When a partner makes an advance or loan to the partnership, how many of these statements are true?
$\bullet$He/she is entitled to interest at the rate of 7% p.a. unless there is an agreement to the contrary.
$\bullet$The amount loaned is added to the partners equity account balance.
$\bullet$Interest on the loan is regarded as an expense of the partnership and appears in the income statement.
A) 0
B) 1
C) 2
D) 3

Question

Quizplus · Accepted Answer

The first statement is true as, in many jurisdictions, interest on a partner's loan to the partnership is payable at a statutory rate (often 7% per annum) unless a different rate is agreed upon. The third statement is also true because interest paid on a partner's loan is considered a business expense for the partnership and is recorded as such in the income statement. The second statement is false because a loan made by a partner to the partnership is recorded as a liability of the partnership, not as an addition to the partner's capital account.

When a Partner Makes an Advance or Loan to the Partnership