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CHAPTER FIFTEEN

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CHAPTER FIFTEEN Powered By Docstoc
					                                     Chapter 15

                     Accounting for Partnerships

Introduction
In Tanzania partnerships are governed by the Law of Contract Ordinance, 1961. Section 190 of
the Law of Contract Ordinance, 1961 defines a partnership as a "relation which subsists between
persons carrying on business in common with a view to profit". Partnerships are formed for the
following three main reasons:

Raising additional capital

As a business expands one owner may not be able to finance all of its operations adequately. In
order to raise additional capital one or more partners may be sought.

Developing and attracting expertise

Expansion of business operations requires expert knowledge in key areas of the business. It is not
always possible for one person to be able to handle satisfactorily different areas of a business. It
then becomes necessary to attract expert knowledge so as to improve overall performance. One
effective way of attracting and committing experts to a business is by offering co-ownership.
Partnerships for this reason are the most common form of business organisation with
professionals.

Sharing of administrative responsibilities and losses

The burden of administrative responsibilities and losses can be eased when shared among
partners rather than being borne by a single owner.



General Duties of Partners
Under Section 192 of the Law of Contract Ordinance, 1961 the general duties of partners are;

to be just and faithful to one another
to carry on business of partnership for the greatest common advantage of the firm.
to render true accounts and full information of all things affecting the partnership to any partner
or his legal representatives.
2 Introductory Financial Accounting



The Partnership Agreement
Administration of a partnership is governed by a partnership agreement. A partnership
relationship arises from contract which can be written or oral. A partnership agreement emanates
from this requirement. Such an agreement sets out duties and responsibilities of individual
partners. Once a partnership agreement is in place its terms can only be varied by consent of all
partners (Section 193).

Following are aspects which should be covered by a partnership agreement:

Capital contribution

How much capital should a partner contribute to the firm? Would capital be allowed to fluctuate
or remain fixed?

Profit sharing

The agreement must stipulate how profits and losses are to be shared among partners. It may also
prescribe whether or not some partners are guaranteed minimum profit shares.

Drawings

Whether or not drawings by partners will be allowed and if interest is to be charged on such
drawings.

Salaries

The agreement should indicate whether salaries are to be paid to partners and amounts of such
salaries, if any.

Interest on capital and current account balances

Whether such interest will be earned by partners and the rates of interest and which capital and
current account balances will be used in computation of interest.

Loans from partners

Where a firm receives loans or advances extended by partners how would these be rewarded?
Unless otherwise stated these will be treated as if they were from outsiders and interest will be
paid on them.

Accounts

The agreement shall stipulate the beginning and the end of an accounting period. It shall also
indicate whether accounts shall be audited.
                                                                   Accounting for Partnerships 3



In the absence of a partnership agreement
Where a partnership agreement is absent, Section 194 gives the rules which determine the rights
and duties of partners in relation to the partnership. These are:

Every partner has a right to take part in management of partnership business.
Differences on ordinary matters are to be decided by majority but change in nature of partnership
requires consent of all partners.
Every partner has a right of access to, inspection and copying any books of the firm.
No remuneration will be received for managing or taking part in business. This implies there will
be no salaries or interest on capital.
Partners will contribute equal capital shares, profits and losses will be shared equally whether
losses are of capital nature or revenue nature.
A partner shall be indemnified in respect of payments made and personal liabilities incurred by
him in the ordinary and proper course of the business of the firm; and in or about anything
necessarily done for the preservation of the business or property of the firm.
A partner shall indemnify the partnership for loss caused to it by fraud or willful neglect in the
conduct of business of the firm.

In addition to the above Section 222 stipulates that in the absence of any agreement to the
contrary, interest on indebtness of a partnership to individual partners shall be 5% per annum on a
loan balance.



Accounting Records and Financial Statements
In accounting for partnership the aim is recording transactions in order to produce information on
the following events:

The formation of a partnership,
The admission of new partners,
The appropriation of partnership profits among partners and updating of equity relating to each
partner, and
Retirement of partners and other changes.

The accounting system and books of original entries in partnerships are similar to those of other
forms of business entities. Financial statements prepared differ from those of other forms of
business organisations in two aspects:

The Appropriation Section of the Statement of Comprehensive Income

In contrast to other business organizations a Statement of Comprehensive Income of a partnership
is extended to show how profit or loss for the year is distributed among the partners. This
extension is known as an appropriation account or statement.

Appropriation of profits is effected through distribution of shares of profit among partners,
salary entitlements and interest on capital balances. These are treated as a means of
distributing partnership profits. Interest on Loans from partners is not an appropriation of
profit and it is therefore not dealt with through the appropriation account. It is treated as a
financial expense and charged to the statement of comprehensive income.

Where partners' drawings are charged interest it adds to the profits of the firm available for
4 Introductory Financial Accounting



distribution. Interest on drawings is also dealt with through the appropriation account.

Statement of Financial Position

In the statement of financial position the capital section is broken down to distinguish the
following elements:

       the original capital contributed into the partnership by each partner,
       the share of profits accruing to each partner reduced by any drawings and interest on
        drawings, and
       any loans extended by a partner to the partnership over and above the agreed capital
        contributions.

In order to generate information in capital, current, drawings and loans specific accounts are
normally kept for each of these items.

Capital account

This account is credited with the capital contributed as per the partnership agreement.

Current account

This account records appropriations of profits and losses. Therefore, it is credited with profit
shares, salaries and interest on capital. It is debited with interest on drawings charged to partners.
The balance in this account represents retained profits attributable to each partner which could be
drawn for personal use depending on the partnership agreement. Drawings therefore, are
ultimately closed to this account.

Drawings account

This account records any cash or other business assets appropriated by partners. The final balance
in this account is closed to the current account at the end of the year. Sometimes drawings, if
made infrequently, are debited directly to the current account in which case there is no need for a
drawings account to be maintained.

Loan Account

This account records loans or advances to the partnership. Such loans normally attract interest set
at the time they are made available. In the absence of agreement on loan interest a rate of 5
percent per annum is fixed by the Law of Contract Ordinance, 1961.



Starting a Partnership
When starting a business partners contribute capital to the firm. Capital contribution can be in the
form of cash or other assets. Where assets other than cash are contributed fair market values of
these have to be established by professional valuers or agreed upon by partners.


The following journal entry is made to record capital contribution:
                                                                       Accounting for Partnerships 5




           Date     Description                          Folio     Debit           Credit
           Y-01
             Jan 1 Cash                                                6,000,000
                    Buildings                                          4,000,000
                    Motor Vehicles                                     4,000,000
                    Furniture and Fittings                             4,000,000
                         Capital Account - A                                         6,000,000
                         Capital Account – B                                         6,000,000
                         Capital Account – C                                         6,000,000
                    To record capital contribution by
                    partners.


Example:

Abuu, Salma and Leyla started a pizza home delivery service business each contributing the
following:

                                                            shs.
                                  Abuu:
                                  Cash                        60,000
                                  Van                        900,000


                                  Salma:
                                  Cash                       100,000
                                  Typewriter                 300,000


                                  Leyla:
                                  Cash                       500,000


The following entry will be made to record the start of the business:

           Date     Description                          Folio     Debit           Credit
           Y-01
             Jan 1 Cash                                                 660,000
                    Motor Vehicles                                      900,000
                    Furniture and Fittings                              300,000
                         Capital Account – Abuu                                       960,000
                         Capital Account – Salma                                      400,000
                         Capital Account – Leyla                                      500,000
                    To record capital contribution by
                    partners.
6 Introductory Financial Accounting



Following are some other events and accounting entries required to record the following events:

Loan advanced to partnership by a partner

           Date    Description                              Folio   Debit           Credit
             Jan 1 Asset Account [with value of asset]                 600,000
                        Loan Account – [Partner]                                       600,000
                   To record loan advanced by partner.

