Edexcel IGCSE Accounting: Financial statements of a partnership (4AC1) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover Topic 4, section 2 (financial statements of a partnership) of the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, points a to g. Amounts are in dollars. All businesses and people are invented. Learn the method first from the study guide or the revision notes. Course home: Edexcel IGCSE Accounting.

Questions

1. State three provisions of Section 24 of the Partnership Act 1890 that apply when partners have no agreement. [3]

2. Farah Qureshi and Yusuf Demir run Kingfisher Wharf Boat Hire with no partnership agreement. Yusuf lent the firm 15,000 for the whole year. Profit before loan interest was 40,500.

(a) Calculate the interest due to Yusuf and state where it is shown. [2] (b) Calculate each partner’s share of the profit for the year. [2]

3. Explain two reasons why two people might form a partnership instead of each trading as a sole trader. [4]

4. Explain how the liability of a member of a limited liability partnership (LLP) differs from that of a partner in an ordinary partnership. [3]

5. Explain the purpose of an appropriation account and state two items that may appear in it. [3]

6. Magnus Aalto and Beatrix Koh trade as Tallow Mill Candles. Profit for the year is 27,500. The agreement gives interest on capital at 5% (capitals: Magnus 50,000 and Beatrix 30,000), a salary of 7,000 to Beatrix, and interest charged on drawings of 280 to Magnus and 140 to Beatrix. The residual is shared 2 : 1. Prepare the appropriation account. [7]

7. Saffron Reed and Yara Nilsson share profits and losses equally in Plover Street Printers. Profit for the year is 5,800. The agreement gives interest on capital of 2,400 to Saffron and 1,600 to Yara, and a salary of 6,000 to Yara.

(a) Prepare the appropriation account. [4] (b) State the net amount credited to each partner’s current account. [2]

8. Gideon Marsh is a partner in Dunmore Quay Kayaks. His current account had an opening debit balance of 1,200. For the year: interest on capital 2,000, share of profit 6,500, drawings 11,000 and interest on drawings 220.

(a) Prepare Gideon’s current account and balance it. [5] (b) State how the closing balance appears in the statement of financial position. [1]

9. A draft appropriation account for a two-partner firm starts with profit for the year of 20,000. It then deducts loan interest of 600 paid to a partner, deducts drawings of 9,000, deducts interest on drawings of 200, and shares the remainder equally. The agreement says profits are shared 3 : 1. Identify four errors. [4]

10. Explain why a partnership keeps both capital accounts and current accounts, giving the type of entry that goes in each. [4]

11. Nisha Pillai and Hugo Laurent trade as Bracken Row Bakehouse. For the year: revenue 142,000; opening inventories 6,800; purchases 61,500; closing inventories 7,900; wages 28,400; rent 8,400; other operating expenses 21,300; depreciation 3,500. Hugo lent the firm 10,000 for the whole year and is paid interest at the Section 24 rate.

The agreement gives interest on capital at 4% (Nisha 45,000 and Hugo 25,000), a salary of 8,000 to Hugo, interest on drawings at 5% (drawings taken evenly through the year: Nisha 9,600 and Hugo 6,400) and the residual shared 3 : 2 between Nisha and Hugo. Opening current accounts: Nisha 1,500 credit and Hugo 400 debit.

(a) Prepare the income statement to profit for the year. [4] (b) Prepare the appropriation account. [4] (c) Calculate the closing balance on each current account. [2] (d) Prepare the equity section of the statement of financial position. [2]

Answers

1. Profits and losses are shared equally [1]. Partners receive no salaries [1]. A partner who lends money to the firm receives interest at 5% a year [1]. (Also acceptable: no interest on capital.) [3] Examiner insight: Name the rule and its default value together, for example “equal shares” rather than “shared fairly”.

2. (a) Interest = 15,000 x 5% = 750 [1]. It is an expense in the income statement, deducted before profit for the year [1]. (b) Profit for the year = 40,500 - 750 = 39,750 [1]. Each partner receives 39,750 / 2 = 19,875 [1]. Examiner insight: The order matters here. Loan interest is deducted before the profit is shared, so sharing 40,500 first would give the wrong figures.

3. Reason 1: more capital is available because each partner pays in money [1], so the firm can afford more inventories or equipment than one person could [1]. Reason 2: skills are shared [1], for example one partner sells while the other keeps the records [1]. (Other valid pairs: shared workload and cover for absence; shared risk.) [4] Examiner insight: Each reason needs a development step. A list of four one-word reasons tends to earn less than two reasons that are each explained.

4. Partners in an ordinary partnership have unlimited liability [1], so their personal assets can be used to pay the firm’s debts [1]. An LLP is a separate legal person and its members’ liability is limited, so their personal assets are generally protected [1]. [3] Examiner insight: A comparison answer should address both forms. Describing only the LLP leaves the “differs from” half of the question unanswered.

5. It shows how the profit for the year is divided among the partners [1]. Two items from: interest on capital [1], salaries [1], interest on drawings, share of residual profit. [3] Examiner insight: Say that it follows the income statement and starts from profit for the year. This separates it from the income statement itself.

6.

