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CHANGES IN PARTNERSHIP Introduction

A change in partnership occurs if there is a change in any of the fundamental

agreement among the partners. Changes in partnership include;

1. Admission of a partner

2. Death or retirement of a partner

3. Amalgamation

4. Conversion to a limited company.

In a strict sense a change in partnership leads to formation of a new partnership

(or company) separate from the old partnership. This entails valuation of the old business net assets and their transfer to the new business. This chapter is concerned with the admission dearth or retirement of partners.

Objectives:

After studying this chapter you should be able to:

1. Appreciate the causes of partnership changes

2. Identify the accounting adjustment to effect changes

3. Appreciate the concept of goodwill in partnership

4. Account for admission of a partner

5. Account for death or retirement of a partner

6. Construct the profit and loss account, appropriation account and balance sheet for a change in partnership

Admission of a Partner When a new partner is admitted to a partnership, s/he joins in the ownership of the business net asset and is therefore entitled to share in the future profits. For that reason he will be required to bring in capital equal to purchase of his partnership share. This requires a revaluation of the business net assets so as to arrive at the partnerships true worth at the time of admission. It must be noted that partnership accounts are drawn on the basis of the historical cost convention

in which the assets are accounted for at their historical cost less accumulated

depreciation. The book value of net assets does not reflect the current value of the business. The incoming partner should be charged for the current value of the assets and not their historical cost. The business normally would not have accounted for its goodwill. Goodwill is the value of a business over and above its net separable assets. The value of the business as a going concern is normally worth more than the value of it net separable assets. The value of the business above the value of its net separable assets (i.e. goodwill) should be recognised before a new partner is admitted.

 

Liabilities Net separable asset

 

(xx)

xxx

Book entries for admission of a partner:

 

Transaction

Dr.

Cr.

1.

Revaluation of asset

Asset a/c

Revaluation

a/c (Gain on revaluation)

 

2.

Goodwill

Goodwill a/c

Revaluation

a/c

3. Reduction in asset in value

4. Share revaluation to old Partners at profit sharing ratio

5. Capital introduced by new Partner

Revaluation a/c

Revaluation

Capital account of new partner:

Asset a/c

Capital

Bank

Example A and B have been in partnership sharing profits and losses in the ratio of 3:2 respectively. Their balance sheet as at 31 st December 2002 is as follows:

Capital A

5,000,000

Land and building Plant and machinery Motor vehicle Stock Debtors Cash

3,000,000

B

4,000,000

2,000,000

 

2,500,000

Creditors

2,000,000

1,500,000

 

1,000,000

1,000,000

 

11,000,000

 

11,000,000

On that date C was admitted and the following was agreed:

i.

Asset value

Land and buildings

3,500,000

Plant and Machinery

2,300,000

Motor vehicle

2,700,000

Stock

1,600,000

Debtors

900,000

Goodwill

1,000,000

ii)

C is to bring in shs. 4,000,000 as his capital.

Required: Draw the relevant accounts to effect the change and the balance- sheet after admission.

 

Revaluation

 
 

Sh.

 

Sh.

Debtors

100,000

Land & building Plant & Machinery

500,000

 

300,000

Capital A 1,200,000 Motor Vehicle

   

200,000

B

800,000

Stock

100,000

 

Goodwill

1,000,000

 

2,100,000

2,100,000

 

Goodwill

 

Sh.

 

Sh.

Revaluation

1,000,000

Bal c/d

1,000,000

 

1,000,000

1,000,000

 

Capital a/c

 

A

B

C

 

A

 

B

 

C

Sh

Sh

Sh

 

Sh

 

Sh

 

Sh

Bal. b/d

5,000,000

4,000,000

 

Revaluation 1,200,000

800,000

Bal c/d 6,200,000 4,800,000 4,000,000

Bank

   

4,000,000

6,200,000

4,800,000

4,000,000

6,200,000

4,800,000

4,000,000

 

A B and C Partnership. Balance sheet as at 31 st December 2002

Capital A

4,000,000

Goodwill

1,000,000

B

6,200,000

Land and buildings Plant and Machinery Motor vehicle Stock Debtor

3,500,000

C

4,800,000

2.300,000

 

2,700,000

1,600,000

900,000

Creditors

2,000,000

Cash

5,000,000

17,000,000

17,000,000

Amortization of Goodwill Partners may choose to write off goodwill immediately after admission. In such a case the amount of goodwill is written off to partners capital accounts in the new partnership in the profit sharing ratio.

