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Free CA Accounting Practice Questions & Answers
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100% free · No login to startQuestion 91
Profits of the last four years were Rs.1,80,000, Rs.2,20,000, Rs.1,60,000 and Rs.2,40,000. Goodwill is to be valued at three years' purchase of the average profit. Goodwill is:
Select an option first.
Correct answer: C — Rs.6,00,000
Explanation: Average profit = (1,80,000 + 2,20,000 + 1,60,000 + 2,40,000) / 4 = Rs.2,00,000; three years' purchase = Rs.6,00,000. 'Years' purchase' simply means the multiple applied to the profit figure. Before averaging, always check whether any year contains an abnormal item requiring adjustment - the examiner usually plants one.
Question 92
Average profit Rs.3,20,000, normal rate of return 12%, capital employed Rs.20,00,000. Goodwill under the capitalisation of AVERAGE profit method is:
Select an option first.
Correct answer: B — Rs.6,66,667
Explanation: Capitalised value of the business = 3,20,000 x 100/12 = Rs.26,66,667; less capital employed Rs.20,00,000 gives goodwill of Rs.6,66,667. Note that this equals the capitalisation of super profit answer on the same facts - the two methods are algebraically identical, and saying so in a written answer demonstrates understanding rather than memory.
Question 93
Using the same figures - a super profit of Rs.80,000 and a normal rate of return of 12% - goodwill under the capitalisation of super profit method is:
Select an option first.
Correct answer: B — Rs.6,66,667
Explanation: Goodwill = super profit / normal rate of return = 80,000 x 100/12 = Rs.6,66,667. This method assumes the super profit will continue indefinitely and capitalises it as a perpetuity, which is why it usually yields a far higher figure than a two or three years' purchase. Distractor A multiplies by the rate instead of dividing - a slip worth guarding against.
Question 94
Capital employed is Rs.20,00,000, the normal rate of return is 12% and the average profit is Rs.3,20,000. Goodwill at two years' purchase of the super profit is:
Select an option first.
Correct answer: B — Rs.1,60,000
Explanation: Normal profit = 20,00,000 x 12% = Rs.2,40,000. Super profit = 3,20,000 - 2,40,000 = Rs.80,000. Goodwill = 80,000 x 2 = Rs.1,60,000. The logic is worth stating in a written answer: a buyer pays for goodwill only to the extent the business earns MORE than a comparable investment would, so a firm with no super profit has no goodwill by this method.
Question 95
Profits for 2022 to 2025 were Rs.1,00,000, Rs.1,20,000, Rs.1,40,000 and Rs.1,60,000, to be weighted 1, 2, 3 and 4 respectively. Goodwill at two years' purchase of the weighted average profit is:
Select an option first.
Correct answer: C — Rs.2,80,000
Explanation: Weighted total = (1,00,000 x 1) + (1,20,000 x 2) + (1,40,000 x 3) + (1,60,000 x 4) = Rs.14,00,000; divided by the sum of the weights, 10, gives Rs.1,40,000; two years' purchase = Rs.2,80,000. Weighting is preferred to a simple average when profits show a clear TREND, because recent years are the better guide to future earnings.
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Question 96
C is admitted for a one-fifth share and cannot bring in his share of goodwill in cash. The goodwill of the firm is valued at Rs.6,00,000. The entry is:
Select an option first.
Correct answer: B — C's Capital A/c Dr. Rs.1,20,000; To the old partners' Capital A/cs in the sacrificing ratio
Explanation: C's share of goodwill is 6,00,000 x 1/5 = Rs.1,20,000. Since no cash comes in, his Capital Account is debited and the sacrificing partners are credited, which achieves the same result as cash followed by immediate withdrawal. Raising goodwill in the books at Rs.6,00,000 is not permitted, as AS 26 allows only PURCHASED goodwill to be recognised.
Question 97
M retires. The goodwill of the firm is valued at Rs.9,00,000 and M's share was one-third. Goodwill is not to be raised in the books. The entry is:
Select an option first.
Correct answer: A — The continuing partners' Capital A/cs Dr. Rs.3,00,000 in the gaining ratio; To M's Capital A/c Rs.3,00,000
Explanation: M's share of goodwill is 9,00,000 x 1/3 = Rs.3,00,000. The continuing partners are acquiring his share of future profits, so they pay for it by having their Capital Accounts debited in the GAINING ratio, with M credited. Raising goodwill in the books is avoided because AS 26 permits recognition only of purchased goodwill.