Interest on Loans or Advances made by a partner

           Date   Description                               Folio   Debit           Credit
           Dec 31 Interest Expenses                                         6,000
                        Current Account – [Partner]                                      6,000
                  To record interest on loan due to a
                  partner.


Drawings by partners


           Date   Description                               Folio   Debit           Credit
           Dec 31 Drawings Account [Partner]                            46,000
                       Asset Account                                                    46,000
                  To record drawings by partner.


Closure of drawings accounts


           Date   Description                               Folio   Debit           Credit
           Dec 31 Current Account [Partner]                             46,000
                       Drawings Account [Partner]                                       46,000
                  To close the drawings account.


Interest on drawings by partners


           Date    Description                               Foli   Debit           Credit
                                                             o
           Dec 31 Current Account [Partner]                                 2,000
                         Statement of Comprehensive
                                                                                         2,000
                         Income [Appropriation]
                   To record interest on drawings charged
                   to a partner.
                                                                            Accounting for Partnerships 7



Interest on Capital


            Date     Description                              Foli     Debit           Credit
                                                              o
                     Statement of Comprehensive Income
            Dec 31                                                             8,000
                     [Appropriation]
                           Current Account [Partner]                                        8,000
                     To record interest on capital balances
                     due to a partner.


Salaries to partners


            Date     Description                              Foli     Debit           Credit
                                                              o
                     Statement of Comprehensive Income
            Dec 31                                                             8,000
                     [Appropriation]
                          Current Account [Partners]                                        8,000
                     To record salary entitlements of
                     partners.

When salaries are taken out the entry is the same as for drawings.

Apportionment of profits to partners


            Date     Description                              Foli     Debit           Credit
                                                              o
                     Statement of Comprehensive Income
            Dec 31                                                            58,000
                     [Appropriation]
                          Current Account [Partners]                                       58,000
                     To record residual profit shares of
                     partners.

If a loss situation is encountered the entry to apportion a loss is the reverse of the above entry.

Example:

Ange, Lina, Conso and Mrefu are in partnership. Capitals they have contributed are shs. 750,000;
shs. 700,000; shs. 600,000 and shs. 600,000 respectively. Partners agreed on the following
arrangement:

Interest is to be allowed on capital at 10% per annum.
Ange, Lina, Conso and Mrefu are to receive salaries of shs. 100,000, shs. 100,000, shs. 80,000
and shs. 80,000 respectively.
Profits are to be shared as follows: Ange 35%; Lina 35%; Conso 20%; Mrefu 10%
Interest is to be charged on drawings at 10% per annum. The amounts chargeable to each partner
for the year ended 31 December 19X2 have been worked out as:

                                                                     shs.
                                   Ange                         17,290
8 Introductory Financial Accounting


                                Lina                          11,000
                                Conso                          8,320
                                Mrefu                          7,890
                                Total                         44,500


During the year ended 31 December 19X2 the partners withdrew the following amounts from the
partnership:

                                                               shs.
                                Ange                         230,500
                                Lina                         219,800
                                Conso                        166,400
                                Mrefu                        173,000
                                Total                        789,700


The partners had the following balances on their current accounts as at 1 January 19X2:

                                                               shs.
                                Ange                      21,000 [cr]
                                Lina                      33,700 [cr]
                                Conso                     12,400 [dr]
                                Mrefu                      9,800 [cr]


During the financial year ended 31 December 19X2 the partnership earned a net profit of shs.
855,500.

Required:

  i.    Draw up the appropriation section of the partnership's Statement of Comprehensive
        Income for the year ended 31 December 19X2.
Prepare the partners' current accounts for the year ended 31 December 19X2.
Prepare an extract of the capital section of the partnership's Statement of Financial Position as at
31 December 19X2.
                                                               Accounting for Partnerships 9




    Statement of Comprehensive Income [Appropriation section only]
                                                shs.          shs.
    Net Profit b/f                                           855,500
    Current Accounts
    Interest on Drawings:
      Ange                                      17,290
      Lina                                      11,000
      Conso                                       8,320
      Mrefu                                       7,890
                                                              44,500
                                                             900,000
    Interest on Capital:
      Ange                                      75,000
      Lina                                      70,000
      Conso                                     60,000
      Mrefu                                     60,000
                                                             265,000
    Salaries:
      Ange                                     100,000
      Lina                                     100,000
      Conso                                     80,000
      Mrefu                                     80,000
                                                             360,000
    Profit shares:
     Ange [35%]                                 96,250
     Lina [35%]                                 96,250
     Conso [20%]                                55,000
     Mrefu [10%]                                27,500
                                                             275,000



Current Accounts
                          Ange       Lina       Conso           Mrefu      Total
Balance b/f                21,000     33,700     (12,400)         9,800      52,100
Interest on Capital        75,000     70,000      60,000         60,000     265,000
Salaries                  100,000    100,000      80,000         80,000     360,000
Interest on Drawings     (17,290)    (11,000)     (8,320)        (7,890)    (44,500)
Profit shares              96,250     96,250      55,000         27,500     275,000
Drawings                (230,500)   (219,800)   (166,400)      (173,000)   (789,700)
Balance c/f                44,460     69,150          7,880      (3,590)    117,900



Statement of Financial Position [extract only] as at 31 December 19X2
                                         Capital        Current     Total
Ange                                        750,000        44,460     794,460
Lina                                        700,000        69,150     769,150
Conso                                       600,000         7,880     607,880
Mrefu                                       600,000                   600,000
                                          2,650,000           121,490      2,771,490
10 Introductory Financial Accounting



Note that where a partner's current account has a debit balance it is not netted off against the
capital account balance fixed in the agreement. Such a debit balance will be shown as a
receivable under current assets.


Changes in Partnership
A change in partnership occurs when the contents of the partnership agreement change. This
could occur when there is:

Admission of a new partner,
Change of profit sharing plan, and
Retirement or death of a partner.

Technically a change in partnership gives rise to dissolution of an existing relationship and
creation of another.

Admission of a New Partner

Section 198 of the Law of Contract Ordinance, 1961 requires that admission of a new partner be
agreed upon by all existing partners. There are two ways a partner can be admitted into an
existing partnership. One is by buying interest from an existing partner and the other is by buying
a share of interest from the firm.

Buying interest from an existing partner

Admission of a new partner can be effected by the new partner buying interest from an existing
partner. Accounting treatment for such an arrangement is straight forward. An existing partner's
interest in the firm is decreased and a new partner is given a share of interest given up by the
existing partner. Consideration can be passed privately between the two partners or can be
recorded through the partnership books.

The following journal entry is made to record such form of admission:

           Date    Description                            Foli     Debit          Credit
                                                          o
             Jan 1 Capital Account [existing partner]                   500,000
                        Capital Account [new partner]                                500,000
                   To record transfer of share of
                   ownership to an incoming partner.


Example:

Abe, Bani and Chombo are in business sharing profits in the ratio 3:2:1 respectively. Capital
account balances as at 31 December 19X1 are:

                                                                 shs.
                                 Abe                        300,000
                                 Bani                       200,000
                                 Chombo                     100,000


Danny is admitted on 1 January19X2 by buying a third of Abe's interest at shs. 300,000.
                                                                       Accounting for Partnerships 11



The entries to record the above events would be as follows:

           Date     Description                                 Foli   Debit        Credit
                                                                o
             19X2
              Jan 1 Capital Account [Abe]                                 100,000
                         Capital Account [Danny]                                       100,000
                    To record transfer of share of
                    ownership from Abe to Danny - an
                    incoming partner.

