Month: April 2020

Albert, Ben and Catherine are in partnership sharing profits and losses in the ratio Albert 1/2; Ben 1/3rd; and Catherine 1/6th.

On 31 December, Albert retired from the partnership and Dymphna was admitted. The new profit sharing ratio being Ben 2/7ths; Catherine 4/7ths; and Dymphna 1/7th.

For the purposes of these changes, goodwill, which is not to be included in the accounts, is calculated at three times the current year’s net profit of £10,500.

The net adjustment on Ben’s capital account in respect of goodwill is?

Select ONE answer:

1. a net credit of £1,500.
2. a net debit of £7,500.
3. a net debit of £12,750.
4. no adjustment.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct – Goodwill = £10,500 x 3 = £31,500, so Ben’s original share = £31,500 x 1/3rd = £10,500. Ben’s new share is £31,500 x 2/7ths = £9,000. The adjustment required is £10,500 – £9,000 = £1,500 reduction. A credit entry is required in the capital account to compensate for this reduction in goodwill.
2. Not correct
3. Not correct
4. Not correct

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

John earns an annual net income of £19,500 from a photography business which he runs.

He has capital of £35,000 invested in this business. If he ceased running his own business and worked as an employee in another photographic business he would earn a salary of £11,000 per annum.

If he could invest his capital elsewhere in a project with the same degree of risk as his own business he could expect a return of 6.5% per annum.

If goodwill in this type of firm is valued at five years’ purchase of super-profits, the goodwill of John’s business is?

Select ONE answer:

1. £31,125
2. £37,500
3. £40,225
4. £42,500

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct – Current annual earnings £19,500, however alternative annual earnings = Salary £11,00 + Interest (£35,000 * 6.5%) £2,275 = Total £13,275. If Annual super-profit is £6,225, therefore, 5 years purchase = £31,125.
2. Not correct
3. Not correct
4. Not correct

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

Joe is buying a firm whose only assets are valued as follows:

• Buildings £50,000
• Vehicles £15,000
• Fixtures £5,000
• Stock £40,000

The firm does not have any liabilities. He is to pay £140,000 for the firm.

This means that?

Select ONE answer:

1. He is paying £40,000 for goodwill.
2. The buildings he is acquiring are costing him £30,000 more than they are worth.
3. He is paying £30,000 for goodwill.
4. He has made an arithmetical mistake.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct – In the context of acquiring a business, goodwill is the difference between the price paid for the business as a whole and the sum of the values of the individual (net) assets. In this case, this is as follows: Price paid for the business £ 140,000 Values of the individual (net) assets (£50,000 + £15,000 + £5,000 + £40,000) £110,000. Therefore, Goodwill £30,000
4. Not correct

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

Tom and Joan formed a partnership.

In addition to investing £15,000, Tom transferred ownership of a building, which had cost him £45,000, to the partnership. At the time of the transfer, the market value of the building was £60,000. The mortgage of £35,000 on the building was taken over by the partnership.

The amount to be recorded in Tom’s capital account is?

Select ONE answer:

1. £25,000
2. £40,000
3. £60,000
4. £75,000

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct – Capital = Cash (£15,000) + Value of the building to the partnership (£60,000 market value – £35,000 mortgage) thus £40,000
3. Not correct
4. Not correct

 

This work is licensed under a Creative Commons Attribution 4.0 International License.

Jack and Diane, the only two partners in a firm, invested capital of £20,000 and £30,000 respectively and agreed their entitlements to be:

• Jack = Annual salary £18,000; Interest on capital (per annum) 10%; Share of remaining profit or loss 40%
• Diane = Annual salary £22,000; Interest on capital (per annum) 10%; Share of remaining profit or loss 60%

If the profit for the year was £40,000, what share would be debited / credited to Diane’s current account?

Select ONE answer:

1. Nil
2. £3,000 Debit
3. £22,000 Credit
4. £24,000 Credit

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct
   – Profit for the year: £40,000
   – Jack & Diane
   – Salary: £ 18,000 & £22,000 = £40,000
   – Interest on capital (10%): £2,000 & 3,000 = £5,000
   – Loss to be shared: -£5,000
   – Share of loss (40% : 60%) -£2,000 & -£3,000 = £5,000
3. Not correct
4. Not correct

 

This work is licensed under a Creative Commons Attribution 4.0 International License.