ACCOUNTANCY FORM SIX TOPIC 1:PARTNERSHIP ACCOUNTING

 

TOPIC 1:  PARTNERSHIP ACCOUNTING

1. PARTNERSHIP
   WHAT IS IT?

Is a relationship between persons who have agreed to share profit and loss of the business carried by all with a profit meditative.

Partners: Are persons making an agreement to carry business for a common purpose/intention.

• Individual – these are partners (Persons by nature).
• Collectively – This is a firm (legal persons).

MAIN FEATURES OF PARTNERSHIP;

1. Two or more persons.
2. There must be an agreement between partners.
3. Lawful business.
4.  Profit Motive.
5. Principal to agent relationship.
6. Unlimited liabilities.

1. CAPITAL ACCOUNTS

Capital can be contributed

(a) In kind

Anything equivalent to cash e.g. A house, a car etc

ENTRIES
DR ; Motor car A/c
CR ; Capital A/c
b) In cash
– It is in cash
ENTRIES
DR ; Cash A/c
CR ; Capital A/c
c) Both cash and in kind
– Partner brought part in cash and part in kind.

TYPES OF CAPITAL ACCOUNTS

There are two types of Capital Account

(a)     Fluctuating capital Account

• Also it is known as floating capital account.
• This system partners capital account do not remain intact (as its original balance but fluctuates quite frequently)
• It means the capital account changes with all items concerning partners e.g. Interest on drawings, interest on capital, Partners salaries, commission, Drawings, Properties brought in, Profit and less distribution.

(b)     Fixed Capital Account

Under this system the original capital invested by the partners remain unaltered unless additional capital is invested or capital itself is withdrawn by mutual agreement.

(c)     Partner’s Current Account

It is an account that carries all items concerning Partners e.g. Interest on capital, Interest on drawings, Drawings, Partner’s salaries and wages/ commission to partner.

(d)    Profit and Loss Appropriation Account

This is an extension of usual profit and loss Account, it Is prepared for adjusting transaction relating to the partnership deed.

Contents

• Interest on partner’s capital.
• Interest on partner’s drawings.
• Interest on partner’s loans.
• Partners salaries.
• Partner’s commission.

NOTE

These transactions are treated separately without mixing up with general trading transaction.

                                             ENTRIES

		DR	CR
1	Interest on Partner’s Capital
	DR; Interest or past Capital   a/c	xx
	CR; Partner’s capital (current a/c		xx
	Transfer (fx)
	DR; Profit and loss appropriation a/c	xx
	CR; Interest on Partner’s capital		xx
2	Interest on drawings
	DR; Partner’s Capital/Current     a/c	xx
	CR; Interest on Partner’s Drawings		xx
	Transfer (fx)
	DR; Interest on Partner’s Drawings       a/c	xx
	CR; Profit and loss Appropriation         a/c		xx
3	Interest on Partner’s Loans
	DR; Interest on Partner’s Loan	xx
	CR; Partners capital   a/c		Xx
	Transfer (fx)
	DR; Interest on partner’s Loan	xx
	CR;		Xx
4	Partner’s salaries/Commissions
	DR; Partner’s salaries/commission	xx
	CR; Partner’s capital   a/c		Xx
	Transfer (fx)
	DR; Profit and loss appropriation   a/c	xx
	CR; Partner’s salaries/commission		Xx

EXERCISE 1

Amake and Babake started a partnership on 1^st January, 2010. Both agreed in the partnership did the following;

1. To contribute Shs.100, 000 each as capital.
2. To share Profit and loss equally.
3. Interest on capital at a rate of 5%.
4. Interest on drawings at a rate of 10%.
5. Partner’s salary Shs.50, 000 per month each.

Transactions for the Month of January, 2010

1st January,2010	Invested required capital as per deed
“	Purchased goods from RTC	700000
“	Purchased goods from Ally cash	100000
“	Babake inject additional funds in cash	200000
“	Amake took 50,000 shs from the firm to pay school fees for his son
31st January 2010	Sold goods to NMC worth	2,000,000
	Sold goods to NMC by cash	500,000
	Goods counted physically worth	100,000
	Paid rent	10,000
	Rent received	100,000
	Paid to partner’s January salaries
	Paid salaries	2000
	Paid productive wages	5000

Required

-Journal Proper to record all the transaction (No narration needed)

-Prepare ledger a/c’s to record all transactions relating to the months 1/2010

-Prepare trading profit and loss a/c and appropriation account for the period in a  question.