There is no other entry if consideration passes privately. However, if consideration is recorded in
partnership books, the entry will be:

           Date     Description                                 Foli   Debit        Credit
                                                                o
             19X2
              Jan 1 Cash                                                  300,000
                          Current Account [Abe]                                        300,000
                    To record consideration to Abe for
                    transfer a third of share of ownership to
                    Danny.

Abe can then take the amount out as he would do for ordinary drawings.

After the transfer of Abe's interest is effected the new profit sharing ratio will be 2:2:1:1 for Abe,
Bani, Chombo and Danny respectively.

Buying a share of partnership interest from the firm

In this mode of admission all existing partners' shares of interest are affected. When a new partner
is admitted he is expected to contribute to the partnership an amount commensurate with the
share of the business he is expected to own. At the point of admission the total of capital and
current accounts of individual partners represent the net assets of the firm. However, the net
assets figure may not reflect the value of a business. It is normal for a firm to be worth more than
the sum of its individual assets net of all liabilities.

Tangible assets could have a higher or lower values than those carried in the books of accounts.
This calls for revaluation of assets before admission of a new partner in order that changes
[increases or decreases] in values of these assets are attributed to existing partners who
contributed towards such changes in value.

Even when tangible assets have been revalued it is possible for a firm to attract a value higher
than the sum of all tangible assets. This is attributed to the existence of an intangible asset called
goodwill. Goodwill may exist in a firm because of:

       being conveniently located
       having loyal customers
       having good competent management
       having partners of good reputation.

These attributes are intangible and difficult to quantify and value. Consequently, goodwill can
only be estimated. There are several approaches to estimating goodwill.
12 Introductory Financial Accounting




Methods of Estimating Goodwill

Revenue based methods

This approach estimates goodwill as for example "n years purchase of annual sales of the past y
years". The methodology involves getting average annual sales of the past 'y' years and
multiplying the average annual sales figure with "n".

Example.

The following are sales figures of a firm, Chaki & Poki.

                       Year                 shs.      Year                shs.
                       1985            230,000        1989            450,000
                       1986            300,000        1990            460,000
                       1987            400,000        1991            420,000
                       1988            420,000        1992            430,000


Goodwill is to be valued at 2 years' purchase of average annual sales of the past 8 years.

                                                    3,110,000
             Average Annual Sales       =                          = shs. 388,750
                                                        8

Goodwill will be shs. 777,500 [388,750*2]

Profit based methods

In principle this is similar to the revenue based method. In the profit based method the basis for
estimation is average profit rather than average revenue.

Example

Chaki & Poki generated the following profits over the past eight years:

                       Year                  shs.     Year                 shs.
                       1985             70,000        1989             95,000
                       1986             90,000        1990             80,000
                       1987             80,000        1991             85,000
                       1988             65,000        1992             75,000


If goodwill is valued as 10 years' purchase of average annual profits of the past 8 years goodwill
is obtained at follows:

                                                     640,000
             Average Annual Profits     =                          = shs. 80,000
                                                        8


Goodwill then becomes shs. 800,000 [80,000*10].
                                                                      Accounting for Partnerships 13



Capitalization of Average Super Profits

Super profits are profits in excess of what is required to earn a normal return on capital in a
business. Super profit is estimated and capitalized for an agreed time period using the normal rate
of return. Capitalization of super profits requires application of the concept of time value of
money. This approach will be covered in sufficient detail in an intermediate accounting course.


Goodwill in partnership accounts
A change in partnership usually necessitates valuation of goodwill. To recognize goodwill upon
admission of a new partner the following journal entry will be made:

           Date     Description                             Foli      Debit            Credit
                                                            o
              Jan 1 Goodwill Account                                       1,300,000
                         Capital Account [old partners]                                  1,300,000
                    To recognize goodwill in books of
                    accounts.

The value of goodwill will be credited to old partners' capital accounts on the basis of the old
profit sharing plan, i.e. before admission of a new partner.

Although a firm may possess goodwill it is not common practice to maintain a goodwill account
in the books. Usually after a goodwill account is raised when a new partner is admitted it will be
written off immediately from the books of accounts. The entry to record such a write off of
goodwill is as follows:


           Date    Description                               Foli      Debit           Credit
                                                             o
             Jan 1 Capital Account [old and new partners]                  1,300,000
                        Goodwill Account                                                  1,300,000
                   To write off goodwill in books of
                   accounts.

Thus, the value of goodwill is written off among all partners using the new profit sharing plan as
a basis of apportioning the write off.

The effect of this entry is to adjust the capital accounts of old and new partners.

Example:

Abe, Bani and Chombo are in business sharing profits at the ratio 3:2:1 respectively up to 31
December 19X1. On 1 January 19X2 Danny is admitted to the partnership and brings in shs.
230,000 cash. The new profit sharing ratio being 1:1:1:1. Goodwill is estimated at shs. 120,000.
Capital account balances on 1 January 19X2 are:

                                                                    shs.
                                  Abe                         350,000
                                  Bani                        200,000
                                  Chombo                      100,000
14 Introductory Financial Accounting




                                                Capital Accounts
                                            Abe        Bani      Chombo                Danny              Total
        Balance b/f                         350,000         200,000      100,000                            650,000
        Goodwill                             60,000          40,000       20,000                            120,000
        Goodwill                            (30,000)      (30,000)       (30,000)       (30,000)          (120,000)
        Cash                                                                            230,000             230,000
        Balance c/f                         380,000         210,000       90,000        200,000             880,000



                       Goodwill                                             Account no. 00
    Date    Details                  Fol.         Debit      Date     Details                      Fol.        Credit

    Jan 1   Capital [Abe]                          60,000 Jan 1       Capital [Abe]                                30,000

            Capital [Bani]                         40,000             Capital [Bani]                               30,000

            Capital [Chombo]                       20,000             Capital [Chombo]                             30,000

                                                                      Capital [Danny]                              30,000

                                                  120,000                                                         120,000




Comparison of capital account balances before and after the adjustments involving goodwill
shows how each partner's capital account has been adjusted.


Admission with Revaluation of Assets
If fair values of assets differ from values recorded in the books there is an argument for
revaluation of assets at the point of admission of a new partner. This is done so that any
appreciation or appreciation in value of assets is shared among the old partners. To record
revaluation of assets the following entries are made:

Increase in value of an asset


            Date      Description                                        Foli       Debit          Credit
                                                                         o
              Jan 1 Asset Account [amount of increase]                                 300,000
                            Revaluation Account                                                       300,000
                      To record increase in asset value on
                      revaluation.


Decrease in value of an asset


            Date      Description                                        Foli       Debit          Credit
                                                                         o
              Jan 1 Revaluation Account                                                100,000
                             Asset Account [amount of
                                                                                                      100,000
                             decrease]
                                                                    Accounting for Partnerships 15


                   To record decrease in asset value on
                   revaluation.

The revaluation account is then balanced. A credit balance represents a net increase in value of
assets which should be shared by existing partners before admission using old profit sharing
ratios.

Sharing of increase in value of assets

The entry to record sharing of increase in value of assets is:

           Date    Description                               Foli   Debit        Credit
                                                             o
             Jan 1 Revaluation Account                                 200,000
                        Capital Account [partners]                                  200,000
                   To record sharing of revaluation gain.

Where the revaluation account ends with a debit balance, it represents a fall in value of assets.
Again this is shared among old partners in the old profit sharing ratio. The accounting entry to
record this being the reverse of the previous journal entry.