Question 98
P, Q and R share profits 3 : 2 : 1. R is guaranteed a minimum of Rs.90,000, any deficiency being borne by P and Q in their profit sharing ratio. The profit for the year is Rs.4,20,000. The deficiency borne by P is:
Select an option first.
Correct answer: C — Rs.12,000
Explanation: R's normal share = 4,20,000 x 1/6 = Rs.70,000, so the deficiency is Rs.20,000. P and Q bear it in 3 : 2, giving P Rs.12,000 and Q Rs.8,000. Present the answer in two stages - first divide the profit normally, then transfer the deficiency - because the marks are for the method, and a guarantee question with a different profit figure may produce no deficiency at all.
Question 99
C is admitted for a one-fourth share and brings Rs.5,00,000 as capital. After all other adjustments the combined capitals of A and B are Rs.12,40,000. The goodwill of the firm implied by C's capital is:
Select an option first.
Correct answer: D — Rs.2,60,000
Explanation: C pays Rs.5,00,000 for one-fourth, so he values the whole firm at 5,00,000 x 4 = Rs.20,00,000. The capital actually in the firm is 12,40,000 + 5,00,000 = Rs.17,40,000. The excess of Rs.2,60,000 is what C is implicitly paying for goodwill. Use this method whenever a question gives the new partner's capital and share but no separate premium.
Question 100
The firm earned a profit of Rs.80,000 before interest on capital. The deed allows interest on capital totalling Rs.1,00,000 and treats it as an appropriation. The interest actually allowed is:
Select an option first.
Correct answer: D — Rs.80,000, distributed between the partners in the ratio of the interest due to each
Explanation: An appropriation can never exceed the profit available, so the whole Rs.80,000 is absorbed and is apportioned between the partners in the RATIO OF THE INTEREST otherwise due to them. Nothing is carried forward as a liability. Had the deed made interest on capital a CHARGE, the full Rs.1,00,000 would be allowed and the firm would report a loss of Rs.20,000 - state which basis you have assumed before you compute.
Question 101
Where there is no partnership deed, interest on partners' capital is:
Select an option first.
Correct answer: B — Not allowed at all
Explanation: Section 13(c) allows no interest on capital unless the deed provides for it, the reasoning being that a partner's return on capital is his share of profit. Contrast section 13(d), which allows 6% per annum on a partner's LOAN or advance beyond his capital. Interest on capital, loan, six per cent and nil - keep the four ideas paired correctly and this becomes a free mark.
Question 102
A partner withdrew Rs.6,000 at the END of every month throughout the year ended 31 March 2026. Interest on drawings is charged at 10% per annum. The interest is:
Select an option first.
Correct answer: B — Rs.3,300
Explanation: Total drawings Rs.72,000. For equal amounts withdrawn at the END of each month the average period is 5.5 months, so interest = 72,000 x 10% x 5.5/12 = Rs.3,300. If the drawings were at the BEGINNING of each month the average period would be 6.5 months, giving Rs.3,900 (distractor A), and for the middle of each month, 6 months, giving Rs.3,600. State which timing you have assumed before computing.
Question 103
A partner withdrew Rs.9,000 at the BEGINNING of each quarter throughout the year. Interest on drawings is charged at 8% per annum. The interest is:
Select an option first.
Correct answer: A — Rs.1,800
Explanation: Total drawings Rs.36,000. For equal amounts drawn at the beginning of each quarter the average period is 7.5 months, so interest = 36,000 x 8% x 7.5/12 = Rs.1,800. Drawings at the END of each quarter give an average of 4.5 months and Rs.1,080; drawings in the MIDDLE of each quarter give 6 months and Rs.1,440. Always write the average period as a separate line.
Question 104
The balance due to a retired partner is left in the firm as a loan. Where the deed is silent, the rate of interest under the Indian Partnership Act, 1932 is:
Select an option first.
Correct answer: A — 6% per annum
Explanation: Section 37 fixes the statutory rate at 6% per annum on the amount remaining unpaid, as an alternative to a share of subsequent profits. This is the same 6% that section 13(d) allows on a partner's advance to the firm - the two provisions are frequently confused, so name the section you are relying on. Verify against the ICAI study material for your attempt.