-Show by extracting financial position of the A and B partnership (Amake and Babake).

PROFIT AND LOSS APPROPRIATION ACCOUNT

Commission	xxx	Net profit b/d	Xxx
Net loss	xxx	interest on drawings
partner’s salaries   A- xx		A – xx
B – xx	xxx	B   – xx	Xxx
Bonus to partner’s
Interest on loan   xx
general reserve   xx
Residual profit
A – xx
B – xx	xxx
	xxxx	xxxx

PROFIT APPORTIONMENT BASIS

We are having two Basis of Apportioning residual profits

1. Time Basis Apportionment.
2. Profit analysis basis.

TIME BASIS APPORTIONMENT

In this method profit is apportioned between the various periods. That is to say the profit is accrued evenly.

Example

A and B are in partnership with share profit of .3:2 respectively on 1^st January their capital stood at 500,000 and 400000 respectively. They decided to admit C as a new partner on 1^st October, 2010, their new share profit ratio is 2.2.1. During the year the following Transaction took place.

	Tshs
Purchases were	1,000,000
Sales were	2,500,000
Partner’s salaries	600,000
C brought 100,000 as capital
Interest on capital 10% p.a
Electricity	100,000
Salaries and wages	200,000

Required;

-Prepare Profit and loss appropriation on time basis for A and B partnership and ABC partnership. Financial year ended 31^st Dec. 2010:

Workings (W).

A AND B

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE PERIOD ENDED

                                           30^TH SEPTEMBER, 2010

(Trading)	(shs)
Purchases	750,000.00	sales	1,875,000.00
gross profit c/d	1,125,000.00
	1,875,000.00	1,875,000.00
electricity	75,000.00	gross profit b/d	1,125,000.00
salaries and wages	150,000.00
net profit c/d	900,000.00
	1,125,000.00	1,125,000.00
interest on capital		Net profit b/d	900,000.00
A – 45,000
B – 30,000	75,000.00
Partner’s salary	450,000.00
residual     profit
A –   225,000
B –   150,000	375,000.00
	900,000.00	900,000.00

Working ; – W2purchases (A, B & C)

Total 1,000,000 x 9/12   = 250,000

Sales (A, B & C)

Total 2,500,000 x   9/12 = 625,000

Electricity (A, B &C)

Total 100,000 x   9/12 = 25,000

Salaries and wages (A, B & C)

Total 200,000 x 9/12= 50

Interest on capital (A, B & C)

Total A – 600,000 x10/100 x9/12 = 15,000

B – 400,000 x10/100 x 9/12= 10,000

C – 100,000 x x = 2500

Partner’s salaries (A, B & C)

Total 600,000 x = 50,000

Residual value

For A; Total 123,500 x = 49,400

For B; Total 123,500 x = 49,400

For c; Total 123,500 x = 24,700

A, B & C PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE PERIOD END 30TH SEPT.

(Trading)	shs
purchases	250,000	sales	625,000
gross profit c/d	375,000
	625,000	625,000
electricity	25,000	gross profit b/d	375,000
salaries and wages	50,000
net profit c/d	300,000
	375,000	375,000
		net profit b/d	300,000
interest on capital
A – 15,000
B – 10,000
C – 2500	27500
Partner salary	150,000
residual profit
A – 49,400
B – 49,400
C – 24,700	123,500
	300,000	300,000

SECOND METHOD; PROFIT ANALYSIS BASIS

In this method profit is apportioned by using analyzed profit and loss. This requires the use of separated column in the profit and loss account for the period in question.

a) Gross Profit

Is apportioned between the period on basis of turn over.

1. b) Fixed charges

Fixed charges are apportioned on the basis of time.

1. c) Variable charges

Variable charges are apportioned on the basis of turnover.

1. d) Other charges

Other charges with special information given are apportioned according to that given information.

EXERCISE

X and Y are carrying on a business in partnership sharing profit and losses in the ratio of 3:2 but during the year ended Dec 31^st 2007 two other member were admitted namely W and Z on July 1^st and sept 30^th 2007 respectively. Net sale during the year amounted to shs. 250,000, selling and distribution on expenses amount to shs. 12,000.

However the firms sales break down were;          Tshs.