Example Suppose in the above example the profit sharing ratio in the new partnership is 2:1:1. The new partnership decided to write of goodwill immediately.

Suggested solution Goodwill accounts

Revaluation

1,000,000 Capital A

 

500,000

1,000,000
1,000,000

B

250,000

C

250,000

1,000,000

Capital account

   
   

A

B

 

C

   

A

B

C

Sh. 000

Sh. 000

Sh. 000

Sh. 000

Sh.000

Sh. 000

G/W

 

500

250

250

 

Bal b/d

 

6,200

 

4,800

4,000

Bal c/d

5,700

4,550

3,750

C

     

6,200

4,800

 

4,000

   

6,200

4,800

4,000

A B and C partnership. Balance sheet

   

Capital A

 

5,700,000

 

Land and build. Plant and mach. Motor vehicle Debtor Cash Stock

3,500,000

 

B

4,550,000

 

2.300,000

C

3,750,000

2,700,000

 
 

900,000

 

Creditors

 

2,000,000

5,000,000

 

1,600,000

 

16,000,000

 

16,000,000

Example 2 A, B & C in partnership sharing profit and losses in the ratio 3: 2:1. They agree to admit D when their Balance Sheet is as follows:

Balance Sheet as at 31/12/03

 

Sh. ‘000’

 

Sh. ‘000’

Capital A

3,000

Land & building Plant & Machinery Stock Debtor Cash

4,000

B

2,000

3,000

C

1,000

2,000

 

1,000

Current A

500

500

B

500

 

C

300

Creditors

3,200

10,500

 

10,500

For the purpose of admitting D the following was agreed. 1) Asset value

Land & Building Plant & Machinery Stock Goodwill

Land & Building Plant & Machinery Stock Goodwill
Land & Building Plant & Machinery Stock Goodwill
Land & Building Plant & Machinery Stock Goodwill

4,500,000

3,500,000

2,200,000

600,000

2) New profit sharing ratio is 3: 1: 1: 1 for A, B, C and D respectively. 3) D is to bring in capital so as to equal that of C after writing off goodwill.

Required:

Draw

the

relevant

books

of

accounts

and

balance

sheet

after

admission.

Suggested solution

Revaluation A/C

 

Sh

Sh Land and building

 

Capital A

900,000

 

500,000

B 600,000

Plant & machinery

500,000

C 300,000

Stock Goodwill

 

200,000

600,000

 

1,800,000

 

1,800,000

 

Goodwill

Revaluation

600,000

capital

A

300,000

 

B

100,000

 

C

100,000

 

-

D

100,000

600,000

 

600,000

 

Capital a/c

   

Sh.

Sh.

Sh.

Sh

 

Sh.

Sh.

Sh.

Sh

A

B

C

D

A

B

C

D

G/W

300

100

100

100

Bal. b/d

3000

2000

1000

 

Rev

900

600

300

Bank

1,300

Bal c/d

3,600 2,500

1,200

1,200

3,900

2,600

1,300

1,300

3,900

2,600

1,300

1,300

 

A, B, C and D Partnership Balance sheet as at 31 st December 2003

 

Capital A

3,600

Land and building Plant & Machinery Stock Debtors Cash

 

4,500

B

2,500

3,500

 

C

1,200

2,200

D

1,200

1,000

 

1,800

Current A

500

 

B

500

C

300

D

-

Creditors

3,200

13,000

   

13,000

 
 

Death or Retirement When a partner dies or retires, the assets of the business must be re-valued at the date of death or retirement so as to adjust the capital accounts of all the partners and arrive at the amount of claim to the outgoing partner. The administrator of the dead partners estate or the retired partner (as the case may be will be) paid his share in manner agreed upon by the partners. He may be paid in full on the date of retirement (or death) or soon thereafter. Payment may be in cash or by taking away part of the partnership assets or a combination of the two. He may be paid in part and the balance remaining as a loan to the partnership attracting interest at an agreed rate.

