Q4: Why create a profit and loss adjustment account? Explain. Answer: The profit and loss adjustment account is created for the following two reasons. 1.To omitted items and, if necessary, correct errors – After the preparation of the income statement and balance sheet, if errors or omissions are found, these errors or omissions are corrected by opening the income statement during the following settlement period, without modification of the old income statement. 2.To to distribute gains or losses between partners – Sometimes, in addition to adjusting items and correcting errors, this account is also used to spread profits (or losses) among partners. In this situation, this account replaces the profit and loss account. The main reason why the profit and loss adjustment account is established is to determine the actual profit or loss. Q7: How will you deal with a change in the incentive rate between existing partners? Do you take imaginary numbers to illustrate your answer? Answer: Usually due to the reception, retirement or death of a partner or sometimes the general agreement between the partners, they may choose to change the profit-making rate. Various adjustments to be taken into account when changing the profit-sharing rate are business or corporate assets, accumulated reserves and profits, profits or losses resulting from revaluation of assets and debt and capital adjustments, etc. General reserves and accumulated profits (if any) as well as profit (or loss) from revaluation of assets and liabilities should be credited (encumbered) to the partner`s capital account in their former profit-sharing ratio. But if existing partners decide to change the profit-sharing rate, some partners (earning partners) win at the expense of other partners (victim partners). The former should therefore compensate for the latter. Therefore, the capital accounts of the winning partners are debited to the extent of their profits and the capital accounts of the victim partners are credited in the volume of their victim.
The next log has passed. Q21: Amit and Bhola are partners in a company. They share the gains in a ratio of 3 to 2. In accordance with their social contract, interest on subscriptions is 10% per year. Their drawings in 2013 were Rs 24,000 and Rs 16,000 respectively. Calculate the interest on subscriptions based on the assumption that the amounts have been withdrawn uniformly throughout the year. Answer: Q10: Sukesh and Vanita were partners in a company. Their partnership agreement provides: (i) the profits are shared by Sukesh and Vanita in a 3-to-2 ratio; (ii) 5% interest on the capital is allowed; (iii) Vanita is expected to receive a monthly salary of Rs 600. The following balances are from the company`s books as of December 31, 2013. Q5: Explain why it is best to enter into a partnership agreement in writing.
Answer: A partnership document forms the basis of a partnership enterprise. An act of partnership consists of all the predetermined conditions agreed by all partners when setting up the partnership. As a general rule, the following information is included in a partnership deed. 1. Purpose of the undertaking`s activities 2. Name and address of the company 3. Name and address of all partners 4. Profit and loss participation rate 5.
Capital contribution from each partner 6. Rights, types of roles and obligations of partners 7. Duration of the partnership 8. Interest rates on principal, subscriptions and loans 9. Salaries, commissions if to be paid to partners. 10. Rules relating to the reception, retirement, death and dissolution of the company, etc. It shall ensure that the act of partnership A can be both oral and written. Although it is not mandatory to enter into a partnership agreement in writing under the Partnership Act 1932, the written act of partnership is more desirable than oral agreements.
This is due to the fact that it guarantees the proper functioning of the activities of the partnership enterprise. It helps to avoid disputes and misunderstandings between partners….