Question – Series 120

1. Admission of a partner is reconstitution of the firm because existing agreement comes to an end and a new agreement comes into effect consequent to admission of a partner.
2. Creditors of ₹ 30,000 and Bills Payable of ₹ 8,000 were due on an average basis of one month after 31stMarch, 2019 but they were paid immediately on 31stMarch, 2019 @ 6% discount p.a., the amount debited to Realisation Account will be ______.
3. Ashima and Nagma are partners in M/s Saraswati Enterprise. They admit Ashok as partner w.e.f 1st April, 2019. They agreed to value goodwill at 3 years’ purchase of Super Profit for which they decided to take average of last 5 years profit. The profits for the last five years were:

Year Ended                                                               ₹

31st March, 2015                2,00,000 (including gain of ₹  25,000 From sale of fixed assets);

31st March, 2016                1,70,000 (including abnormal loss of  ₹  50,000)

31st March, 2017                                             2,10,000;

31st March, 2018                                             2,30,000;

31st March, 2019                                             2,50,000.

Capital employed in the firm is ₹  15,00,000 and normal rate of return in similar business is 10%. Calculate value of goodwill.

a) ₹ 2,01,000

b) ₹ 1,01,000

c) ₹ 2,01,000

d) ₹ 3,06,000

1. True

Reason: Reconstitution of firm takes place when there is a change in profit-sharing ratio, admission retirement or death because new terms are agreed among partners and fresh Partnership Deed is executed. As a result, old partnership comes to on end and new agreement comes into effect.

1. ₹ 37,810
2. (c)

Reason: Calculation of Normal Profit

Year Ended                   Profit (₹ )          Adjustment (₹ )       Normal Profit (₹ )

31st March, 2015                2,00,000                  (25,000)                  1,75,000

31st March, 2016                1,70,000                    50,000                   2,20,000

31st March, 2017              2,10,000                      –                            2,10,000

31st March, 2018              2,30,000                     –                             2,30,000

31st March, 2019              2,50,000                       –                            2,50,000

10,85,000

Average Profit = Total Normal Profit / Number of Years

= ₹  10,85,000/5

= ₹  2,17,000

1. Calculation of Normal Profit :

Capital Employed = ₹  15,00,000

Normal Rate of Return = 10%

Normal Profit = ₹  15,00,000 X 10/100 = ₹  1,50,000

1. Calculation of Super Profit:

Super Profit = Average Profit – Normal Profit

= ₹  2,17,000 – ₹  1,50,000

= ₹  67,000

1. Value of goodwill:

Goodwill = Super Profit X Number of Years’ Purchase

= ₹  67,000 X 3

= ₹  2,01,000

Question – Series 121

1. A and B are sharing profits and losses in the ratio 3:2. They admitted C as a partner and gave him 1/3rd share in the profits of the firm. New profit sharing ratio will be 6:4:5.
2. Bharat, a partner was to look after the dissolution for an amount of ₹ 50,000. Bharat agreed to bear the dissolution expenses. Actual dissolution expenses were ₹ 30,000 which were paid by Bharat. Realisation Account will be debited by _______.
3. Capital Account of the partners will be credited for

(a)     Writing off goodwill

(b)     Distribution of debit balance of Profit & Loss Account

(c)     Profit on revaluation of assets and reassessment of liabilities

(d)     Loss on revaluation of assets and reassessment of liabilities

1. True

Reason: Sacrificing Ratio of A and B is not given. Thus, their sacrificing ratio is their profit-sharing ratio i.e., 3:2. Profit share of C is 1/3

Thus, Balance Profit is 1 – 1/3 = 2/3, which will be shared by A and B in the ratio of 3:2

A’s share in profits is 2/3 × 3/5 i.e., 2/5 or 6/15

B’s share in profits is 2/3 × 2/5 i.e., 4/15

C’s share of profit is 1/3 or 5/15

New Profit-sharing Ratio is 6:4:5.

1. ₹ 50,000
2. (c)

Reason: Goodwill has a debit balance and so does the loss in case of debit balance in the Profit and Loss Account. Goodwill when written off or loss when distributed, Capital Account of the partners will be debited. Profit on revaluation of assets or reassessment of liabilities will have credit balance, which will be credited to the Capital Accounts.