January 1^st to march 31st                                     62,500

April 1^st to June 30^th                                            93,750

July 1^st to sept 30^th                                            31,250

Oct 1^st to Dec 31^st                                               62,500

The firm normally fixes the Gross profit at 25% above the cost

Their profits and losses sharing ratios were;

X and Y and W was 2; 2; 1

X, Y, W and Z was 4; 3; 2; 1

Prepare;

1. a) The profit and loss account for the year ended 31^st Dec 2007
2. b) An appropriation account for the year ended Dec 2007.

SOLUTION;

W_1; GROSS PROFIT AMOUNT

If the gross profit is 25% above the cost

Thus

Sales are at 25%

G.P = x 250,000; from where r = rate

= 50,000

W₂; First 6 month’s G.P; (sales; – 62500 + 93750 = 156250)

6 months G.P = Gross profit x sales for the period

=   x 156,250 = 31250.

W_3; Gross profit from July 1^st – 30^th sept (sales = 31250)

3 months G.P = x 31250

= 6250

W₄ = Gross profit from October^1st– Dec 31^st (sales = 62500)

Lost 3 month’s G.P

= 12,500

W_5; Administrative expenses 12,000

1. a) X 12,000 = 6000
2. b) X 12000 = 3000
3. c) X 12,000 = 3000

Selling and distribution expenses 25,000

1. a)  For 6 month’s sales = 156250

6 month’s selling and distribution exp.

Total expenses  x sale for the period

Total sales

25,000   x 156,250

250,000

= 15,625

1. b)   For next 3 months sales = 31,250

3 months selling and distribution exp. = 25,000 x 31250

250,000

= 3125

1. c) For the last 3 month’s sales = 62,500

Last 3 month’s selling and distribution exp. =

25,000 x 62,500   = 6250

250,000

 DR     PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31^ST DEC 2007            CR

DETAILS	6	3	3	DETAILS	6	3	3
Admin. Expenses	6000	3000	3000	Gross profit	31250	6250	12500
selling & distr. Exp	15625	3125	6250
9625	125	3250
	31250	6250	12500	31250	6250	12500

PROFIT AND LOSS APPROPRIATION A/C FOR THE PERIOD ENDED 30/6/07

SHS		SHS
Capital   X ; ½ x 9625	5,775.00	Net profit b/d	9,625.00
Y ; 2/5 x 9625	3,850.00
	9,625.00	9,625.00

PROFIT AND LOSS APPROPRIATION FOR THE PERIOD ENDED 31^ST DEC.2007

Capital   X; 2/5 x 125	50
Y ; 2/5 x 125	50	Net profit b/d	125
	25
	125	125

PROFIT AND LOSS APPROPRIATION A/C FOR THE PERIOD ENDED 31^ST DEC.2007

Capital x: 4/10 x 3250	1300	Net profit       b/d	3250
y: 3/10 x 3250	775
z: 2/10 x   3250	650
w: 1/10 x 3250	325
	3250	3250

ADMISSION OF PARTNERS

• When additional capital or managerial stalls or both are required in the course of expansion it is quite usual to take new partner or partners into partnership firm.
• The new partner usually invests additional capital to the firm.
• Admission of a new partner raises the following thins.

1. Treatment of Goodwill
2. Revaluation of Assets and liabilities
3. Re-arrangement of old partners capital balances after admission
4. Re-arrangement of old partners profit sharing rations

GOODWILL

• Goodwill simply means the good name or the reputation of the business
• Attraction of more customers depends on Goodwill and helps in earning more profit in future
• Goodwill is an asset
• New partner gets benefit of the extra asset and old ones lose their shares
• In other words when a new partner get some shares in the profit of the firm he acquire the same rights in the existing Assets of the firm and in the extra Asset (Goodwill).
• If that’s the case automatically incoming partner, he has to compensate the old partners either:

By paying in cash for his share of Goodwill

By allowing the old partners capital account to be raised rate-ably

Method of Valuing Goodwill/Methods of calculating Goodwill

• The Goodwill of any business whether sole trader, Firm or company is generally determined by sharing.
• But it depends upon the following factors;

1. Present earning capacity of the business.
2. Results of the operations of a few previous years.
3. The future prospectors of the business.
4. Efficiency of management and employers.
5. Efficiency of advertising machinery and possession of trade marks.

WHEN VALUATION NEEDED

(a)   On admission of a new partner.

(b)   On retirement of a new partner.

(c)   When changing profit sharing ratios.

