Week 2 and 3 – SS1 Second Term Financial Accounting Notes

WEEK TWO – THREE
ADMISSION OF NEW PARTNER AND RETIREMENT OF AN EXISTING PARTNER IN CONTINUING BUSINESS
Partnership changes usually occur during a financial year and the accounting records are contrived without interruption. Final accounts are prepared at the end of the financial year. When a partner leaves the firm or a new partner joins, it marks the end of one partnership and the beginning of a new one. No records and entries are made in the books as at the period of change until the end of the financial year. In the process, revaluation of asset, valuation of goodwill and changes in the profit/loss sharing ratio may occur.
Illustration 5: Admission of a new partner
Dami and Lola have shared profits and losses in the ration of 3:2. On 1 October 2010, they decided to admit Bola as a partner. No entries to record Bola’s admittance as a partner were made in the books before the end of the financial year on 31 December 2010.
Information extracted from the books for the year ended 31 December 2010 include the following:

 (based on the asset revaluation as shown below)

 At December 2009, the balances on Dami and Lola’s capital and current accounts were as follows:

 On 1 October 2010, the partnership assets were revalued as follows:

 The partners agreed the value of goodwill on 1 October 2010 at N40,000 and decided that no goodwill account should be opened in the books.
On 1 October 2010, Bola paid N20,000 into the firm’s bank account as capital. On the same day, Dami lent the partnership N20,000. He is entitled to interest at a rate of 100% per annum on the loan.
The balances on the partners drawings account at 31 December 2010 were as follows:

The new partnership agreement provided for the following as from 1 October 2010.

1. Interest was allowed on the balances on capital accounts on 31 December each year at a rate of 5% per annum.

1. Lola was entitled to a salary of N12,000 per annum.

1. The balance of profits and losses were to be shared. Dami – , Lola and Bola –

Required:

1. Prepared the capital accounts of Dami, Lola and Bola as at 31 December 2010.

1. Prepare the partnership trading, profit and loss and appropriate account for the year ended 31 December 2010.
2. Prepare the partners current accounts as at 31 December 2010.

Solution
Workings
1.     
Revaluation a/c

1. Goodwill: Since the partners agreed that no goodwill account should be opened, then working of the share of goodwill to capital account is only shown as follows:

   Value of goodwill N40,000 as at 1 October 2010 share to Dami and Lola in their old profit-sharing ratio as follows:
   Dami ( x 40,000)    =    24,000
   Lola ( x 40,000)     =    16,000
   Goodwill to be written off immediately from the books as follows using new profit-sharing ratio:
   Dami ( x 40,000)    =    16,000
   Lola ( x 40,000)    =    16,000
   Bola ( x 40,000)    =    8,000

2. Partners Capital Account

   	Dami (N)	Lola (N)	Bola (N)		Dami (N)	Lola (N)	Bola (N)
   Goodwill w/off Bal c/d	16,000 77,800      93,800	16,000 43,200      59,200	8,000 12,000      20,000	Bal. b/d Bank Profit on Revaluation Goodwill  Bal b/d	50,000    19,800 24,000 93,800 77,800	30,000    13,200 16,000 59,200 43,200	– 20,000  – – 20,000 12,000

    

    
    
    
    

3. Dami, Lola and Bola
   

   Trading, Profit and loss and Appropriation Account for the Year Ended 31 December, 2010
                N
   Turnover            400,000
   Less: Cost of Sales    240,000
   Gross profit c/d        160,000
   

     9 months to 30        3 months to 31        year to
    September 2010        December 2010        31 December 2010

1. Partners’ Current Account
   

   	Dami	Lola	Bola		Dami	Lola	Bola
   	N	N	N		N	N	N
   Drawings	23,000	17,000	3,000	Bal. b/d	2,000	3,000	–
   Bal. c/d	29,388	24,295	367	Loan interest	500	–	–
   				Int. on capital	973	540	150
   				Salary	–	3,000	–
   				Share of profit	48,915	34,755	3,217
   	52,388	41,295	3,367		52,388	41,295	3,367
   				Bal. b/d	29,388	24,295	367

    

Essay Type Questions

1. (a)    Define ‘partnership’.