Example XYZ have been in partnership sharing profits in the ratio 3: 2: 1. Z retired at a time when their balance sheet was as follows;

Balance sheet 31/12/02

 

Sh. ‘000’

 

Sh. ‘000’

Capital X

3,000

Land and building

2,000

Y

2,000

Plant

1,500

Z

1,000

Motor

1,200

 

Stock

1,300

Current X

200

Debtors

500

Y

200

Cash

500

Z

100

 

Creditors

500

7,000

 

7,000

1. Assets value Land and building Plant Motor vehicle Goodwill

2,500,000

1,700,000

1,400,000

600, 000

2. X and Y are to continue in partnership sharing profits/losses at 2:1 respectively

3. Z took a motor vehicle valued at Ksh 600,000, He was paid Sh. 400,000 of all that he is owed and the balance to remain as a loan at 10% interest.

4. Goodwill is written off in the new partnership

Required: Relevant books of accounts to effect the partnership change and balance sheet after retirement.

Suggested solution

Revaluation

 

Motor Veh.

200,000

Capital X

750,000 Land & Build

500,000

Y

500,000

Plant

200,000

Z

250,000

Goodwill

600,000

1,500,000

1,500,000

Capital accounts

 

X

Y

Z

X

Y

Z

Goodwill

400

200

Bal b/f

3,000

2,000

1,000

Cash

400

Revaluation

750

500

250

M/V

600

Current a/c

100

Loan a/c

350

Bal.c/d

3,350v 2,300

 

3,750

2,500

1,350

 

3,750

2,500

1,350

X and Y partnership Balance sheet as at 31 st December 2002

 

Capital X

3,350

Land and Building Plant Motor Stock Debtor Cash

 

2,500

Y

2,300

1,700

 

800

Current X

200

1,300

Y

200

500

 

100

Creditors

500

 

Loan

350

6,900

 

6,900

 

Example A, B, and C are in partnership sharing profits and losses in the ratio 3: 2: 1. D was admitted on 30 th June 2002. The trial balance as at 31 st December 2002 is:

 

Dr.

Cr.

Fixed Assets

9,000

Capital A

4,000

B

3,000

C

2,000

Current

A

2,000

B

1,000

C

500

D (drawings)

500

Sales

15,000

Opening stock

2,000

Purchases

8,000

Expenses

5,000

Cash Creditors Cash paid by D

2,000

 

2,000

3,000

 

32,000

32,000

Additional information

1. Fixed assets were revalued on 30/6/02 at a gain of 1,200,000.

2. For the purpose of admission, goodwill is valued at 1,500,000.

3. New profit sharing ratio is 3:2:2:1

4. Goodwill is to be written off.

5. Sales are evenly distributed throughout the year but the expenses were spread at ratio of 2:3 between 1 st and 2nd half of the year.

6. Interest on capital is provided at the rate of 10% p.a.

7. No adjustments have been made in the books for the purpose of admitting

D.

Required:

i) Draw capital account to show changes

ii) Trading profit and loss appropriation account

iii) Partners current account

iv) Balance sheet as at 31/12/02

Suggested solution

Revaluation Account

 

Sh ‘000’

 

Sh. ‘000’

 

Capital A

1,350

Fixed assets

1,200

 

B

900

Goodwill

1,500

C

450

 
 

2,700

 

2,700

 

Capital account

 
   

A

B

C

D

 

A

 

B

C

D

Sh ‘000’

Sh ‘000’

Sh ‘000’

Sh ‘000’

Sh ‘000’ Sh‘000’

 

Sh ‘000’ Sh‘000’

G/W

562.5

375

 

375

187.5 Bal/b/d 4,000

 

3,000

2,000

 

-

 

Rev

1,350

900

450

 

Bal c/d 4,787.5

3,525

2,075

2,812.5

Bank

 

3,000

5,350

3,900

2,450

3,000

5,350

3,900

2,450

3,000

Trading account

 

Sh. ‘000’

Sh. ‘000’

Sales

15,000

Opening stock

2,000

Purchases

8,000

(10,000)

Gross profit

5,000

Profit and loss and Appropriation account For year ended 31/12/02

 

Sh. ‘000’

Sh. ‘000’

Sh. ‘000’

Sh. ‘000’

Gross profit Less expenses Net profit /loss

2,500

2,500

(2,000)

(3,000)

500

(500)

Less Interest on capital

 

A

200

200

B

150

150

C

100

100

D

-

(450)

150

(600)

Profit (Loss) share A B

25

16.7

50

(1,100)

 

412.5

275

C

8.3

275

D

-

(50)

137.5

1,100

Current account

-

 