(d)   On sale of the business.

(e)   During Amalgamation.

(f)    On dissolution.

METHOD OF VALUATION OF GOODWILL

We are having four methods of valuation of Goodwill

1. 1. Purchases of Past profit methods
   2. Purchase of super profits methods
   3.  Inferred or Implied Goodwill method
   4. Valuation by bargaining (Arbitrary methods).

– The value of goodwill is decided by direct bargaining between the buyer and seller.

– For Examination purposes such an amount is usually mentioned.

(a)   Purchase of Past Profit Method

In this method Goodwill is valued at an agreed number of years (2-3 years) of an average profits of a given number of past years) illustration.

Goodwill is valued at two years purchased of the average profits of four years.

• It means average of four years profit multiply by two

PROFITS	YEARS
60,000	2011
50,000	2010
40,000	2009
5,000	2008

Goodwill =  x  no. years of purchase

= x 2= 100,000/=

Goodwill = 100,000

1. Purchase of super profit method

Super profit is the difference (Excess) between average annual earning (actual) of the business and the expected or normal return on capital invested.  If the average annual profit of the business is Shs.5000,000/= and the normal earning capacity is 6%, if the capital invested is shs.300,000. Find super profits.

Super Profit = Average profit (Actual) – Normal return of capital invested.

= 50000 – x 800,000

= 50000 – 48,000

= 2000

Then super profit is taken as a base in compilation of Goodwill.

The goodwill be valued at a certain years of purchase of that super profit

3 years purchase: 2000 x 3 = 6,000

1. Inferred or implied goodwill method        

When a prospective buyer of a business agrees to pay more than the value of the business taken over, the difference between the purchase price and actual value of the business is known as inferred or implied goodwill.

Example

If the Assets worth 1,000,000 Tshs along with the liabilities of Tshs.30, 000 Tshs are taken over by a buyer for Shs.1, 000,000 then the goodwill is;

Goodwill = Purchase Price – Value of the business

= 1,000,000 = [1,000,000 – 30,000]

= 1,000,000 – 970,000

:. Goodwill 30,000

1. Valuation by bargaining (arbitrary valuation)

–        The value of goodwill is decided by direct bargaining between the buyer and seller.

–        For examination purposes such an amount is usually mentioned.

ACCOUNTING TREATMENT OF GOODWILL ON ADMISSION

There are two methods in which goodwill can be accounted in the books on admission

(a)   When the goodwill is not appeared in the books

(b)   When the goodwill is already appearing in the books (in the balance sheet)

(c)     When goodwill is not appearing in the books

(d)   When new partner pays cash for goodwill, it is always equal to his share in the total goodwill.

MODE OF PAYMENT

(i)   Cash paid to all partners outside the business or paid privately

(ii)   Cash paid through the firm or business, such cash may be

(a)   Raised in the business as additional working capital

(b)   written drawn by old partners either full or partial

(iii)   Goodwill raised in the books

• When the new partner cannot pay in cash for his share in goodwill and partners capital accounts will be raised rate-ably by raising or bringing in goodwill in the books.
• In this case goodwill must be recorded at it is full value ways.

(i)     Goodwill raised and retained in the books at full value

(ii)   Goodwill raised and written off either fully or partly

(iii)   Goodwill raised without opening goodwill account in the books

1. b) When the goodwill is already appearing in the Books

• When goodwill appears in the books (Appeared in the Balance sheet) it means it has been already recorded and credit given told partners
• Therefore new partner need not to contribute for goodwill
• If new partner brings in cash for goodwill in this case should treated as additional capital and the goodwill should cancelled out.

ACCOUNTING ENTRIES FOR GOODWILL

1. When no goodwill appears in the balance sheet

– When incoming pays money for goodwill privately

In this there is no Entry.

2. When incoming partners brings in cash and is retained in the business

Debit: Cash a/c                                   (with cash) brought

Credit: Goodwill a/c

Debit; Goodwill     a/c                            (Old profit)

Credit; old partner’s capital a/c         (sharing ratio)

Example I

A and B are partners carrying on a Business, their profit sharing ratio is 3:2. They decide to admit C in the firm. Their new profit sharing ratio is 2:2:1 for A, B and C respectively C pays shs.10, 000/= as goodwill. These money were left into the business.

