Q1. Which of the following is NOT a characteristic of a partnership firm under the Indian Partnership Act, 1932?
(a) Minimum two persons required
(b) Separate legal entity from its partners
(c) Mutual agency
(d) Unlimited liability of partners
Answer: (b)
Explanation: A partnership firm does not have a separate legal entity distinct from its partners (except for limited liability partnership).
Q2. In the absence of a partnership deed, profits are shared among partners:
(a) In the ratio of their capital contributions
(b) Equally
(c) In the ratio of time devoted to the business
(d) As decided by the majority of partners
Answer: (b)
Explanation: Section 13(b) of the Indian Partnership Act states that, in the absence of an agreement, profits and losses are shared equally.
Q3. Interest on drawings is charged to:
(a) Reduce the capital of the partner
(b) Increase the profit of the firm
(c) Compensate the firm for use of its funds
(d) Both (a) and (c)
Answer: (d)
Explanation: Interest on drawings is debited to the partner’s capital/current account (reducing his equity) and credited to profit & loss appropriation account as income for the firm.
Q4. A partner is entitled to receive interest on his loan to the firm at:
(a) 6% per annum unless otherwise agreed
(b) The rate agreed in the partnership deed
(c) No interest unless the deed provides
(d) The prevailing bank rate
Answer: (b)
Explanation: Interest on a partner’s loan is payable as per the terms of the partnership deed; if silent, no interest is payable (but if agreed, the agreed rate applies).
Q5. Goodwill arising on admission of a new partner is credited to:
(a) Capital accounts of old partners in their sacrificing ratio
(b) Capital accounts of old partners in their old profit sharing ratio
(c) Capital account of the new partner
(d) Profit and Loss Appropriation Account
Answer: (a)
Explanation: Goodwill brought in by the new partner is shared by the existing partners in the ratio in which they sacrifice their share of profits.
Q6. On retirement of a partner, the amount due to him is paid:
(a) Immediately in cash
(b) In installments with interest as per agreement
(c) Only after the firm is dissolved
(d) After revaluation of assets and liabilities
Answer: (b)
Explanation: The retiring partner’s dues may be paid lump sum or in installments; if deferred, interest is usually allowed as per agreement or mutual consent.
Q7. When a firm is dissolved, the realization account is prepared to:
(a) Ascertain profit or loss on dissolution
(b) Transfer assets to partners’ capital accounts
(c) Record revaluation of assets and liabilities
(d) Calculate interest on capital
Answer: (a)
Explanation: The realization account records the sale of assets and payment of liabilities; its balance shows profit or loss on dissolution.
Q8. A partner’s salary is debited to:
(a) Profit and Loss Account
(b) Profit and Loss Appropriation Account
(c) Partner’s Capital Account
(d) Drawings Account
Answer: (b)
Explanation: Partner’s salary is an appropriation of profit and is debited to the Profit and Loss Appropriation Account.
Q9. Interest on capital is allowed only if:
(a) The partnership deed provides for it
(b) The firm has made profits
(c) The partner’s capital exceeds a certain limit
(d) All partners unanimously agree each year
Answer: (a)
Explanation: Interest on capital is not a statutory right; it is allowed only when expressly agreed upon in the partnership deed.
Q10. The sacrificing ratio is calculated as:
(a) Old ratio – New ratio
(b) New ratio – Old ratio
(c) Old ratio + New ratio
(d) New ratio / Old ratio
Answer: (a)
Explanation: Sacrificing ratio = Old profit sharing ratio – New profit sharing ratio (for existing partners).
Q11. On admission of a partner, revaluation of assets and liabilities is done to:
(a) Increase the firm’s goodwill
(b) Adjust the capital accounts of old partners for any gain or loss
(c) Reduce the new partner’s capital contribution
(d) Avoid payment of stamp duty
Answer: (b)
Explanation: Revaluation ensures that any increase/decrease in asset/liability values is adjusted in the old partners’ capital accounts in their old profit sharing ratio.
Q12. When a partner guarantees a minimum profit to another partner, any deficiency is borne by:
(a) The guaranteeing partner alone
(b) All partners in their profit sharing ratio
(c) The guaranteed partner
(d) The firm’s reserves
Answer: (a)
Explanation: The guaranteeing partner compensates the guaranteed partner for any shortfall from the agreed minimum profit.
Q13. In the case of a partnership firm, the maximum number of partners allowed in a banking business is:
(a) 10
(b) 20
(c) 50
(d) No limit
Answer: (a)
Explanation: Under Section 464 of the Companies Act, 2013 (and earlier rules), a banking partnership cannot have more than 10 partners.