           Date    Description                               Foli   Debit        Credit
                                                             o
             Jan 1 Capital Account [partners]                          200,000
                        Revaluation Account                                         200,000
                   To record sharing of revaluation loss.
16 Introductory Financial Accounting



Example:

Bino, Jesse and Bob, sharing profits and losses equally had been trading for a number of years.
On 1 January 19X3 they admitted Shani. The Statement of Financial Position as at 31 December
19X2 was as follows:

                                      Bino, Jesse & Bob
                    Statement of Financial Position as at 31 December 19X2

                                                           shs. '000   shs. '000
                    Assets
                    Non Current Assets
                    Buildings                                              8,000
                    Machinery                                              4,000
                    Equipment                                              6,000
                                                                          18,000
                    Current Assets:
                    Stocks                                     5,000
                    Debtors                                    6,000
                    Cash at Bank                               3,000
                                                                          14,000
                     Total Assets                                         32,000



                    Owners' Equity and Liabilities
                    Current Liabilities:
                    Creditors                                              8000


                    Capitals:
                    Capitals:
                    Bino                                      10,000
                    Jesse                                      8,000
                    Bob                                        6,000
                                                                          24,000
                    Total Owners' Equity and Liability                 32,000

Shani is to contribute shs. 7 million cash towards the business as capital and including payment
for his share of goodwill. The value of goodwill was agreed at shs. 9 million.

Buildings had increased in value as a result of general economic conditions; the value being
agreed at shs. 12.1 million. Machinery and equipment were valued at shs. 3.6 million and shs. 5.3
million respectively.

Required:
Show the adjusted Statement of Financial Position of the firm after admission of Shani assuming:
the partners wish to retain the assets at their revised valuations.
the assets are to be reflected in the Statement of Financial Position at their original valuations.
                                                                               Accounting for Partnerships 17



Assuming assets are retained at revised valuations


                      Revaluation                                        Account no. 00
       Date    Details                      Debit           Date   Details                       Credit

       Jan 1   Machinery                         400,000           Buildings                      4,100,000

               Equipment                         700,000

               Capital [Bino]                   1,000,000

               Capital [Jesse]                  1,000,000

               Capital [Bob]                    1,000,000

                                                4,100,000                                         4,100,000




                      Goodwill                                           Account no. 00
       Date    Details                      Debit           Date   Details                       Credit

       Jan 1   Capital [Bino]                   3,000,000

               Capital [Jesse]                  3,000,000

               Capital [Bob]                    3,000,000          Balance                        9,000,000

                                                9,000,000                                         9,000,000




                                                Capital Accounts
                                 Bino                Jesse            Bob            Shani           Total
   Balance b/f                   10,000,000           8,000,000       6,000,000                      24,000,000
   Revaluation Account              1,000,000         1,000,000       1,000,000                       3,000,000
   Goodwill                         3,000,000         3,000,000       3,000,000                       9,000,000
   Cash                                                                              7,000,000        7,000,000
   Balance c/f                   14,000,000          12,000,000      10,000,000      7,000,000       43,000,000
18 Introductory Financial Accounting



Statement of Financial Position reflecting revised valuations.

                                         Bino, Jesse, Bob & Shani
                          Statement of Financial Position as at 31 December 19X2
                                                                  shs. '000       shs. '000
                      Assets
                      Non Current Assets
                      Buildings                                                      12,100
                      Machinery                                                       3,600
                      Equipment                                                       5,300
                      Goodwill                                                        9,000
                                                                                     30,000
                      Current Assets:
                      Stocks                                          5,000
                      Debtors                                         6,000
                      Cash at Bank                                   10,000
                                                                                     21,000

                                                                                     51,000

                      Owners' Equity and Liabilities
                      Current Liabilities:
                      Creditors                                                       8000


                      Capitals:
                      Capitals:
                      Bino                                           14,000
                      Jesse                                          12,000
                      Bob                                            10,000
                      Shani                                           7,000
                                                                                     43,000
                      Total Owners' Equity and Liability                          51,000




Assuming revised asset valuations are not retained in books


                       Goodwill                                        Account no. 00
        Date    Details                      Debit       Date   Details                       Credit

        Jan 1   Capital [Bino]               3,000,000          Capital [Bino]                 2,250,000

                Capital [Jesse]              3,000,000          Capital [Jesse]                2,250,000

                Capital [Bob]                3,000,000          Capital [Bob]                  2,250,000

                                                                Capital [Shani]                2,250,000

                                             9,000,000                                         9,000,000
                                                                        Accounting for Partnerships 19



               Buildings                                         Account no. 00
Date    Details                     Debit          Date   Details                          Credit

Jan 1   Balance b/f                 8,000,000             Capital [Bino]                     1,025,000

        Revaluation                 4,100,000             Capital [Jesse]                    1,025,000

                                                          Capital [Bob]                      1,025,000

                                                          Capital [Shani]                    1,025,000

                                                          Balance c/f                        8,000,000

                                    4,100,000                                                4,100,000




               Machinery                                         Account no. 00
Date    Details                     Debit          Date   Details                          Credit

Jan 1   Balance b/f                 4,000,000             Revaluation                         400,000

        Capital [Bino]                   100,000

        Capital [Jesse]                  100,000

        Capital [Bob]                    100,000

        Capital [Shani]                  100,000          Balance c/f                        4,000,000

                                    4,400,000                                                4,400,000




               Equipment                                         Account no. 00
Date    Details                     Debit          Date   Details                          Credit

Jan 1   Balance b/f                 6,000,000             Revaluation                         700,000

        Capital [Bino]                   175,000

        Capital [Jesse]                  175,000

        Capital [Bob]                    175,000

        Capital [Shani]                  175,000          Balance c/f                        6,000,000

                                    6,700,000                                                6,700,000




 Capital Accounts
                             Bino             Jesse         Bob              Shani         Total
 Balance b/f               10,000,000        8,000,000     6,000,000                      24,000,000
 Revaluation Account        1,000,000        1,000,000     1,000,000                       3,000,000
 Goodwill                   3,000,000        3,000,000     3,000,000                       9,000,000
 Goodwill                  (2,250,000)      (2,250,000)   (2,250,000)       (2,250,000)   (9,000,000)
 Buildings                 (1,025,000)      (1,025,000)   (1,025,000)       (1,025,000)   (4,100,000)
 Machinery                    100,000          100,000       100,000           100,000       400,000
 Equipment                    175,000          175,000       175,000           175,000       700,000
 Cash                                                                        7,000,000     7,000,000
 Balance c/f               11,000,000        9,000,000     7,000,000         4,000,000    31,000,000
20 Introductory Financial Accounting



Statement of Financial Position retaining original valuations

                                       Bino, Jesse & Bob
                     Statement of Financial Position as at 31 December 19X2
                                                             shs. '000   shs. '000
                     Assets
                     Non Current Assets
                     Buildings                                               8,000
                     Machinery                                               4,000
                     Equipment                                               6,000
                                                                            18,000
                     Current Assets:
                     Stocks                                      5,000
                     Debtors                                     6,000
                     Cash at Bank                               10,000
                                                                            21,000

                                                                            39,000

                     Owners' Equity and Liabilities
                     Current Liabilities:
                     Creditors                                               8000


                     Capitals:
                     Capitals:
                     Bino                                       11,000
                     Jesse                                       9,000
                     Bob                                         7,000

                     Shani                                       4,000
                                                                            31,000
                     Total Owners' Equity and Liability                   39,000



Retirement of a Partner
Section 200 of the Law of Contract Ordinance, 1961 stipulates that where there is no fixed term a
partner may retire by giving notice of his intention to all partners.

In the absence of any agreement to the contrary an outgoing partner according to Section 222 is
entitled to opt for the share of profits made since his retirement or to interest at the rate of 5% per
annum on the amount of his share of partnership assets, if his share was not paid to him on
retirement.

