When a partner makes an advance or loan to the partnership, which of the following statements is correct?
I.The partner is entitled to interest at the rate of 7% p.a. unless there is an agreement to the contrary.
II.The amount loaned is added to the partner's equity account balance.
III.Interest on the loan is regarded as an expense of the partnership and appears in the income statement.
A) I and II
B) I and III
C) II and III
D) I, II and III

Question

Quizplus · Accepted Answer

I. According to partnership law in many jurisdictions, a partner who makes a loan to the partnership is entitled to interest at a rate of 7% per annum unless a different rate is agreed upon. This encourages partners to lend money to their own partnerships by ensuring they receive a minimum return on their loan. II. The amount loaned by a partner to the partnership is not added to the partner's equity account but is recorded as a liability of the partnership to the partner. This is because the loan is considered a separate transaction from the partner's capital contribution. III. Interest paid on the loan by the partnership to the partner is considered an expense of the partnership and is deducted from the partnership's income on the income statement. This reduces the partnership's taxable income and reflects the cost of borrowing the funds from the partner.

When a Partner Makes an Advance or Loan to the Partnership