Question – Series 122

1. At the time of admission, General Reserve is transferred to Capital Accounts of the partners in old profit sharing ratio. .
2. In case of admission of a partner, the entry for unrecorded investment is _________.
3. There are three partners in a firm P & Q. R is admitted in the firm for 1/3rd share of profit with the guaranteed annual profit of ₹ 18,000 p.a. The firm’s total profit for the year is ₹  42,000. If A stood as guarantor of guaranteed profit to R, how much profit would be given to Q

(a)     ₹  20,000

(b)     ₹  15,000

(c)     ₹  10,000

(d)     ₹  18,000

1. True

Reason: General Reserve is an appropriation of profit. General Reserve in the books of the firm is set aside out of profits earned when old partners were partners in the firm. Thus, old Partners have the right to that profit and not the new partner.

1. Debit Investment A/c and Credit Revaluation A/c
2. (c)

Reason: Q has guaranteed the share of profit to the R. Therefore, Q will bear the deficiency out of his share of profit. Total profit will be distributed in the profit sharing ratio as given, thereafter the deficiency of the guaranteed profit of R will be charged from Q. Profit shares of Q and R before adjustment is ₹  14,000 each. Deficiency in R’s profit is ₹  4,000 (₹  18,000 – ₹  14,000) which will be borne by Q. Therefore, Q’s share of profit is ₹  10,000 (₹  14,000 – ₹  4,000).

Question – Series 123

1. Debentures by a Banking Company can be redeemed out of capital. .
2. If the capital account of a partner shows a debit balance at the time of final settlement then he will bring _________ equal to the debit balance.
3. A and B are partners sharing profits in the ratio 2 : 1. They decided to share future profit in the ratio 3 : 2. If the goodwill of the firm is valued at ₹ 1,80,000, how the adjustment in the profit will be affected?

(a)     B pays A ₹  12,000

(b)     A pays B ₹  12,000

(c)     A pays B ₹  18,000

(d)     B pays A ₹  18,000

1. True

Reason: Because Banking companies are exempted from setting aside amount to  DRR. Therefore, they can redeem their debentures out of capital.

1. Cash
2. (a)

Reason:                                              A                         B

New Ratio                                3/5                        2/5

Old Ratio                                 2/3                        1/3

Gaining / Sacrificing Ratio                (1/15)                    1/15

i.e., B is the Gaining Partner while A is the Sacrificing Partner. Therefore, B will compensate A an amount equal to 1/15th of ₹  1,80,000 i.e. ₹  12,000.

Question – Series 124

1. General Reserve can be transferred to Debenture Redemption Reserve. .
2. Capital + Reserves – Fictitious Assets – Non-trade investments = ________.
3. The amount set aside for redeeming debentures out of profits available for payment of dividend is termed:

(a)     General Reserve

(c)     Debenture Redemption Reserve

(d)     Capital Redemption Reserve

1. True

Reason: A company before redeeming the debentures shall transfer out of profits available for payment as dividend to shareholders at least 25% of the nominal value of the outstanding debentures to DRR. Dividend can be paid by a company from General Reserve. Thus, DRR can be created from General Reserve.

1. Capital Employed
2. (c)

Reason: A company is required by law to transfer amount to Debenture Redemption Reserve (DRR) out of profits available for payment of dividend for the purpose of redemption of debentures.

Question – Series 125

1. Weighted Average Method of calculating goodwill is useful when Profits are similar in all the years. .
2. If debentures are redeemed without setting aside amount to Debenture Redemption Reserve (DRR), it is redemption out of _________.  .
3. Average net profit of Anjara Depot expected in future is ₹ 54,000 per year. Average Capital Employed in the business is ₹  3,00,000. Normal Profit expected from Capital invested in this class of business is 10%.Management Cost is estimated to be ₹  9,000  p.a. Determine the value of  goodwill on the basis of two years’ purchase of super profit.

a) ₹ 60,000

b) ₹ 90,000

c) ₹ 30,000

d) ₹ 45,000

1. False

Reason: Weighted Average Method of calculating goodwill is used when profit shows a trend because profits of latest years indicate the profit the firm is likely to earn in coming years.  Profits of later years is given more weightage it being profit of more recent years.