A

B

 

C

 

D

   

A

 

B

 

C

D

Bal b/d

500

500

 

Bal. b/d

2,000

1,000

 

Loss

412.5

275

275

137.5

Int.on capital

 

400

300

 

200

150

Share

           

Profit share

 

25

 

16.7

 

8.3

 

Bal. c/d2,012.5 1041.7

 

Bal c/d

   

566.7

487.5

2,425 1,316.7

725

637.5

 

2,425

1,316.7

77.5

637.5

Balance sheet

 

Sh ‘000’

Sh. ‘000’

Fixed assets

10,200

Debtors

5,000

Cash

2,000

7,000

Less creditors

(2,000)

5,000

 

15,200

Financed by:

Capital account

A

4,787.5

B

3,525

C

2,075

D

2,812.5

13,200

Current account

A

2,012.5

B

1,041.7

C

(566.7)

D

(487.5)

2,000

 

15,200

Examination Questions Question One

Awino , Chebet and Enzibo have been in partnership sharing profits in the ratio 5 : 3 : 2 respectively. On 30 June 1998 Awino retired and Chebet and Enzibo decided to continue the partnership, sharing profits equally. The partnership trial balance as at 31 December 1998, was as follows:

Ksh

Land at cost Buildings: cost Buildings: depreciation at 1 January 1998 Shop and office equipment: Cost Depreciation at 1 January 1998 Accounts receivable

Allowance for doubtful debts 1 January 1998

Cash at bank Accounts payable Capital accounts at 1 January 1998: Awino

120,000

320,000

48,000

68,400

4,200

180,000

Ksh

81,200

11,000

2,100

24,000

Capital accounts at 1 January 1998: Chebet

170,000

Enzibo Current accounts at 1 January 1998: Awino

160,000

3,000

Current accounts at 1 January 1998: Chebet

 

2,000

Enzibo

2,000

Drawings accounts:

Awino (to 30 June 1998) Chebet (to 31 December 1998) Enzibo (to 31 December 1998) Inventory at 1 January 1998 Purchases Sales revenue Staff wages Rent General administrative expenses Bad debts written off

21,000

37,000

36,000

81,000

291,000

 

494,000

58,600

25,000

14,200

900

 

1,127,300

1,127,300

Notes (1) Profits are to be assumed to accrue equally in the periods before and after Awino’s retirement.

(2) The balance due to Awino is to remain in the partnership from 1 July 1998 as a loan carrying no interest until 1 January1999. (3) The value of the partnership goodwill at 30 June 1998 was agreed by all three partners at Ksh200,000. Goodwill is not toappear in the balance sheet after the adjustments necessary at 30 June 1998. (4) It was decided, as part of the process of valuing Awino’s share of the partnership, to revalue the land at 30 June fromKsh120,000 to Ksh160,000. The increased value is to be included in the balance sheet. (5) The inventory at 31 December 1998 was Ksh90,000. (6) Accruals and prepayments at 31 December 1998 were:

Rent: paid in advance to 31 March 1999 Ksh5,000. General administrative expenses:

prepayments

Ksh 1,800

accruals

Ksh 6,200

(7) The allowance for doubtful debts is to be increased to Ksh2,400. (8) Depreciation is to be provided as follows:

Buildings 2% per annum straight line

Shop and office equipment 15% per annum straight line.

(9) No adjustments has been made with respect to Awino’s retirement .

Required:

(a) Prepare the income statement and a statement showing the division of the

profit for the year ended 31 December 1998 and balance sheet as at that date; (16 marks)

(b) Show the partners’ capital and current accounts for the year and Awino’s loan

account.

(8 marks) (Total 24 marks)

Awino Chebet and Enzibo Trading profit and loss account for the year ended 31 December 1998

Sales Opening stock Purchases Closing stock Gross profit Staff wages Rent Bad debts General expenses Depreciation building Shop & office Allowance for bad debts Net profit

 

494,000

 

81,000

291,000

(90,000)

(282,000)

212,000

58,600

20,000

900

18,600

 

6,400

7,200

300

(112,000)

100,000

Profit and loss appropriation account 1 st half

2 nd half

50,000

50,000

Awino

(25,000)

Chebet

(15,000)

(25,000)

 

Enzibo

(10,000)

(25,000)

 

Capital account

 
 

A

B

E

 

A

B

E

Goodwill

 