If a retiring partner's share of partnership assets is not paid out on the date of retirement it
becomes a debt to the partnership. Subject to any agreement the amount due from continuing
partners is a debt accruing at the date of dissolution (Section 223). For the purpose of establishing
the date of dissolution where a partnership is dissolved by notice, the effective date is the date
mentioned on the notice or if no date is mentioned, as from date of communication of notice
[Section 212 (c)].
                                                                       Accounting for Partnerships 21




There are two ways of effecting retirement of a partner:

Remaining partners may purchase outgoing partner's interest in the firm, or
Retiring partner is paid out of the firm's assets.

Purchase of interest by remaining partners

In this case the remaining partners divide up the capital share of a retiring partner. Consideration
can be paid privately or that payment can be recorded through partnership books. In any case this
approach does not result in a change of partnership's net assets.

Example:

A, B and C are in partnership sharing profits and losses in the ratio 2:1:1. A retires on 1 January
19X3 and the partnership Statement of Financial Position as at 31 December 19X2 was:

                  ABC Statement of Financial Position as at 31 December 19X2
                                                                                shs.
                  Land                                                              150,000
                  Other net assets                                                  250,000
                                                                                    400,000
                  Capitals:
                  A                                                                 200,000
                  B                                                                 100,000
                  C                                                                 100,000
                                                                                    400,000



It was agreed that B and C were to buy jointly A's interest.

The entry to record the purchase of interest from A by B and C is made as follows:

           Date      Description                                Foli   Debit         Credit
                                                                o
             Jan 1 Capital Account [A]                                    200,000
                          Capital Account [B]                                            100,000
                          Capital Account [C]                                            100,000
                     To record transfer of share of ownership
                     from Partner A to Partner B and C.


Consideration for that purchase can be passed privately or recorded through partnership books. If
it is through partnership books, the continuing partners will bring money into the partnership and
it will be paid over to Partner A.
22 Introductory Financial Accounting



The Statement of Financial Position after the transfer of interest will look as follows:

                         ABC Statement of Financial Position as at 1 January 19X3
                                                                          shs.
                    Land                                                   150,000
                    Other net assets                                       250,000
                                                                           400,000
                    Capitals:
                    B                                                      200,000
                    C                                                      200,000
                                                                           400,000



Purchase of interest of the retiring partner by the firm

When a partner retires and is to be paid out of firm's assets the partnership agreement needs to be
consulted for guidance. In the absence of any agreement a retiring partner is entitled to his share
of net assets of the firm.

When a partner retires Statement of Financial Position values may not represent properly net
assets of a firm. As such, a retiring partner is entitled to have assets revalued and goodwill
recognized. Usually continuing partners will not wish to maintain a goodwill account in the books
or assets at their revised values.

The share of net assets due to the retiring partner can be paid out immediately but it may also be
treated as a loan to the firm and paid out in installments. Where the amount is converted into a
loan it shall carry interest at the rate of 5% per annum, unless there is agreement to the contrary
(Section 222).
                                                                 Accounting for Partnerships 23



Example:

Bino, Jesse and Bob sharing profits and losses equally had been trading for a number of years.
Bob decided to retire as at 31 December 19X2. The partnership Statement of Financial Position
on that date was as follows:

                                      Bino, Jesse & Bob
                    Statement of Financial Position as at 31 December 19X2
                                                         shs. '000   shs. '000
                   Assets
                   Non Current Assets
                   Buildings                                              800
                   Machinery                                              400
                   Equipment                                              600
                                                                         1,800
                   Current Assets:
                   Stocks                                     500
                   Debtors                                    600
                   Cash at Bank                               300
                                                                         1,400

                                                                         3,200

                   Owners' Equity and Liabilities
                   Current Liabilities:
                   Creditors                                              800


                   Capitals:
                   Capitals:
                   Bino                                      1,000
                   Jesse                                      800
                   Bob                                        600

                                                                         2,400
                   Total Owners' Equity and Liability                  3,200


The value of goodwill is agreed at shs. 900,000. The buildings had increased in value as a result
of general economic conditions. The value being agreed at shs. 1,120,000. Machinery and
equipment were revalued at shs. 360,000 and shs. 530,000 respectively and it was agreed to
provide 5% in respect of debtors as doubtful.

Required:
Show the Statement of Financial Position after retirement of Bob and show the amount to which
Bob will be entitled.
24 Introductory Financial Accounting




                        Revaluation                                  Account no. 00
       Date    Details                 Debit        Date     Details                     Credit

       Jan 1   Machinery                   40,000            Buildings                      320,000

               Equipment                   70,000

               Provision for d/debts       30,000

               Capital [Bino]              60,000

               Capital [Jesse]             60,000

               Capital [Bob]               60,000

                                          320,000                                           320,000




                        Goodwill                                     Account no. 00
       Date    Details                 Debit        Date     Details                     Credit

       Jan 1   Capital [Bino]             300,000

               Capital [Jesse]            300,000

               Capital [Bob]              300,000            Balance                        900,000

                                          900,000                                           900,000




          Capital Accounts
                                       Bino           Jesse              Bob           Total
          Balance b/f                  1,000,000           800,000           600,000   2,400,000
          Revaluation Account            60,000             60,000            60,000    180,000

          Goodwill                      300,000            300,000           300,000    900,000

          Loan                                                           (960,000)     (960,000)
          Balance c/f                  1,360,000       1,160,000                  0    2,560,000



                        Loan [Bob]                                   Account no. 00
       Date    Details                 Debit        Date     Details                     Credit

       Jan 1   Balance c/f                960,000            Capital [Bob]                  960,000

                                          960,000                                           960,000
                                                                         Accounting for Partnerships 25



                                          Bino & Jesse
        Statement of Financial Position as at 31 December 19X2 (After Bob's retirement)
                                                        shs. '000       shs. '000       shs. '000
              Assets
              Non Current Assets
              Buildings                                                                     1,120
              Machinery                                                                      360
              Equipment                                                                      530
              Goodwill                                                                       900
                                                                                            2,910
              Current Assets:
              Stocks                                                         500
              Debtors                                           600
              Less: Prov. For doubtful debts                     30
                                                                             570
              Cash at Bank                                                   300

                                                                                            1,370

                                                                                            4,280

              Owners' Equity and Liabilities
              Current Liabilities:
              Creditors                                                                      800
              Non Current Liabilities
              Loan [Bob]                                                                     960
              Capitals:
              Capitals:
              Bino                                                          1,360
              Jesse                                                         1,160

                                                                                            2,520
              Total Owners' Equity and Liability                                          4,280


If the partnership had enough cash the amount due to Bob as a loan could have been paid
immediately, the entry being as follows:

          Date       Description                                 Foli    Debit           Credit
                                                                 o
                     Loan Account [Bob]                                       960,000
                           Cash                                                               960,000
                     To record settlement of Bob’s Loan after
                     retirement.


In the above Statement of Financial Position the partners wished to report goodwill and other
assets at their revised values. If they chose to retain old values (i.e. revised values were for the
purpose of effecting Bob's retirement only) the gain on revaluation of shs. 180,000 and goodwill
of shs. 900,000 would be written off against partners capital accounts. The following journal
entry being made:
26 Introductory Financial Accounting
                                                                        Accounting for Partnerships 27




          Date      Description                                 Foli    Debit           Credit
                                                                o
                    Machinery Account                                         40,000
                    Equipment Account                                         70,000
                    Provision for Doubtful Debts Account                      30,000
                    Capital [Jesse]                                          540,000
                    Capital [Bino]                                           540,000
                          Buildings Account                                                  320,000
                          Goodwill Account                                                   900,000
                    To restate revalued assets at their
                    original values and write off the gain on
                    revaluation.