1. Capital
2. (c)

Reason:                                                                                                                ₹

Average Profit                                                                                                    54,000

Less: Management Cost                                                        ₹  9,000

Normal Profit on Capital Employed (₹  3,00,000 X 10/100)    ₹  30,000        39,000

Super Profit                                                                                                         15,000

Goodwill, being two  years’ purchase of Super Profit = ₹  15,000 X 2

= ₹  30,000.

Management Cost is deducted to determine normal profit because it is the value of their services to the firm for handling business.

Question – Series 126

1. Goodwill is valued only at the time of change in profit sharing ratio.
2. Amount earlier written off as bad debt now received is transferred to Revaluation Account in the ________.
3. Amount is not set aside to Debenture Redemption Reserve (DRR) on

(a)     Fully Convertible Debenture

(b)     Non-Convertible Debenture

(c)     Secured Debentures

(d)     Irredeemable Debenture

1. False

Reason: Goodwill is calculated at the time of reconstitution of firm that is at the time of change in profit-sharing ratio, admission of a partner, retirement or death of a partner so that gaining partners should compensate the sacrificing partners accordingly.

1. Credit
2. (a)

Reason:  According to Companies Act, 2013 and Rule 18(7) (b) of Companies (Share Capital and Debentures) Rules 2014, amount is not set aside to DRR if the debentures are fully convertible into shares or debentures.

Question – Series 127

1. At the time of admission of a Partner, Gain (Profits) or Losses arising on the revaluation of assets and reassessment of liabilities is transferred to old Partners’ Capital Account in their old profit sharing Ratio.
2. Comparative Statement is _______ analysis.
3. The excess of Purchase Consideration over net assets is debited to

(a) Goodwill A/c

(b) Capital Reserve A/c

(c) General Reserve A/c

(d) Reserve Capital A/c

1. True

Reason: New partner when admitted should not be put to an advantage or disadvantage. Therefore, assets are revalued and liabilities are reassessed at the time of admission. Gain (profit) or loss arising there from is transferred to old partners in their old profit sharing ratio.

1. horizontal
2. (a)

Reason:  If Purchase Consideration is more than net assets acquired, the difference amount is paid towards Goodwill. It therefore, is debited to Goodwill Account.

Question – Series 128

1. Ram and Shyam share profits and losses in the ratio of 4 : 3. They admit Mohan in the firm for 3/7th share which he gets 2/7th from Ram and 1/7th from Shyam. The new profit sharing ratio will be 2 : 2 : 3.
2. It is necessary that the firm should do only business that is ______.
3. Favourable attributes or factors on which goodwill of a firm depends will not include:

(a)     Customer’s attitude

(c)     Desirable location

(d)     Absence of competition

1. True

Reason: Mohan is admitted for 3/7th share in profits. He gets 2/7th from Ram therefore Ram’s share in profit 4/7 – 2/7 = 2/7, Shyam’s share in profit 3/7 – 1/7 = 2/7 and Mohan’s share in profit is 3/7. Therefore New Profit-Sharing Ratio is 2 : 2 : 3.

1. Lawful
2. (c)

Reason:  The existence of positive customer’s attitude, turnover of business and absence of competition are essential elements for goodwill. The existence of these three elements may not require the firm to have desirable location.

Question – Series 129

1. Loan by a partner to the firm is an outside liability.
2. For the firm, interest on drawings is an _______.
3. Under Premium Method, share of goodwill brought in cash by the new partner is shared among the old partners:

(a)     Equally

(b)     In their Sacrificing Ratio

(c)     In their new Ratio

(d)     In their Capital Ratio

1. False

Reason: Partner’s Loan is not an outside liability. It is payable after payment of outside liabilities but before repayment of capital.

1. income
2. (b)

Reason: Premium for Goodwill brought by the new partner is shared by the existing partners in their sacrificing ratio. Sacrificing Ratio is the ratio in which the partners have given up their shares in favour of the new partner.

