advertisement expenses
- Underwriting commission
Treatment in Balance Sheet:
- Shown under Non-Current Assets
- Listed under Other Non-Current Assets
- Must be written off within 5 years from the date of incorporation
- Annual amortization is charged to Profit & Loss Account
5
Question
What are the users of financial statements? Classify them into internal and external users.
Answer
Internal Users
- Management: For decision making and planning
- Employees: For job security and wage negotiations
- Board of Directors: For strategic decisions
External Users
- Investors: For investment decisions
- Creditors: For credit worthiness assessment
- Banks: For loan decisions
- Government: For taxation and regulation
- Suppliers: For business relationship decisions
- Customers: For continuity of supply
6
Question
Explain the concept of 'Other Comprehensive Income' in financial statements.
Answer
Other Comprehensive Income (OCI) includes items of income and expense that are not recognized in the Statement of Profit and Loss but are included in comprehensive income.
Examples of OCI items:
- Revaluation gains/losses on property, plant and equipment
- Actuarial gains/losses on employee benefit obligations
- Foreign currency translation differences
- Fair value changes in certain financial instruments
Key Points:
- OCI items may be reclassified to P&L in future periods
- Total Comprehensive Income = Net Profit + Other Comprehensive Income
- Disclosed separately in Statement of Profit and Loss
7
Question
What is the significance of Notes to Accounts in financial statements?
Answer
Notes to Accounts are additional explanations and disclosures that accompany the main financial statements.
Significance:
8
Question
Distinguish between Revenue Expenditure and Capital Expenditure with examples.
Answer
| Basis | Revenue Expenditure | Capital Expenditure |
|---|---|---|
| Nature | Regular, recurring expenses | One-time, long-term investments |
| Period | Benefits for current accounting period | Benefits for more than one accounting period |
| Treatment | Charged to Profit & Loss Account | Shown in Balance Sheet as assets |
| Examples | Rent, Salaries, Repairs, Raw Materials | Purchase of machinery, Land, Building |
| Impact on Profit | Reduces current year's profit | No immediate impact on profit |
9
Question
Explain the concept of Earnings Per Share (EPS) and its calculation.
Answer
Earnings Per Share (EPS) represents the portion of company's profit allocated to each outstanding share of equity stock.
Formula:
EPS = Net Profit After Tax / Weighted Average Number of Equity Shares
Example:
- Net Profit After Tax: ₹10,00,000
- Number of Equity Shares: 2,00,000
- EPS = ₹10,00,000 ÷ 2,00,000 = ₹5 per share
Significance:
- Measures company's profitability per share
- Used for comparing performance across companies
- Important for investment decisions
10
Question
What are Contingent Liabilities? How are they disclosed in financial statements?
Answer
Contingent Liabilities are potential obligations that may arise from past events and whose existence depends on uncertain future events.
Examples:
- Pending court cases
- Guarantees given to third parties
- Bills discounted with banks
- Claims not acknowledged as debts
Disclosure:
- Not shown in Balance Sheet
- Disclosed in Notes to Accounts
- Mentioned as a footnote
- Explained with nature and estimated financial effect
11
Question
Explain the treatment of Provision for Doubtful Debts in financial statements.
Answer
Provision for Doubtful Debts is created to account for trade receivables that may not be recovered.
Treatment:
- Provision created or increased - Debited
- Provision reduced - Credited
- Shown as deduction from Trade Receivables
- Net receivables = Gross Receivables - Provision
Example:
Trade Receivables: ₹1,00,000
Less: Provision for Doubtful Debts: ₹5,000
Net Trade Receivables: ₹95,000
12
Question
What is the importance of Cash Flow Statement? Explain its main components.
Answer
Importance of Cash Flow Statement:
- Shows actual cash generation and utilization
- Helps assess liquidity position
- Aids in cash planning and budgeting
- Evaluates company's ability to pay dividends
Operating Activities
- • Cash from sales
- • Cash paid to suppliers
- • Cash paid for expenses
- • Tax payments
Investing Activities
- • Purchase of assets
- • Sale of assets
- • Investments made
- • Investment income
Financing Activities
- • Issue of shares
- • Loan receipts
- • Loan repayments
- • Dividend payments