The Statement of Financial Position of the firm assuming assets are restated at their original
values will look as follows:

                                           Bino & Jesse
                      Statement of Financial Position as at 31 December 19X2
                                                         shs. '000     shs. '000       shs. '000
             Assets
             Non Current Assets
             Buildings                                                                      800
             Machinery                                                                      400
             Equipment                                                                      600
                                                                                           1,800
             Current Assets:
             Stocks                                                         500
             Debtors                                                        600
             Cash at Bank                                                   300
                                                                                           1,400

                                                                                           3,200

             Owners' Equity and Liabilities
             Current Liabilities:
             Creditors                                                                      800
             Non Current Liabilities
             Loan [Bob]                                                                     960
             Capitals:
             Capitals:
             Bino                                                           820
             Jesse                                                          620

                                                                                           1,440
             Total Owners' Equity and Liability                                          3,200
28 Introductory Financial Accounting




Changes in Partnership during an Accounting Period
Admissions and retirements can be effected at any time during an accounting period. So far
examples have involved changes in partnership occurring at the end or beginning of an
accounting period.

Where changes occur during an accounting period a trading Statement of Comprehensive Income
account for the period has to be prepared up to the date of change and also a Statement of
Financial Position as at that date. When financial statements are prepared immediately after such
a change, the new arrangement starts with the books of accounts which reflect the new
arrangement. However, in a number of cases changes occur during the year and these are not
reflected until after financial statements have been prepared at the end of the year.

In these cases, the approach is to apportion results of operations such that results of the period
before change are reported separately from the results after change. This is done because a
change in partnership may result in a change in profit sharing plan. Therefore, a profit sharing
plan ruling before change should apply to the results before change and the profit sharing plan
ruling after change should apply to results after change.

Example:

Bavos, Chuma and Dula have been working in partnership as mechanics for several years. At 1
January 19X3 a summarized Statement of Financial Position shows the following items:

                                      Bavo, Chuma and Dula
                        Statement of Financial Position as at 1 January 19X3
                                                                                  shs.
            Assets:
            Service Yard                                                       100,000
            Motor cycles                                                       160,000
            Equipment                                                           40,000
            Net current assets                                                  40,000
                                                                               340,000
            Capitals:
            Bavos                                                              160,000
            Chuma                                                              100,000
            Dula                                                                80,000
                                                                               340,000


The partnership agreement allows for 10% per annum interest on capital - then profits shared in
the ratio of Bavos 5/12; Chuma 1/3; and Dula 1/4, with Dula being guaranteed a minimum of shs.
130,000 per annum in addition to his interest on capital.

Bavos retired on June 30 19X3 on which date goodwill was valued by an agreed method at shs.
240,000. A goodwill account is not to be maintained in the books. Bavos took the motorcycle he
had been using. Its book value at 1 January 19X3 was shs. 60,000 and the agreed valuation at 30
June 19X3 was shs. 46,000. Chuma and Dula continued in partnership sharing profits equally
after allowing interest on capital at 10% per annum as before. Dula is no longer going to have a
guaranteed profit share.
                                                                           Accounting for Partnerships 29




At 30 June 19X3 Chuma agreed to purchase the service yard which is adjacent to his house for
shs. 220,000 cash and then to lease it to the partnership for shs. 30,000 per annum. This
arrangement enabled the partnership to pay Bavos all but shs. 80,000 of the amount owing to him
with interest of 15% per annum being paid on that balance as per agreement. The profit on the
sale of the service yard is to be credited to the partners’ capital accounts. Chuma and Dula
withdrew shs. 160,000 and shs. 150,000 respectively during the year.

Income earned during the year was shs. 640,000 and shs. 360,000 of that relate to the first half-
year. The working expenses were shs. 160,000 for the year and shs. 90,000 of that relates to the
first half-year. Depreciation on motorcycles is charged at 20% per annum on book value and on
equipment at 10% per annum on book value.

Required:

Prepare partners' capital accounts, current accounts, the Statement of Comprehensive Income for
the year ended 31 December 19X3 and a summary Statement of Financial Position as at 31
December 19X3.

                Statement of Comprehensive Income for the year ended 31 December
                                             19X3
                                                         Jan - Jun       Jul - Dec         Total
                                                              shs.            shs.          shs.


               Income earned                             360,000         280,000         640,000
               Working expenses                           90,000           70,000        160,000
               Depreciation - Motorcycles                 16,000           10,000         26,000
               Depreciation - Equipment                     2,000           2,000          4,000
               Service Yard hiring charges                                 15,000         15,000
               Loan interest                                                6,000          6,000
               Operating expenses                        108,000         103,000         211,000
               Profit from operations                    252,000         177,000         429,000
               Loss from sale of motorcycle                 8,000                          8,000
               Net Profit                                244,000         177,000         421,000
               Current Accounts
               Interest on Capital
               Bavos                                        8,000                          8,000
               Chuma                                        5,000           5,000         10,000
               Dula                                         4,000           2,500          6,500
                                                          17,000            7,500         24,500
               Profit Shares
               Bavos                                      90,000                          90,000
               Chuma                                      72,000           84,750        156,750
               Dula                                       65,000           84,750        149,750
                                                         227,000         169,500         396,500


            Current Accounts
                                          Bavos            Chuma             Dula          Total
            Balance b/f                             0                0               0             0
            Interest on Capital                 8,000          10,000           6,500        24,500
            Profit shares                      90,000         156,750         149,750       396,500
            Drawings                                0          (6,750)         (6,250)      (13,000)
            Capital                           (98,000)                                      (98,000)
30 Introductory Financial Accounting



             Balance c/f                            0           160,000           150,000          310,000


             Capital Accounts
                                            Bavos         Chuma                  Dula             Total
             Balance b/f                     160,000            100,000             80,000         340,000
             Goodwill                        100,000             80,000             60,000         240,000
             Gain on sale of yard             50,000             40,000             30,000         120,000
             Goodwill [write off]                          (120,000)             (120,000)        (240,000)
             Motorcycle disposal             (46,000)                                              (46,000)
             Current account                  98,000                                                98,000
             Cash                           (282,000)                                             (282,000)
             Loan account                    (80,000)                                              (80,000)
             Balance c/f                            0           100,000             50,000         150,000


                     Bavo, Chuma and Dula Statement of Financial Position as at
                                      31 December 19X3
                                                         shs.             shs.           shs.
                    Assets:
                    Motor cycles                                                         80,000
                    Equipment                                                            36,000
                    Net current assets*                                                 127,000
                                                                                        243,000


                                                        Capital           Current
                    Chuma                               100,000            6,750        106,750
                    Dula                                 50,000            6,250         56,250
                                                        150,000           13,000        163,000
                    Loan Account [Bavos]                                                 80,000
                                                                                        243,000


* Note that Net current assets is a balancing figure.
                                                                 Accounting for Partnerships 31



Review Questions
Define a Partnership.

What are the rights of partners in a firm?

What are the advantages of a partnership over a sole trader?

If a partnership agreement does not exist, how would a partnership be administered?

5.Can you list the main clauses usually covered in a partnership agreement? Must they be written
to be legal?

What are the differences between financial statements of a partnership and those of a sole trader?

Mention three modes by which partnerships profits can be appropriated.

Sometimes a partner would extend a loan to a firm at an interest. How would you treat such a
loan for income determination and Statement of Financial Position purposes?

There are two ways a new partner may be admitted in a partnership. What are they? and what is
their basic difference?

Do you think that when an incoming partner invests in a partnership rather than purchasing an
interest from an existing partner, assets and equity of a firm will both increase?

Why is it necessary to revalue assets when there is a change in partnership?

What is goodwill and how does it arise?

There are two ways of effecting the retirement of a partner. What are they?

In a Statement of Financial Position how would you classify the amount outstanding to a retired
partner?

When there is a change in partnership during an accounting period a Statement of Comprehensive
Income account and a Statement of Financial Position should preferably be prepared at that point.
Why?