100,000

100,000

Balance b/f

180,000

170,000

160,000

Loan

307,000

   

Revaluation

120,000

720,000

48,000

Balance

 

142,000

108,,000

Current a/c

7,000

   

c/f

 

307,000

242,000

208000

 

307,000

242,000

208,000

Current account

 

A

B

C

 

A

B

C

Drawings

21,000

37,000

36,000

Balance

3,000

2,000

2,000

b/f

Capital

7,000

   

Profit

25,000

40,000

35,000

a/c

Balance

 

5,000

1,000

       

c/f

 

28,000

42,000

37,000

 

28,000

42,000

208,000

Chebet and Enzibo Balance sheet as at 31 December 1998 Cost

Depreciation

NBV

Land Buildings Shop & furniture

160,000

160,000

320,000

30,400

289,600

48,000

18,200

29,800

 

479,400

Stock Prepayment Accounts receivables Cash

90,000

6,800

66,000

4,200

167000

Creditors

81,200

Accruals

6,200

(87,400)

79,600

 

559,000

Loan

(307,000)

Net assets

252,000

Financed by:

Capital

Chebet

142,000

Enzibo

108,000

250,000

Current a/c

Chebet

5,000

Enzibo

1,000

6,000

 

252,000

Question Two

Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively.

Given below is the balance sheet of the partnership as at 31 March 2001:

Balance Sheet

as

at

31 March

 

2001

Assets Non-current assets:

Sh.

Sh.

Fixed assets

465,000

Current assets:

Stocks

294,000

Debtors

209,000

 

503,000

968,000

Capital and liabilities

Capital accounts:

Kyamba

160.000

Onyango

140,000

Wakil

200,000

 

500,000

Current accounts Kyamba

65,300

Onyango

49,000

WakiL

53,000

 

167,300

667,300

Current liabilities:

Bank overdraft

48,700

Trade creditors

252,000

 

300,700

968,000

Additional information

1. On I April 2001, Wakil retired from the partnership and was to start a business as sole trader while Kyamba and Onyango continued in partnership.

On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango continued with the retail business.

2. The assets and liabilities transferred to Wakil were as follows:

Net book value Sh.

Transfer value

Sh.

Fixed asset

260,000

306,000

Stocks

166,000

157,000

Debtors

172,000

165,000

Creditors

156,000

156,000

Wakil obtained a loan from a commercial bank and paid into the partnership the net amount due from him.

3.

On retirement of Wakil from the partnership, goodwill was valued at Sh. 200,000 but was not to be maintained in the books of the partnership of Kyamba and Onyango.

4.

After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the following terms and details of the new partnership:

Kyamba and Onyango to introduce additional capitals of Sh. 48, 000 and Sh. 68,000 respectively.

Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001 and the balance of profits was to shared equally after allowing for annual salaries of Sh. 72,000 to Kyamba and Sh. 60,000 to Onyango.

5.

The profit of the new partnership before interest on capitals and partners’ salaries was Sh. 240,000 for the year ended 31 March 2002.

6.

The profits made by the new partnership increased stocks by Sh. 100,000; debtors by Sh. 90,000 and bank balance by Sh. 50,000.

7.

Drawings by the partners in the year were Kyamba Sh. 85,000 and Onyango Sh. 70,000.

Required:

(a)

Profit and loss and appropriation account for the year ended 31 March 2002. (4 marks)

(b)

Capital accounts for the year ended 31 March 2002

(4 marks)

(c)

Current accounts for the year ended 31 March 2002

(4 marks)

(d)

Balance sheet of the new partnership as at 31 March 2002 (8 marks) (Total: 20 marks)

a)

Kyamba and Onyango Profit and loss appropriation

Net profit

240,000

Interest

K

20,000

 

O

20,000

 

40,000

 

Salary:

K

72,000

 

O

60,000

 

132,000

 

Share of profit:

 

K

34,000

 

O

34,000

 

68,000

(240,000)

 

b)

Kyamba, Onyango and Wakil

 

Revaluation Account

 

Stocks

9,000

Fixed assets

46,000

Debtors

9,000

Goodwill

 

200,000

Capital:

 

K

92,000

O

92,000

W

46,000

246,000

 

246,000

 

Capital Account

 
 

K

O

W

 

K

O

W

F. Assets

   

306,000

 

Balance b/f

 