Question – Series 130

1. All liabilities except Partner’s Capital Accounts are transferred to Realisation Account.
2. If a fixed amount is withdrawn by a partner on the first day of every month for one year, interest on the total amount is charged for ________ months.
3. X and Y are partners sharing profits equally. X draws ₹ 2,000 at the end of each month for 6 months. If interest on drawings is to be charged @ 6% p.a. What will be the interest on drawings of X?

(a)     ₹ 150

(b)     ₹ 160

(c)     ₹ 170

(d)     ₹ 155

1. False

Reason: All outside liabilities are transferred to Realisation Account. Thus, Partner’s Loan Account (given by the Partner) and Partner’s Capital Accounts are not transferred to Realisation Account. It is so because outside liabilities are paid first, therefore Loan by Partner’s is repaid and lastly Partner’s Capital Account.

1. 6.5
2. (a)

Reason: Total amount withdrawn will be ₹ 12,000. Rate of Interest @ 6% p.a.

Therefore interest = ₹ 2,000 X 6 X 6 X 5 / (100 X 12 X 2) = ₹ 150

Question – Series 131

1. Dissolution of Partnership Firm means Relationship among the Partners come to an end.
2. Common Size Financial Statements are ________ analysis of financial statements.
3. Sleeping Partners are those who:

(a)     Take active part in the conduct of the business but provide no capital. However, Salary is paid to them.

(b)     Do not take any part in the conduct of the business but provide capital and share profits and losses in the agreed ratio.

(c)     Take active part in the conduct of the business but provide no capital. However, Share Profits and Losses in the agreed ratio.

(d)     Do not take any part in the conduct of the business and contribute no capital. However, share profits and losses in the agreed ratio.

1. True

Reason: Dissolution of Partnership Firm means closure of business and Partnership coming to an end. Hence, when the firm is dissolved partnership also comes to an end.

1. Vertical
2. (b)

Reason: Sleeping partners are those who do not take business decision and thus, do not take part in the conduct of the business. However, they invest capital in the business and share profits and losses in the agreed ratio.

Question – Series 132

1. Raju a partner was to bear realisation expenses, for which he was to be given ₹ 40,000. Raju paid ₹ 50,000 as Realisation Expenses. Realisation Account will be debited by ₹ 50,000.
2. Share Capital that a Company decides to call at the time of winding up is termed as _____.
3. Maximum Number of partners in a partnership firm can be:

(a)     Two

(b)     Ten

(c)     One Hundred

(d)     Fifty

1. False

Reason: Realisation Account is debited by the amount that is borne by the firm. In the present question, firm is bearing ₹ 40,000, the amount agreed to be paid by the firm.

1. Reserve Capital
2. (d)

Reason: Maximum Number of Partners in a Partnership Firm can be fifty. It is so provided in the Companies Act, 2013.

Question – Series 133

1. Debenture holders have a right to vote in the event they are not paid interest.
2. Discount or Loss on Issue of debentures is a ________ loss.
3. In the absence of agreement, partners are entitled to:

(a)     Salary

(b)     Commission

(c)     Interest on Capital

(d)     Interest on Loan to the firm @ 6% p.a.

1. False

Reason: Debentureholders do not have any voting rights even if they have not been paid interest.  They are lenders of the Company who are entitled to interest alone.

1. Capital
2. (d)

Reason: In the absence of agreement, provision of the Partnership Act, 1932 apply. It provides that in the absence of Partnership Deed, Partners will not get salary, commission, interest on capital but will get interest @ 6% p.a. on the loan given to the firm.

Question – Series 134

1. Debenture issued at Par means Debenture issued at a nominal (face) value.
2. Remuneration is paid to partners only if the ________ allows it to be paid.
3. Sangeeta and Ankita are partners in a firm. Sangeeta’s Capital is ₹ 70,000 and Ankita’s Capital is ₹ 50,000. Firm’s Profit is ₹ 60,000. Ankita’s Share in profit will be:

(a) ₹ 25,000

(b) ₹ 30,000

(c) ₹ 35,000

(d) ₹ 20,000.

1. True

Reason: Debenture issued at their Nominal (Face) value is called Debenture issued at Par.