Question 105
An Investment Fluctuation Fund of Rs.50,000 stands against investments costing Rs.4,00,000 whose market value is Rs.3,70,000. On the admission of a partner:
Select an option first.
Correct answer: C — Rs.30,000 is applied against the fall in value and Rs.20,000 is distributed to the old partners in their old ratio
Explanation: The fund exists precisely to absorb a fall in the value of investments, so the Rs.30,000 decline is charged against it first and only the surplus of Rs.20,000 is a free reserve belonging to the old partners. Had the fall exceeded the fund, the excess would go to the debit of the Revaluation Account. Deal with the fund before touching the Revaluation Account, not after.
Question 106
A firm of three partners sharing equally holds a Joint Life Policy for Rs.10,00,000, the premium having been charged to the Profit and Loss Account each year. On the death of one partner the policy money is received. It is credited to:
Select an option first.
Correct answer: A — All the partners' Capital Accounts in their profit sharing ratio
Explanation: Because the premium was treated as an expense of the FIRM, the policy money belongs to all the partners and is credited to every Capital Account, including the deceased partner's, in the profit sharing ratio. Had the premium been capitalised as a Joint Life Policy Account asset, only the excess of the sum received over the book value would be so distributed.
Question 107
A limited liability partnership under the LLP Act, 2008 differs from a general partnership chiefly in that:
Select an option first.
Correct answer: B — It is a body corporate with perpetual succession, and the liability of its partners is limited
Explanation: An LLP is a separate legal entity with perpetual succession: it can own property and sue in its own name, partners' liability is limited to their agreed contribution, and a change of partners does not affect its existence. A general partnership firm has none of these features - the partners are the firm, and their liability is unlimited, joint and several.
Question 108
The maximum number of partners permitted in a partnership firm is prescribed by:
Select an option first.
Correct answer: D — The Companies Act, 2013 read with the Rules made under it
Explanation: The Partnership Act itself sets no ceiling. The limit comes from section 464 of the Companies Act, 2013, under which an association of more than the prescribed number of persons carrying on business for gain must be registered - the number prescribed by the Rules is currently 50. An LLP, by contrast, has no maximum. Verify the prescribed number against the ICAI study material for your attempt, as the Rules have been amended before.
Question 109
A Memorandum Revaluation Account is prepared where:
Select an option first.
Correct answer: B — The assets and liabilities are to appear in the new Balance Sheet at their OLD values
Explanation: When the partners want the effect of revaluation shared out but do NOT want the revised values carried into the books, the account is prepared in two parts: the first records the revaluation and credits the old partners in the old ratio, the second reverses it and debits all partners in the new ratio. The net effect transfers the gain or loss without disturbing the recorded values.
Question 110
Goodwill is best described as:
Select an option first.
Correct answer: C — An intangible but real asset
Explanation: Goodwill has no physical form, which makes it intangible, but it has genuine value realisable on sale of the business, which makes it real rather than fictitious. Fictitious assets, such as deferred revenue expenditure not yet written off, represent no resource at all. Purchased goodwill is recorded; self-generated goodwill is not, because no cost has been incurred.
Question 111
On dissolution, after meeting the expenses of realisation, the amounts realised are applied FIRST towards:
Select an option first.
Correct answer: A — The debts of the firm owed to third parties
Explanation: Section 48 fixes the order: expenses of realisation, then the firm's debts to OUTSIDERS, then partners' loans and advances, then capitals, and finally any surplus in the profit sharing ratio. The rule protects outside creditors, who have no say in the firm's affairs. State the whole sequence in a written answer - it is a standard three-mark theory question in its own right.
Question 112
A firm incurred a LOSS of Rs.50,000 before partners' salaries of Rs.60,000, which the deed treats as an appropriation of profit. The salaries are:
Select an option first.
Correct answer: A — Not allowed, an appropriation being payable only out of profits
Explanation: An appropriation presupposes a profit to appropriate. With a loss there is nothing to distribute, so no salary is allowed and the loss of Rs.50,000 is simply shared in the profit sharing ratio. Read the deed's wording with care: where salary is expressed as a CHARGE, it is allowed regardless and the loss becomes Rs.1,10,000 - the same facts give opposite answers on that one word.