160,000

140,000

200,000

Stock

157,000

Creditors

156,000

Debtors

165,000

Revaluation

92,000

92,000

46,000

Goodwill

100,000

100,000

Current a/c

53,000

Balance

200,000

200,000

Cash

 

48,000

68,000

173,000

c/f

 

300,000

300,000

628,000

300,000

300,000

628,000

c)

Current account

 
 

K

O

W

 

K

O

W

Drawings

85,000

70,000

 

Bal. b/f

65,300

49,000

53,000

Capital

53,000

Interest

20,000

20,000

a/c

Balance

106,300

 

93,000

-

Salary

72,000

60,000

c/f

 

Profit

34,000

34,000

191,300

1630,00

53,000

191300

163,000

53,000

Kyamba and Onyango Balance sheet as at 31 st march 2001 Fixed assets

205,000

Stock

228,000

Debtors

127,000

Bank

135,300

490,300

Creditors

(96,000)

394,300

Net assets

599,300

Financed by:

Capital:

K

200,000

O

200,000

400,000

Current a/c

K

106,300

O

93,000

199,300

 

599,300

Question Three

Rotich and Sinei have been in partnership for several years, sharing profits and losses in the ratio 2:1. Interest on fixed capitals was allowed at the rate of 10% per annum, but no interest was charged or allowed on current accounts.

The following was the partnership trial balance as at 30 April 2001:

Sh.

Sh.

Fixed capital accounts

Rotich

750,000

Sinei Current accounts

500,000

Rotich

400,000

Sinei Leasehold premises (purchased 1 May 2000)

2,250,000

300,000

Purchases

4,100,000

Motor vehicle (cost)

1,600,000

Balance at bank

820,000

Salaries (including partners’ drawings)

1,300,000

Stocks: 30 April 2000

1,200,000

Furniture and fittings (cost) Debtors

300,000

225,000

Accountancy and audit fees Wages Rent, rates and electricity General expenses (Sh. 352,400 for the six

Accountancy and audit fees Wages Rent, rates and electricity General expenses (Sh. 352,400 for the six
Accountancy and audit fees Wages Rent, rates and electricity General expenses (Sh. 352,400 for the six

105,000

550,000

310,000

months to 31 October 2000) 660,000 Cash introduced-Tonui

1,250,000

Sales (Sh. 3,500,000 to 31 October 2000) Accumulated depreciation: 1 May 2000 Motor vehicle

8,750,000

300,000

Furniture and fittings

100,000

Creditors

1,070,000

 

13,420,000

13,420,000

Additional information:

1. On 1 November 2000, Tonui was admitted as a partner and from that date, profits and losses were to be shared in the ratio 2:2:1. For the purpose of this admission, the value of goodwill was agreed at Sh. 3,000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh. 1,250,000 into the firm of which Sh. 375,000 comprised his fixed capital and the balance was credited to his current account.

2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. In addition after Tonui’s admission, no interest was to be charged or allowed on current accounts.

3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated, were to be apportioned on a time basis.

4. A Charge was to be made for depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost.

5. On 30 April 2001, the stock was valued at Sh. 1,275,000.

6. Salaries included the following partners drawings:

Rotich Sh. 150,000, Sinei Sh. 120,000 and Tonui Sh. 62,500

7. A difference in the books of Sh. 48,000 had been written off at 30 April 2001 to general expenses, which was later found to be due to the following clerical errors:

Sales returns of Sh. 32,000 had been debited to sales returns but had not been posted to the account of the customer concerned;

The purchases journal had been undercast by Sh. 80,000.

8.

Doubtful debts (for which full provision was required) amounted to Sh. 30,000 and Sh. 40,000 as at 31 October 2000 and 30 April 2001 respectively.

9.

On 30 April 2001, rates and rent paid in advance amounted to Sh. 50,000 and a provision of Sh. 15,000 for electricity consumed was required.

Required:

(a) Trading and profit and loss account for the year ended 30 April 2001. (9

marks)

(b)

Partners’ current accounts for the year ended 30 April 2001. marks)

(4

(c)

Balance sheet as at 30 April 2001.