1. Partnership Deed
2. (b)

Reason: Firm’s Profit = ₹ 60,000

Profit Sharing Ratio is not given. It means profit will be shared equally by partners.

Therefore Ankita’s Share = ₹ 30,000.

Question – Series 135

1. According to the Partnership Act, 1932 (Sec. 37), interest payable to the deceased partner on the amount left by him will be @ 6%.
2. Total Profit of the year is apportioned between the periods of pre-death and post-death on the basis of turnover by applying ___________.
3. Normal Profit for Goodwill Valuation is calculated:

(a)     By deducting abnormal gains (profit)

(c)     By deducting abnormal gains and adding abnormal losses

1. False

Reason: The Partnership Act, 1932 provides that interest payable to the retiring partner on the amount not paid to him will be @ 6% p.a. and not 6%.

1. Turnover Basis Method
2. (c)

Reason: Goodwill is valued on the basis of normal profit. Normal Profit is  calculated by deducting abnormal gains (like sale of investment) and adding abnormal losses (like loss by fire).

Question – Series 136

1. Debentures can be issued at par, premium or discount.
2. Goodwill is recognised in the books of account only when consideration in _______ or ________ has been paid for it.
3. The formula for Capitalisation of Super Profit Method is:

(a)     Super Profit X Number of Year’s Purchase

(b)     Super Profit X 100/Normal Rate of Return

(c)     (Super Profit – Normal Profit) X 100 / Number Rate of Return

(d)     Super Profit X 100/Number of Years’ Purchase

1. True

Reason: The Companies Act, 2013 permits issue of debentures at par, discount or at premium.

1. Money, Money’s Worth
2. (b)

Reason: Capitalisation of Super Profit = Super Profit X 100/Normal Rate of Return.

Question – Series 137

1. If firm’s assets are inadequate to meet firm’s debts, private assets of the partners are applied to meet firm’s debts.
2. If a Company has Reserve Capital, such shares, in the Notes to Account on Share Capital, are shown as______.
3. ‘Discount received on making payment to suppliers’ results in:

(a)     Inflow of Cash and Cash Equivalents.

(b)     Outflow of Cash and Cash Equivalents.

(c)     No Flow of Cash and Cash Equivalents.

(d)     Both inflow and outflow of Cash and Cash Equivalents.

1. True

Reason: Liability of a partner is unlimited, joint and several. Thus if firm’s assets are not adequate to meet firm’s debts, net private assets of the partners are applied to pay the deficiency.

1. Subscribed and not fully paid up
2. (b)

Reason: Discount Received against payment to suppliers will reduce the amount payable to them. As a result, decrease in creditors will mean outflow of cash.

Question – Series 138

1. Raju a partner was to bear realisation expenses for which he has paid ₹ 40,000. Raju paid ₹ 50,000 as Realisation Expenses. Realisation Account will be debited by ₹ 50,000.
2. Statement prepared for comparing assets, equity and liabilities for two or more accounting periods is called __________.
3. Receipts and Payments Account is summary of:

(a)     Day to day cash transactions.

(b)     Summary of cash transactions.

(c)     Credit transactions.

(d)     Both Cash and Credit transactions.

1. False

Reason: Realisation Account is debited by the amount that is borne by the firm. In the present question, firm is bearing ₹ 40,000, the amount agreed to be paid by the firm.

1. Comparative Balance Sheet
2. (b)

Reason: Receipts and Payments Account is a summary of Cash and Bank transactions. It starts with opening cash and bank balance and ends with closing cash and bank balance and shows receipts and payments during the year under appropriate heads of accounts.

Question – Series 139

1. Surplus or Deficit of a Not-for-Profit Organisation is transferred to Capital A/c.
2. Interest on Loan taken by a partner is _______ to Profit and Loss Account.
3. Example of Investing Activity both for ‘Financial’ and ‘Non-Financial’ Companies:

(a)     Purchase of Non-Current Assets.

(b)     Purchase of Stock.

(c)     Transfer to General Reserve.

(d)     Purchase of Current Asset.