Question 113
Interest on capital of Rs.24,000 in total was omitted for the previous year, when A and B shared profits 3 : 1 and their capitals were equal. The adjusting entry now is:
Select an option first.
Correct answer: D — A's Capital A/c Dr. Rs.6,000; To B's Capital A/c Rs.6,000
Explanation: Equal capitals mean interest should have been Rs.12,000 each. Because it was omitted, the Rs.24,000 stayed in profit and was shared 3 : 1, so A received Rs.18,000 and B Rs.6,000. A is therefore over-credited by Rs.6,000 and B under-credited by Rs.6,000. Set out a two-column table of 'what was given' against 'what should have been given' - the single adjusting entry then falls straight out of the difference.
Question 114
Under the maximum loss method of piecemeal distribution, each instalment realised is distributed after:
Select an option first.
Correct answer: C — Assuming the remaining assets will realise nothing
Explanation: At each stage the worst case is assumed - that nothing more will be realised - so the notional maximum loss is charged to the partners in their profit sharing ratio and only the resulting credit balances are paid out. This guarantees that no partner is ever overpaid, which is the whole purpose of piecemeal distribution. The alternative surplus capital method reaches the same destination by a different route.
Question 115
The private assets of a partner are applied FIRST towards:
Select an option first.
Correct answer: B — His private debts, only the surplus being available to the firm
Explanation: Section 49 gives private creditors the first claim on private assets, and firm creditors the first claim on firm assets; each set of creditors reaches the other fund only out of the surplus remaining. This is why a partner may be solvent as an individual and yet contribute nothing to the firm's deficiency, and it is the point on which insolvency questions usually turn.
Question 116
Realisation expenses of Rs.18,000 are to be borne by a partner personally but are paid by the firm. The entry is:
Select an option first.
Correct answer: A — The partner's Capital A/c Dr. Rs.18,000; To Cash A/c Rs.18,000
Explanation: Because the partner has agreed to bear the cost, the firm has merely paid on his behalf, so his Capital Account is debited and Cash credited - the Realisation Account is not touched at all. Where instead the FIRM bears the expenses, Realisation is debited; and where the partner bears them and pays them himself, no entry appears in the firm's books.
Question 117
Rent of Rs.1,20,000 payable to a partner for the use of his building is:
Select an option first.
Correct answer: B — A charge against profit, debited to the Profit and Loss Account
Explanation: The partner is acting as a LANDLORD here, not as a partner: the firm would pay rent to anyone whose building it used, so the cost is a genuine business expense and a charge against profit. It is credited to his Current Account (or paid in cash), and it is allowed even if the firm makes a loss - which is precisely what distinguishes it from a partner's salary.
Question 118
L, M and N share profits in the ratio 4 : 3 : 2. M retires, and L and N agree to share future profits in the ratio 5 : 4. The gaining ratio of L : N is:
Select an option first.
Correct answer: C — 1 : 2
Explanation: Gain = new share less old share. L: 5/9 - 4/9 = 1/9. N: 4/9 - 2/9 = 2/9. Gaining ratio = 1 : 2. This ratio is not the new ratio, and it matters because the retiring partner's share of goodwill is debited to the continuing partners in the GAINING ratio - using the new ratio there is a standard error worth guarding against.
Question 119
The essential difference between a Revaluation Account and a Realisation Account is that:
Select an option first.
Correct answer: D — A Revaluation Account records changes in value while the firm CONTINUES; a Realisation Account records the actual disposal of assets when the firm is DISSOLVED
Explanation: A Revaluation Account deals with notional changes in value on a reconstitution - admission, retirement, death or a change of ratio - and only the affected assets and liabilities pass through it. A Realisation Account is prepared on dissolution, takes in ALL assets and outside liabilities at book value, and records what they actually fetched or cost to settle.
Question 120
A loss on revaluation arising at the time of a partner's retirement is borne by:
Select an option first.
Correct answer: B — All the partners, including the retiring partner, in the OLD ratio
Explanation: The change in values accrued while the retiring partner was still a partner, so he must bear his share - the loss is debited to all Capital Accounts in the old ratio. Contrast this with GOODWILL on retirement, which is borne by the continuing partners in the gaining ratio because it relates to FUTURE profits. Past belongs to everyone; future belongs to those who remain.
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