(7 marks)

Suggested solution

(Total: 20 marks)

Rotich, Sinei and Tonui Trading and profit and loss account for the year ended 30 April 2001

Sales

8,750,000

Opening stock

1,200,000

Purchases

4,180,000

Closing stock

(1,275,000)

(4,105,000)

Gross profit

4,465,000

 

31/10/00

30/4/2001

Gross profit

1,858,000

2,787,000

Salaries

(483,750)

(483,750)

Accountancy

(52,500)

(52,500)

Wages

(275,000)

(275,000)

Rent rates &electricity

(137,500)

(137,500)

General expenses

(306,000)

(306,000)

Depreciation Motor vehicles

(160,000)

(160,000)

Furniture

(15,000))

(15,000)

Provision for bad debts

(30,000)

(10,000)

Net profit Interest on capital

398,250

1,347,250

R

(37,500)

(77,500)

 

S

(25,000)

(15,000)

T

-

(13,750

Share of profit

 

R

(223,833)

(496,400)

 

S

(111,917)

(496,400)

T

-

(248,200)

398,250

1,347,250

Capital account

 
 

R

 

S

T

 

R

S

T

Goodwill

1,200,000

1,200,000

600,000

Bal. b/f

750,000

500,000

 
       

Cash

   

875,000

Bal. c/f

1,550,000

 

300,000

275,000

Good

2,000,000

1,000,000

 
 

will

 

2,750,000

1,500,000

875,000

 

2,750,000

1,500,000

875,000

Current account

 
 

R

S

T

 

R

S

T

 

Drawings

150,000

120,000

62,500

Bal.

b/f

400,000

300,000

       

Interest

115,000

40,000

13,750

       

Profit

720,233

608,317

248,200

Balance

1,085,233

828,317

574,450

Bank

-

-

375,000

c/f

 
 

1,235,233

948317

636,950

 

1,235,233

948317

636,950

Rotich, Sinei and Tonui Balance sheet as at 30 April 2001 Cost

 

Depn

NBV

Leasehold premises Motor vehicles Furniture

 

2,250,000

-

2,250,000

 

1,600,000

620,000

980,000

300,000

130,000

170,000

 

3,400,000

Current assets

 

Stock

1,270,000

 

Debtors

153,000

Prepayment

50,000

Bank

820,000

2,298,000

 

Current liabilities Creditors

 

1,070,000

 

Accruals

150,000

(1,085,000)

(1,213,000)

Net assets

4,613,000

Financed by:

Capital

R

1,550,000

S

300,000

T

275,000

2,125,000

Current account

R

1,085,233

S

828,317

T

574,450

2,488,000

 

4,613,000

Question four

Atieno, Babu and Chesire have been trading in partnership sharing profits/losses in the ratio of 5:3:2 respectively. On 1 April 2000 they admitted their manager. Dagana as a partner and the profit sharing ratio was changed to 4:3:2:1 for Atieno, Babu, Chesire and Dagana respectively.

The partners valued the goodwill at Sh. 510,000. Dagana paid in Sh. 200,000 as capital and his share of goodwill, which should be based on capital contributions.

The partners do not wish to retain the goodwill account after admission of Dagana. The admission of Dagana has not been fully recorded other than the cash receipt of Sh. 376,500.

The following is the trial balance of the partnership as at 31 March 2001.

 

Sh.

Sh.

Capital accounts

Atieno

700,000

 

Babu

600,000

Chesire

400,000

Current accounts

Atieno

350,000

 

Babu

325,000

Chesire

195,000

Drawings

Atieno

250,000

Babu

260,000

Chesire

250,000

Dagana

175,000

Land and buildings at cost

2,000,000

Furniture and fittings at cost

500,000

Provision for depreciation on future and fittings

150,000

Motor vehicles Provision for depreciation on motor vehicles

860,000

480,000

Trade debtors and creditors

365,000

823,500

Dagana account Purchases and sales

3,380,000

376,500

5,975,000

Stock 1 April 2000

465,000

Salaries and wages

295,000

Rates

137,000

Telephone and postage

116,000

Vehicles running expenses

396,000

Insurance and subscriptions

162,000

General expenses

72,000

Bank charges and interests

124,000

Bad debts

68,000

Returns inwards and outwards

61,000

75,000

Cash in hand Cash at bank

490,000

24,000

10,450,000

10,450,000

Notes:

1. Depreciation on furniture and fittings and motor vehicles is at 10% and 20%

on reducing balance respectively.