1. False

Reason: A NPO does not have Capital Account but has Capital Fund Account . Surplus is added to Capital Fund while Deficit is deducted from it.

1. credited
2. (a)

Reason: Purchase of Non-Current Assets either tangible or intangible is an investing activity.

Question – Series 140

1. M Ltd. purchased a machinery of ₹ 12,00,000 by paying cash of ₹ 3,00,000 and issue of shares at premium for ₹ 9,00,000. In the Cash Flow Statement, the transaction will be shown as outflow under investing activity ₹ 12,00,000.
2. Smaller number of shares are allotted to each applicant according to the number of shares applied by him. This is called __________.
3. The amount set aside for redeeming the debentures out of profits available for payment of dividend is termed as:

(a)     General Reserve.

(c)     Debenture Redemption Reserve.

(d)     Capital Redemption Reserve.

1. False

Reason: Cash Flow Statement is prepared showing inflow and outflow of cash and cash equivalents under Operating, Investing and Financing Activity. In the present question, ₹ 3,00,000 is paid. Hence ₹ 3,00,000 will be shown as outflow under Investing Activity.

1. pro-rata
2. (c)

Reason: A company is required by law to transfer amount to Debenture Redemption Reserve (DRR) out of profits available for payment of dividend for the purpose of redemption of debentures. This provision however, does not apply to All India Financial Institutions governed by RBI, Banking Companies, Fully Convertible Debentures and Convertible Part of Partly Convertible Debentures.

Question – Series 141

1. Shares issued to promotors of a company is not a flow of Cash.
2. A, B and C are partners sharing profits in the ratio of 1/4 : 3/10: 9/20. New profit sharing ratio on retirement of C will be __________.
3. X contributes ₹ 2,00,000 for his 1/4th share then the total capital of the firm will be:

(a)     ₹ 6,50,000.

(b)     ₹ 5,62,500.

(c)     ₹ 8,00,000.

(d)     ₹ 10,00,000.

1. True

Reason: Shares issued to promotors not generating the revenue or Cash.

1. 5 : 6
2. (c)

Reason: X brings in ₹ 2,00,000 for his 1/4th share in the new firm.

Therefore, the total capital of the firm will be ₹ 8,00,000 (₹ 2,00,000 X 4/1).

Question – Series 142

1. Voluntary Retirement Compensation paid to employees is an operating activity.
2. In case of _________ allotment is made to all the applicants.
3. Which of the following statement is true?

(a)     A minor cannot be admitted as a partner.

(b)     A minor can be admitted as a partner, only for the benefits of the partnership.

(c)     A minor cannot be a sleeping partner.

(d)     A minor can be admitted as a partner but his rights and liabilities are same of adult partner.

1. True

Reason: Compensation is paid by the enterprise to its retiring employees, who work to produce revenue for the enterprise. Hence, it is an Operating Activity.

1. under subscription
2. (b)

Reason: A minor can be admitted as a partner only into the benefits of the partnership because a minor is not capable to take sound decisions.

Question – Series 143

1. Debenture holders have a right to vote in the event they are not paid interest.
2. Discount or Loss on Issue of debentures is a _______ loss.
3. In the absence of agreement, partners are entitled to:

(a)     Salary

(b)     Commission

(c)     Interest on Capital

(d)     Interest on Loan to the firm @ 6% p.a.

1. False

Reason: Debentureholders do not have any voting rights even if they have not been paid interest.  They are lenders of the Company who are entitled to interest alone.

1. Capital
2. (d)

Reason: In the absence of agreement, provision of the Partnership Act, 1932 apply. It provides that in the absence of Partnership Deed, Partners will not get salary, commission, interest on capital but will get interest @ 6% p.a. on the loan given to the firm.

Question – Series 144

1. Debentures can be issued at par, premium or discount.
2. Goodwill is recognised in the books of account only when consideration in _______ or _______ has been paid for it.
3. The formula for Capitalisation of Super Profit Method is:

(a)     Super Profit X Number of Year’s Purchase

(b)     Super Profit X 100/Normal Rate of Return

(c)     (Super Profit – Normal Profit) X 100 / Number Rate of Return

(d)     Super Profit X 100/Number of Years’ Purchase