Exercises
    1. (a)     On January 1, Chenga and Sadia are starting a partnership to be called Sachenga
       & Co. Chenga is contributing land, building and office equipment that have a fair market
       value of shs. 100,000, 200,000 and 50,000 respectively. Sadia is contributing cash of shs.
       200,000. Prepare the general journal entry to record the transfer of assets to the
       partnership.

        (b)      Chenga and Sadia each invest an additional cash shs. 100,000 in Sachenga & Co.
                 on September 1. Prepare the general journal entry.

    2. (a)       If a partnership agreement between Viringe and Dodo allows for a salary of shs.
32 Introductory Financial Accounting



       60,000 to Viringe and shs. 40,000 to Dodo. Calculate the distribution of net income of
       shs. 300,000 to Viringe and Dodo.

       (b) Assume the same facts as in (a) above, except interest of 10% is paid on beginning
       capital balances of shs. 350,000 for Viringe and shs. 200,000 for Dodo. Show the
       distribution of net income to Viringe and Dodo.

   3. Ali and Issa have been partners in a clothing business for five years. Ali decided to sell
      his interest to his brother Mwalimu. Issa agrees to admit Mwalimu to the partnership.
      Ali's capital account has a balance of shs. 150,000. He sells his interest to Mwalimu for
      shs. 200,000. Prepare the general journal entry to record this transaction.

   4. A, B & C are in partnership sharing profits in the ratio 3:2:1 up to 31 December X1.
      From 1 January X2 D is admitted forming a new partnership ABC & D, the new profit
      sharing plan being 1:1:1:1. Goodwill has been estimated at shs. 120,000 and is to be
      written off immediately. Capital account balances before admission of D were A: shs.
      350,000 B: shs. 200,000 and C: shs. 100,000. D is to contribute shs. 200,000 cash as
      capital and shs. 30,000 cash as his share of goodwill. Show the general journal entries to
      record the above transactions.

   5. Cero a partner in a firm died on 31 March 19X3 and his share of capital and goodwill is
      ascertained to be shs. 760,000. It was arranged that this should be paid out by annual
      installments of shs. 200,000 to include principal and interest on the outstanding balance
      at 5% per annum. The first payment being made one month after death and succeeding
      payments are made on the anniversary of the date of death. Show the account in the firm's
      books. Make calculations to the nearest hundred shilling. The firm's year end is 31
      December.


Problems
   1. Othello, Sweet and Demona have been trading in partnership sharing profits and losses
      5
       /10, 3/10 and 2/10 respectively. The summarized Statement of Financial Position at 31
      March 19X5 of the partnership is as follows:

                                                          shs. '000   shs. '000
                 Fixed Assets:
                 Fixture, Fittings and Motor Vehicles                    14,000
                 Current Assets:
                 Stocks                                       6,200
                 Debtors                                      2,800
                 Cash at Bank                                 2,000
                                                             11,000
                 Current Liabilities:
                 Creditors                                    5,000
                 Net Current Assets                                       6,000
                 Total Net Assets                                        20,000
                 Financed by:
                 Capitals:
                 Othelo                                      11,000
                 Sweet                                        5,000
                 Demona                                       4,000
                                                                         20,000
                                                               Accounting for Partnerships 33



   On 1 April 19X5 Sweet retired from the partnership when it was agreed that:

       a. The car owned by the partnership would be transferred to Sweet at an agreed
          valuation of shs. 1,000,000.
       b. The remaining fixed assets which stay in the partnership would be valued at shs.
          17,000,000.
       c. Stocks would be valued at shs. 4,000,000 and debtors at shs. 2,400,000.
       d. Goodwill would be valued at shs. 6,000,000.
       e. Shs. 1,200,000 cash would be paid immediately to Sweet the balance due to him
          to remain as a loan to the partnership until 30 June 19X5, interest being payable
          on the loan at 10% p.a.
       f. The partnership continued with its policy of not maintaining a Goodwill account
          in the books of accounts.

   Required:

      i.    Capital accounts of Othello, Sweet and Demona recording the above
            transactions.
     ii.    Statement of Financial Position at completion of all the above transactions.

2. Abe, Bani and Chombo have been in partnership as practicing accountants for a number
   of years sharing profits and losses in the ratio 6:5:3.

   The Statement of Financial Position of the partnership on 31 March 1991 showed the
   following position:-

                                                          shs. '000   shs. '000
                Fixed Assets at net book value                          224,000
                Goodwill                                                129,500
                                                                        353,500
                Current Assets:
                Stocks
                Debtors                                     735,000
                Cash at Bank                                104,500
                                                            839,500
                Current Liabilities:
                Creditors                                   676,000
                Net Current Assets                                      163,500
                Total Net Assets                                        517,000
                Financed by:
                Capitals:
                Abe                                         250,000
                Bani                                        180,000
                Chombo                                       87,000
                                                                      517,000

   On 31 March 1991 Abe retired from the partnership and it was agreed to admit Denda as
   a partner on the following terms:

           i.     Goodwill is to be revalued to 2 years purchase of the average profits over the
                  past 3 years and then to be written off immediately.
34 Introductory Financial Accounting



                    Profits for the past 3 years have been as follows:


                                                                          shs.'000
                    Year ended 31 March 1989                              124,000
                    Year ended 31 March 1990                              136,000
                    Year ended 31 March 1991                              140,050


              ii.   Abe is to take over his car - a BMW at shs. 10,000,000. The net book value
                    on 31 March 1991 was shs. 5,940,000 which is included in the partnership
                    fixed assets.
             iii.   Although work-in progress had not been and will not be included in
                    partnership accounts the new partners are to credit Abe with his share which
                    is to be based on an estimate that work-in-progress is equivalent to 20% of
                    the debtors.
             iv.    The new partnership of Bani, Chombo and Denda are to share profits in the
                    ratio 5:3:2. Their initial capital is to be shs. 250,000,000 contributed in
                    proportion to profit sharing ratios.
              v.    Bani, Chombo and Denda are each to pay Abe the sum of shs. 50,000,000
                    out of their personal resources in part payment for his share of the
                    partnership.
             vi.    From the amount due to him Abe is to lend Denda any amount required to
                    make up his capital in the firm and any further balance due to Abe is to be
                    left in the firm as a loan at 9% per annum.
            vii.    Any adjustments required to the capital accounts of Bani and Chombo are to
                    be paid into or withdrawn from the partnership bank account.

       Required:

       a. Show how you arrive at the balance of capital accounts of the partners taking account
          of all of the above items.
       b. A Statement of Financial Position upon completion of the change.

   3. Good, Better and Best trading as Fine & Co. share profits and losses in the ratio of 5:9:6.
      A Statement of Financial Position of the partnership was prepared on the 31 December
      19-4 as follows:
                                                           shs.          shs.
                        Net Assets:
                        Langoni factory                           1,350,000
                        Ufukweni factory                           680,000
                        Mugango factory                            570,000
                        Total Net Assets                          2,600,000
                        Financed by:
                        Capitals:
                        Good                           500,000
                        Better                         900,000
                        Best                           600,000
                                                                  2,000,000
                        Loan Accounts:
                        Better                         400,000
                        Excel                          200,000
                                                                   600,000
                                                                  2,600,000
                                                               Accounting for Partnerships 35




Note: Cash adjustments were made which cleared the balance on the current accounts of
the partners.

The partnership agreement included the following details:-

a. Each partner is entitled to a salary of shs. 60,000 per annum.
b. When a partner retires he will receive a lump sum payment equal to one half of the
   net amount due to him including his share of goodwill. The balance will be paid in
   six equal half-yearly installments. Interest will be charged on the outstanding balance
   at the rate of 10% per annum.
c. Profits and losses are to be shared as stated above.