Line	Magnus	Beatrix	Total
Profit for the year [1]			27,500
Add interest on drawings [1]	280	140	420
Less interest on capital [1]	2,500	1,500	(4,000)
Less salary [1]		7,000	(7,000)
Residual profit [1]			16,920
Share 2 : 1	[1] 11,280	[1] 5,640	16,920

Check: 27,500 + 420 - 4,000 - 7,000 = 16,920 and 16,920 / 3 = 5,640. [7] Examiner insight: Show the residual as its own line and label the ratio step. A slip in the interest on drawings carries through every later figure, so the working lets a reader follow your method.

7. (a) Profit for the year 5,800 [1]. Less interest on capital 4,000 (Saffron 2,400, Yara 1,600) and salary 6,000 [1]. Deficit = 5,800 - 4,000 - 6,000 = (4,200) [1]. Shared equally: (2,100) each [1]. (b) Saffron: 2,400 - 2,100 = 300 credit [1]. Yara: 1,600 + 6,000 - 2,100 = 5,500 credit [1]. Examiner insight: A low profit does not remove the agreed salary and interest. Showing a negative residual in brackets signals that you know the deficit is shared.

8. (a) Debit side: opening balance 1,200 and drawings 11,000 [1], interest on drawings 220 [1]. Credit side: interest on capital 2,000 [1] and share of profit 6,500 [1]. Debits total 12,420, so the balance carried down is 12,420 - 8,500 = 3,920 debit, placed on the credit side to balance, and both totals are 12,420 [1]. (b) It is deducted from the partners’ equity [1]. Examiner insight: Check that the two totals agree before you finish. Writing “debit” next to the balance tells the reader which way it runs.

9. Loan interest belongs in the income statement, not the appropriation account [1]. Drawings are not appropriated; they are entered in the current account [1]. Interest on drawings should be added, not deducted [1]. The residual should be shared 3 : 1, not equally [1]. [4] Examiner insight: For each error, say where the item should go or how it should be treated. Stating only that something is wrong is less useful.

10. The capital account records the long-term investment in the firm [1] and usually stays fixed unless capital is paid in or withdrawn [1]. The current account records the yearly entries: interest, salary and share of profit on the credit side, and drawings and interest on drawings on the debit side [1]. Keeping them apart shows each partner’s capital clearly, and both balances are shown in the equity section [1]. [4] Examiner insight: Give the type of entry for both accounts, since the question asks for it. Mentioning only one account leaves marks available.

11. (a)

Item	Amount
Revenue	142,000
Cost of sales (6,800 + 61,500 - 7,900) [1]	(60,400)
Gross profit [1]	81,600
Wages 28,400, rent 8,400, other operating expenses 21,300, depreciation 3,500, loan interest 500 [1]	(62,100)
Profit for the year [1]	19,500

(b) Interest on capital: Nisha 1,800 and Hugo 1,000 [1]. Interest on drawings added: Nisha 240 and Hugo 160 [1]. Residual = 19,500 + 400 - 2,800 - 8,000 = 9,100 [1]. Shares 3 : 2: Nisha 5,460 and Hugo 3,640 [1]. (c) Nisha: 1,500 + 1,800 + 5,460 - 9,600 - 240 = 1,080 debit [1]. Hugo: -400 + 1,000 + 8,000 + 3,640 - 6,400 - 160 = 5,680 credit [1]. (d) Capital: Nisha 45,000 and Hugo 25,000 (total 70,000). Add Hugo’s current account 5,680 and deduct Nisha’s debit current account 1,080 [1]. Total equity = 74,600 [1]. Examiner insight: On a long question, label each part and carry your own figures forward. A clear layout lets a reader credit later work built on an earlier slip.

Where marks are usually lost

• Adding loan interest to the appropriation account instead of deducting it as an expense.
• Deducting interest on drawings instead of adding it.
• Dividing interest on capital and salaries in the profit-sharing ratio.
• Ignoring a debit opening balance on a current account.
• Using the default equal sharing when the question states a ratio.
• Dropping the salary when profit is low, instead of showing a deficit.
• Giving interest on drawings for twelve months when drawings are taken evenly.
• Leaving a one-word reason with no explanation.
• Not stating whether a closing current account balance is debit or credit.

Next steps

• Recap the rules in the revision notes.
• Rework anything you missed with the study guide.
• Course home: Edexcel IGCSE Accounting and the printable checklist.
• Take the free diagnostics.
• Book a free trial class.

Frequently asked questions

How are interest on capital and partners’ salaries shared? Interest on capital and salaries are fixed amounts for each partner set by the agreement, so they are not split in the profit-sharing ratio. Only the residual profit or loss is shared in the ratio.

What happens if profit is too small to cover partners’ salaries and interest? Salaries and interest on capital are still credited because they are entitlements under the agreement. The resulting deficit is shared between the partners in the profit-sharing ratio, rather than dropping the salary.

How is interest on drawings calculated when drawings are taken evenly? When drawings are taken evenly through the year, interest runs for an average of six months, so multiply drawings by the rate and by 6/12. Charging interest for twelve months is a common error.

How do you show a partner’s closing current account balance? State whether the closing balance is a debit or a credit. A credit balance means the firm owes the partner, while a debit balance means the partner has taken out more than has been credited, and a debit opening balance reduces the closing figure.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1), Specification, Issue 1, October 2016, published by Pearson Education Limited. Topic 4: The preparation of financial statements, section 2 (Financial statements of a partnership), points a to g.