Q14. Which account is NOT opened in the books of a partnership firm?
(a) Partner’s Capital Account
(b) Partner’s Loan Account
(c) Partner’s Salary Account
(d) Partner’s Drawings Account
Answer: (c)
Explanation: There is no separate “Partner’s Salary Account”; salary is recorded as an appropriation in Profit and Loss Appropriation Account and credited to the partner’s capital/current account.
Q15. If a partner withdraws a fixed amount at the beginning of each month, interest on drawings for a year is calculated for:
(a) 6 months
(b) 6.5 months
(c) 12 months
(d) 6 months on average
Answer: (b)
Explanation: Drawings at the beginning of each month accrue interest for an average period of 6.5 months ( (12+1)/2 ).
Q16. The revaluation account is a:
(a) Nominal account
(b) Real account
(c) Personal account
(d) Valuation account
Answer: (a)
Explanation: Revaluation account records increases/decreases in asset and liability values; it is a nominal account as its balance is transferred to partners’ capital accounts.
Q17. On dissolution, unrecorded liabilities are:
(a) Ignored
(b) Credited to realization account
(c) Debited to realization account
(d) transferred to partners’ capital accounts
Answer: (c)
Explanation: Unrecorded liabilities, when paid, are debited to the realization account (increase in expenses/loss).
Q18. The gaining ratio is used when:
(a) A partner is admitted
(b) A partner retires or dies
(c) The firm changes its profit sharing ratio without any admission/retirement
(d) The firm is dissolved
Answer: (b)
Explanation: Gaining ratio = New ratio – Old ratio (for continuing partners) and is used to allocate goodwill or revaluation gains/losses on retirement/death.
Q19. Interest on a partner’s loan to the firm is treated as:
(a) An appropriation of profit
(b) A charge against profit
(c) Capital expenditure
(d) Not allowed unless the deed provides
Answer: (b)
Explanation: Interest on loan is a charge against profit (like any external loan) and is debited to Profit and Loss Account before arriving at net profit.
Q20. Which of the following statements about limited liability partnership (LLP) is correct?
(a) Partners have unlimited liability
(b) LLP is governed by the Indian Partnership Act, 1932
(c) At least one partner must have unlimited liability
(d) LLP is a separate legal entity and partners’ liability is limited to their agreed contribution
Answer: (d)
Explanation: An LLP is a body corporate with perpetual succession; liability of each partner is limited to his/her agreed contribution.
Q21. A partner’s capital account fluctuates when:
(a) The partnership deed provides for a fixed capital method
(b) The firm follows the fluctuating capital method
(c) Interest on capital is not allowed
(d) Drawings are not made
Answer: (b)
Explanation: Under the fluctuating capital method, all adjustments (profit, interest, salary, drawings, etc.) are made directly in the capital account, causing it to fluctuate.
Q22. On admission, if the new partner brings goodwill in cash, the amount is credited to:
(a) Goodwill Account
(b) Capital accounts of old partners in sacrificing ratio
(c) Bank Account
(d) Profit and Loss Appropriation Account
Answer: (b)
Explanation: Cash brought in as goodwill is shared by the old partners in their sacrificing ratio; the bank account is debited, and the old partners’ capital accounts are credited.
Q23. When a firm is dissolved, the partner’s loan account is:
(a) Treated as an external liability and paid before settling partners’ capital
(b) Treated as part of partner’s capital and paid last
(c) Set off against the partner’s drawings
(d) Converted into equity
Answer: (a)
Explanation: A partner’s loan is considered an external liability; it is paid off before any amount is returned to partners on account of capital.
Q24. The profit and loss appropriation account is prepared to show:
(a) Gross profit of the firm
(b) Net profit after appropriations like interest, salary, commission
(c) Only the firm’s expenses
(d) The firm’s assets and liabilities
Answer: (b)
Explanation: The P&L Appropriation Account starts with net profit and shows allocations such as interest on capital, partner’s salary, commission, and transfers to reserves.
Q25. If a partner’s capital account shows a debit balance at the end of the year, it indicates:
(a) Excess profit credited to his account
(b) That he has withdrawn more than his entitled share (overdrawn)
(c) Interest on capital has not been allowed
(d) The firm has incurred a loss
Answer: (b)
Explanation: A debit balance in a partner’s capital/current account means the partner has withdrawn more than his credit entries (capital, profit share, etc.), i.e., an overdrawn account.
—
End of MCQs.
