The below Guarantee of Profits MCQ is designed for conceptual clarity. Attempt the test and check your concepts now!!!
MCQ Quiz - Practice Questions
MCQ Quiz
Question 1
In a partnership, who can give a guarantee of profits?
B
Correct Answer: One or more partners.
In partnership, one or more partners can give a guarantee of profits to one or more other partners.
Question 2
What is the primary condition for the guarantee of profits to be activated?
B
Correct Answer: When the guaranteed partner's profit share is less than the minimum guaranteed profit.
Guarantee will be activated only if the share of the guaranteed partner is less than the guaranteed profits.
Question 3
If Partner C is guaranteed a minimum profit of Rs 100,000, and their actual share of profit for the year is Rs 120,000, what adjustment is required for the guarantee?
C
Correct Answer: No entry or adjustment is required for the guarantee.
If the guaranteed partner's profit share is greater than or equal to the guaranteed profits, then no entry is required for the guarantee.
Question 4
How is the deficiency in profit share calculated for a guaranteed partner?
C
Correct Answer: Guaranteed Profits - Actual Profit Share
The formula to calculate deficiency is Guaranteed Profits - actual profit share.
Question 5
A, B, and C are partners sharing profits in the ratio of 1:1:1. C is guaranteed a minimum profit of Rs 100,000. If the firm earned profits of Rs 150,000, what would be C's initial share before guarantee adjustment?
C
Correct Answer: Rs 50,000
C's initial share would be 150,000 * 1/3 = Rs 50,000.
Question 6
Following the previous question, what is the deficiency that A and B have to bear to fulfill C's guarantee?
B
Correct Answer: Rs 50,000
The deficiency is (Guaranteed Profit - Actual Share) = (100,000 - 50,000) = Rs 50,000.
Question 7
If the question does not specify a separate ratio for bearing the deficiency, how will the guaranteeing partners bear it?
C
Correct Answer: In their mutual profit sharing ratio.
If no deficiency ratio is given, partners bear the deficiency in their mutual profit sharing ratio.
Question 8
What is the journal entry to record the guarantee adjustment where the guaranteeing partner transfers the deficiency to the guaranteed partner?
B
Correct Answer: Guaranteeing Partner Capital A/c Dr. To Guaranteed Partner Capital A/c
The journal entry for guarantee adjustment is Guaranteeing Partner Capital A/c Dr. To Guaranteed Partner Capital A/c.
Question 9
Can a guarantee of profits be given to more than one partner?
B
Correct Answer: Yes, it can be given to one or more partners.
It is not necessary that guarantee can be given only to one partner; it can be given to one or more partners.
Question 10
If a business starts on July 1, 2024, and a partner is guaranteed Rs 90,000 per year, what will be the proportionate guarantee amount for the year 2024?
C
Correct Answer: Rs 67,500
The business ran for 9 months. So, 90,000 * 9/12 = Rs 67,500.
Question 11
What happens if the guaranteeing partners' profit share becomes a loss share after bearing the deficiency?
B
Correct Answer: They still have to bear the deficiency.
Deficiency is to be borne by guaranteeing partners even if their profit share becomes a loss share.
Question 12
In the Profit and Loss Appropriation Account, how is the guarantee adjustment shown?
B
Correct Answer: By adding or subtracting in the inner column of profit shares.
Guarantee adjustment is shown by simple adding or subtracting in the inner column of the Profit and Loss Appropriation Account.
Question 13
What is the key difference between Guarantee of Profits and Guarantee of Earnings (Sales)?
C
Correct Answer: Guarantee of Profits is for minimum profits, while Guarantee of Earnings is for minimum sales.
Guarantee of profits is given for minimum profits, whereas Guarantee of Earnings (Sales) is given for minimum sales (earnings).
Question 14
In a Guarantee of Earnings (Sales), who gives this guarantee to whom?
C
Correct Answer: One or more partners give this guarantee to the firm.
In a Guarantee of Earnings (Sales), one or more partners give this guarantee to the firm.
Question 15
If a question has both a sales guarantee and a profit guarantee, which adjustment should be done first?
B
Correct Answer: Sales guarantee adjustment.
If a question has both sales and profit guarantee, first do the sales guarantee adjustment, then the profit guarantee adjustment.
Question 16
Partner A, B, and C share profits in a 3:2:1 ratio. C is guaranteed Rs 100,000. If the firm's profit is Rs 900,000, what is C's share and is a guarantee adjustment needed?
A
Correct Answer: C's share is Rs 150,000; no adjustment needed.
C's share = 900,000 * 1/6 = Rs 150,000. Since Rs 150,000 > Rs 100,000, no guarantee adjustment is needed.
Question 17
If the firm earned a profit of Rs 60,000 and Partner C (guaranteed Rs 100,000) received Rs 10,000 as their share, how much deficiency must be covered?