2. The closing stocks were valued at Sh. 560,000.

3. Accrued salaries and wages and telephone bills amounted to Sh. 24,000 and Sh. 14,000 respectively.

4. Prepaid subscriptions and rates amounted to Sh. 5,000 and Sh. 25,000 respectively.

5. The partners decided that Dagana should be given a monthly salary of Sh. 20,000 for the whole year from 1 April 2000 to 31 March 2001.

6. Dagana took goods for own use at cost amounting to Sh. 185,000. No entry has been made in the books.

7. The old partners shared the cash paid by Dagana for part of his goodwill.

Required:

(a)

Trading, profit and loss account for the year ended 31 March 2001.

(10

marks)

(b)

Partners capital accounts.

(2 marks)

(c)

Partners current accounts.

(3 marks)

(d) Balance sheet as at 31 March 2001. (5 marks) (Total: 20 marks) Suggested solution
(d)
Balance sheet as at 31 March 2001.
(5 marks)
(Total: 20 marks)
Suggested solution
a)
Atieno, Babu ,Chesire and Dagana
Trading, profit and loss account for the year ended 31 March 2001
Sales (net)
Opening stock
Purchase
Drawings
Closing stock
Gross profit
Salaries & wages
Rates
Telephone
Postage
Vehicle expense
Insurance
5,914,000
465,000
3,325,000
(18,500)
(560,000)
(4,368,500)
3,025,000
319,000
112,000
&
130,000
396,000
&subscriptions
157,000
General expense
Bank charges
Bad debts
Depreciation:
72,000
124,000
68,000
furniture
35,000
Motor vehicles
76,000
(1,489,000)
Net profit
1,400,000
Salaries
240,000
Profit Share: A
464,000
B
348,000
C
232,000
D
116,000
1,400,000
b)
Current account
A
B
C
D
A
B
C
D
Bal
Drawings
250,000
260,000
250,000
175,000
b/f
350,000
325,000
195,000
Stock
185,000
Cash
176,500
Salary
240,000

Bal c/f

564,000

413,000

177,000

172,500

Profit

464,000

348,000

232,000

116,000

 

814,000

673,000

427,000

532,500

 

814,000

673,000

427,000

532,500

c)

Capital account

 
 

A

B

C

D

 

A

B

C

D

 

Capital

       

Bal

       

A

25,500

b/f

700,000

600,000

400,000

Capital

                 

B

15,300

Cash

200,000

Capital

                 

C

10,200

D cap.

 

25,500

15,300

10,200

Bal c/f

725,500

615,300

410,200

149,000

         
 

725,500

615,300

410,200

200,000

 

725,500

615,300

410,200

200,000

Workings Cash paid by Dagana Capital and goodwill Balance to Dagana’s current account

376,500

(200,000)

176,500

Capital and Goodwill Goodwill share (510,000 *1/10) Balance to Dagana’s capital account

200,000

(51,000)

149,000

Partners share of Gagana’s goodwill Atieno: 51,000* 5/10 = 25,500 Babu: 51,00 * 3/10= 15300 Chesire : 51,000 * 2/10 = 10,200

and

d)

Atieno, Babu ,Chesire and Dagana Balance sheet as at 31 March 2001

Fixed assets

Cost

Depn

NBV

Land & building

2,000,000

2,000,000

Furniture

500,000

185,000

3,150,000

Motor vehicle

860,000

556,000

304,000

 

2,619,000

Stock

560,000

Debtors

365,000

Prepayment

30,000

Bank

490,000

Creditors

823,500

Accruals

38,000

(861,500)

607,500

 

3,226,500

Net assets

Financed by

Capital A

725,500

B

615,300

C

410,200

D

149,000

1,900,000

Current A

564,000

B

413,000

C 177,000

 

D 172,500

 

3,226,500

Question Five Kamau and Kimani are partners sharing profits and losses in the ratio 3:2

respectively. The partnership agreement provides for Kimani to receive a salary of Sh. 4,000,000 per annum and interest on capitals for both partners at 5% per annum. The partnership balance sheet as at 31 December was as follows:

 

Sh. ‘000’

 

Sh. ‘000’

Sh. ‘000’

Sh. ‘000’

 

Capital accounts Kamau

20,800

 

Premises

 
 

16,000

Less depreciation

 

Kimani

10,000

26,000

Equipment

at

cost

8,000

Depreciation

 

(4,800)

 

3,200

 

24,000

Current accounts Kamau Kimani

 

3,200

(300)

2,900

Stock