The following information is relevant:

d. Excel is a manager in the firm earning shs. 60,000 per annum. On 1 January 19-2 he
   and Better made loans to the firm to help it over financial difficulties. Excel has
   received 10% annual interest on his loan but Better has not received any interest.
e. Better retired on 30 June 19-5. Excel was admitted as a partner on 1 July 19-5.
f. Due to pressure of work the required adjustments relating to the partnership changes
   had not been made in the accounts by 31 December 19-5. The profit figure shown in
   (g) below represents the position which would have applied, if there had been no
   partnership changes.
g. Profits after charging Excel's salary and interest but before charging any salary for
   partners:

        Year ended            Langoni    Ufukweni          Mugango             Total
                                 shs.        shs.              shs.             shs.
        19-2                  360,000     180,000          160,000        700,000
        19-3                  380,000     210,000          220,000        810,000
        19-4                  460,000     240,000          220,000        920,000
        19-5                  420,000     260,000          240,000        920,000


All profits accrued evenly over each year.

h. Goodwill was valued at shs. 600,000 on 30 June 19-5 and 1 July 19-5. Goodwill
   adjustments are to be made through the partners' capital accounts and goodwill is not
   to be shown in the books as an asset.
i. The following are the main points of the new agreement:-

        Profit sharing plan                         Good                Best            Excel
        From 1 July 19-5                               8                  8                4
        Annual salaries                         60,000                60,000           60,000


j. Excel's salary and interest, as from 1 July, 19-5 are to be treated as drawings.
k. Excel's loan is to be treated as part of his capital contribution. He has to pay in shs.
   300,000 as the balance of his capital and shs. 120,000 as his share of goodwill.
l. Better is claiming 10% interest on his loan as from the 1 January 19-2. The other
   partners claim that he is not entitled to any interest as it was not mentioned in the
   partnership agreement. They have agreed to accept your decision on this matter.
m. There were no partners' drawings during 19-5 other than Excel's salary and interest.
n. On leaving the partnership Better took his company car at an agreed valuation of shs.
   75,000. The net book value of the car at 30.6.19-5 was shs. 55,000.
36 Introductory Financial Accounting



       Required:
              i.   The partners' capital and current accounts reflecting the above matters.
             ii.   A Statement of Financial Position as at 31 December 19-5.
       Note: A single combined figure for net assets is all that is required.

   4. Raha and Leo commenced business on 1 January 1989. No agreement was made between
      them as to profit sharing but it was understood that each partner should contribute capital
      of shs. 5,000,000.

       Both partners paid in the agreed amount on 1 January 1989 and Leo paid in a further shs.
       2,000,000 on 1 April 1989 in order to provide additional working capital for the firm.All
       the amounts of capital contributed were banked.

       The partners have asked you to prepare their financial statements for the first trading year
       and have given you the following information:

       a. As at 31 December 1989

                                                                     shs. '000
                     Debtors totaled                                    8,419
                     Creditors totaled                                  8,212
                     Stock was valued at                              19,762
                     Advertising unpaid was                               192


       b. Payments made by cheque during the year, per Bank Statements totaled

                                                                      shs. '000
                     for purchases                                     96,261
                     for rates - to 31.3.89                                412
                     for rates - to 31.3.90                              1,860
                     for electricity to 31.10.89                           462
                     for advertising                                       846
                     for stationery                                        275
                     Miscellaneous business expenses                       988
                     for rent - 4 quarters in arrears                    2,000


       c. No business expenses were paid by cash during the year.

       d. Cheques drawn for purchases in December 1989 totaling shs.1,710,000 were not paid
          by the bank until 4 January 1990.

       e. Cash and cheque banked on 29 December 1989 amounting to shs. 985,000 were not
          credited by the bank until 4 January 1990.

       f.   A direct transfer of shs. 498,000 made by a customer was credited by the bank on 16
            December 1989, but was not entered in the customer's account until January 1990.

       g. Bank charges during the year totaled shs. 153,000.

       h. Bad debts written off during the year totaled shs. 428,000 and it is considered that
          5% of the debtors as at 31 December 1989 should be regarded as doubtful.

       i.   The closing balance in the partnership bank account as at 31 December 1989 per
            bank statement was shs. 827,000 credit.
                                                                  Accounting for Partnerships 37




   j.   The partners drew the following amounts regularly in cash, Raha shs. 50,000 per
        week, Leo shs. 150,000 per month.

   Required:

   To prepare the Statement of Comprehensive Income of the partnership for the year to 31
   December 1989 and the Statement of Financial Position as at that date.

   Note: Assume additional capital carries interest at 5% p.a.
                                                                            (NABOCE, May 1991)

5. Pesa, Talhiya and Shumbusho were in partnership sharing profits and losses; Pesa 40%,
   Talhiya 35% and Shumbusho 25%.

   The draft Statement of Financial Position of the partnership as on 30 September 19X3
   was as follows:

                                                      shs. '000      shs. '000
                 Fixed Assets:
                 Leasehold Premises at cost                             7,500
                 Plant and Equipment at cost             8,000
                 less: Accumulated depreciation          2,800          5,200
                                                                      12,700
                 Current Assets:
                 Stocks                                                 4,200
                 Debtors                                 3,400
                 less: Provision for doubtful debts        600
                                                                        2,800
                 Cash at Bank                                           6,700
                                                                      13,700
                 Current Liabilities:
                 Creditors                               3,800
                 Loan - Talhiya                          3,000          6,800
                 Net Current Assets                                     6,900
                 Total Net Assets                                     19,600
                 Financed by:
                 Capitals:
                 Pesa                                    9,000
                 Talhiya                                 5,000
                 Shumbusho                               3,000
                                                                      17,000
                 Current Accounts:
                 Pesa                                    1,200
                 Talhiya                                   800
                 Shumbusho                                 600
                                                                        2,600
                                                                      19,600


   Talhiya retired on 30 September 19X3 and Pesa and Shumbusho continued in partnership
   sharing profits and losses: Pesa 60%, Shumbusho 40%. Half of Talhiya's Loan was
   repaid on 1 October 19X3 and it was agreed that shs. 8 million of the balance remaining
   due to her should remain on loan to the partnership.
38 Introductory Financial Accounting




       It was agreed that adjustments were to be made to the Statement of Financial Position as
       on 30 September 19X3 in respect of the following:

       a. The leasehold premises which had been acquired on 1 October 19X1 on a 15 year
          lease were to be written off over the period of the lease.

       b. The plant and equipment was to be revalued at shs. 5.8 million.

       c. The provision for doubtful debts was to be increased by shs. 120,000.

       d. Creditors for expenses amounting to shs. 500,000 had been omitted from the books.

       e. Shs. 400,000 was to be written off the stock in respect of obsolete items included
          therein.

       f.   Professional valuation charges of shs. 120,000 need to be accrued in the books.

       The partnership agreement provided that on retirement of a partner goodwill was to be
       valued at an amount equal to average annual profit of the three years expiring on the date
       of retirement. The relevant profits were:

                                                                          shs.'000
                Year ended 30 September 19X1                                14,400
                30 September 19X2                                           16,800
                30 September 19X3 (as per draft accounts)                   18,820


       It was agreed that for the purpose of valuing goodwill the revaluation of the plant and
       equipment and the professional valuation charges should not be regarded as affecting the
       profits.

       A goodwill account is not to be maintained in the books and all adjusting entries of
       transactions between partners should be made in their capital accounts.

       Required:

           i.   The Revaluation account and Partners' Capital accounts,
          ii.   Talhiya's account showing the balance due to her, and
         iii.   The Statement of Financial Position of Pesa and Shumbusho as on 1 October
                19X3.

				
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