   (b)    Is it possible for a partnership to exist without agreement? If so, why do you consider a written agreement to be desirable?
   (c)    Is it possible for a person
   (i)    To receive a share in the profits of a business without being liable as a partner therein;
   (ii)    To be liable as partner without receiving a share of the profits of a business?

    

2. The following trial balance has been extracted from the books of Sam and Dan at 30 April 2011.

   	N	N
   Sales		425,000
   Purchases	200,000
   Stock at 1 May 2010	30,000
   Wages	98,000
   Rent	25,000
   Heating and lighting	16,000
   Office expenses	12,600
   Vehicle expenses	5,510
   Advertising	3,500
   Bad debts written off	416
   Plant & machinery at cost	125,000
   Provision for depreciation plant & machinery		36,000
   Motor vehicle at cost	41,000
   Provision for depreciation of motor vehicle		22,000
   		18,000
   Trade debtors and creditors	45,750
   Provision for doubtful debts		1,000
   Bank balance	15,724
   Loan from Sam		60,000
   Capital a/c – Sam – Dan Current a/c – Sam – Dan Drawings a/c – Sam – Dan	30,000 13,500	50,000 40,000 7,000 3,000
   	662,000	662,000

   Additional Information
   

   1. Stock at 30 April, 2011 is valued at N27,000
   2. Sam is to be credited with interest on the loan at a rate of 10% per annum.
   3. The bank reconciliation shows that bank interest of N314 and bank charges of N860 have been debited in the bank statements. These amounts have not been entered in the cash book.
   4. On 30 April 2011, rent of N1,500 and advertising of N2,000 have been paid in advance.
   5. Depreciation is to be provided as follows:
      1. Plant and machinery 10% per annum on cost.
      2. Motor vehicles 20% per annum on their written down values.
   6. The partners are to be charged interest on drawings and allowed interest on capital at a rate of 10% per annum.
   7. Partnership salaries are to be allowed as follows: Sam N10,000 per annum, Dan N8,000 per annum.
   8. The balance of profits and losses is to be shared as follows: Sam – 3/5; Dan 2/5.

Required:

1. Prepare the partnership trading, profit and loss and appropriate accounts for the year ended 30 April 2011.
2. Prepare the partners’ current accounts for the year ended 30 April 2011.
3. Prepare the balance sheet as at 30 April 2011.

    

4. Bose, Bukky and Biola are partners sharing profit and losses in ratio 3:2:1 respectively.

   The partners’ trial balance as at 31 December 2010 is as follows:

   	Dr (N)	Cr (N)
   Capital account Bose Bukky Biola Current account Bose Bukky Biola Premises Plant Vehicles Furniture Loan – Biola Creditors Stock Debtors Bank	5,018  180,000 74,000 30,000 4,000    125,758 69,960  487,736	170,000 130,000 70,000  7,428  9,356        56,000 38,072    6,880 487,736

    

Biola retires on 31 December 2010 and Shola was admitted as a partner on that date.

 The following matters were agreed on:

1. Assets revalued – premises N24,000 plant N60,000 and stock N108,358.
2. Goodwill of N84,000 is to be recorded in the books on the day Biola retires.
3. Provision is to be made for doubtful debts of N 6,000.
4. The partners in the new firm do not wish to maintain goodwill account
5. Bose and Bukky are to share profits in the same ration as earlier and Shola is to have the same share of profit as Bukky.
6. Biola is to take over car at its book value of N7,800 in part payment and the balance of all she is owed by the firm in cash except N40,000 which she is willing to leave as a loan.
7. The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned.
8. Shola is to contribute cash to bring the capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.
9. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

Required:

1. Prepare account for the above transactions including goodwill and retiring partners account.
2. Balance sheet of the new partnership of Bose, Bukky and Shola as at 31 December 2010.