Required;   Draw journal entries to record the goodwill

JOURNAL ENTRIES

DETAILS	DEBIT	CREDIT
Cash a/c (premium)	10,000
Goodwill a/c		10,000
(being cash received for goodwill)
Goodwill a/c	10,000
A’s capital (3/5 x 10,000)		6000
B’s capital (2/5 x 10,000)		4,000
(being the distribution of goodwill

III. When incoming partner pays ash for Goodwill and that money is withdrawn by old partners

Debit; Cash a/c                        (with Cash brought)

Credit; Goodwill   a/c

Debit; Goodwill     a/c

Credit; old partner’s capital   a/c

Debit; old partner’s capital a/c

Credit, Cash   a/c

(With old profit sharing ratio).

Example 2

X and Y are equal partners carrying on business as accountants and auditors they decided to admit W with share of profit to the business. W paid Shs.30,000 as goodwill in the business in cash. But old partners decided withdraw all the money paid for business.

Required

-Draw up Journal entries to receive the above.

                                   JOURNAL ENTRIES

DETAILS	DEBIT	CREDIT
Cash a/c	30,000.00
Goodwill a/c		30,000.00
being cash received for goodwill
Goodwill a/c	30,000.00
X   capital a/c		15,000.00
Y capital   a/c		15,000.00
being the distribution of good
will to partners
X capital a/c	15,000.00
Y capital a/c	15,000.00
cash a/c		30,000.00
being withdrawal of money paid
for goodwill

IV   When Incoming Partner does not Bring Cash

• When new partner does not bring cash for goodwill the goodwill accounts is raised in the books of account is raised in the books of accounts and it is allowed to remain in the books.
• It is agreed to estimate the value of Goodwill for that particular business. However an adjustment is made in the old partners capital accounts in proportion to less suffered by old partners

ENTRIES

1. ADJUSTMENTS

Dr: New partner’s capital a/c

Cr: Old partner’s capital a/c

Dr: Goodwill a/c

Cr: old partner’s capital a/c (With old profit sharing ratio).

Example

M and N are partners with PSR 3:2. They decided to admit O as a new partner to the business; they agreed new profit sharing ratio is 4:3:3 for m, N and O respectively. But it was further agreed that unrecorded goodwill of Shs 105,000.00 is to be raised in the Books of the firm.

Required; Show journal entries to show

(a)   Loss suffered by M and N

(b)   Goodwill shared by M and N

Determine the proportion of loss suffered on admitting O

	M	N	O
Old Profit sharing ratio	x =	x =	–
Less;
New profit sharing ratio
Gain/Loss Ratio	()

Determine O share of Goodwill

O share = Amount of Goodwill x sacrificed Ratio

= 105000 x () = 31,500

	DETAILS	DEBIT	CREDIT
a)	O capital a/c	31,500.00
	M (2/3 x 31500)		21,000.00
	N (1/3 x 31500)		10,500.00
	(Loss suffered by admission
	of O)
b)	Goodwill a/c	105,000.00
	(M 3/5 x 10500		63,000.00
	(N 2/5 x 10500		42,000.00
	Goodwill distributed to old
	partners)

REVALUATION OF ASSETS AND LIABILITIES

When a new partner is admitted is very important to revalue all assets depending on market value rather than in their cost or written down value.

Open revaluation account

INCREASE IN ASSETS	DR	CR
Debit; Asset     a/c	xx
Credit; Revaluation   a/c		Xx
Decrease in assets
Debit; Revaluation a/c	xx
Credit; assets   a/c		Xx
( c) Increase in Liability
Debit; Revaluation     a/c	xx
Credit; Revaluation   a/c		Xx
d)Decrease in liability
Debit; Liability     a/c	xx
Credit; Revaluation   a/c		Xx

1. Revaluation Account results   (Transfer)

In case of Profit on revaluation

Debit; revaluation   a/c

Credit; Capital       a/c

In case of loss on revaluation

Debit; capital       a/c

Credit; Revaluation   a/c

Exercise

BALANCE SHEET AS AT 31/12/1997

Capital		Fixed Assets
S – 20,000		Free hold property	20,000.00
D – 10,000	30,000.00	Motor cars	5,000.00
		office equipments	3,000.00
Creditors	5,000
		CURRENT ASSETS
		Stock	3,000.00
		Debtors	2,500.00
		cash at bank	1,500.00

On First January 1998, they admit John to bring in 10,000 as capital, the profit and loss sharing ratio is 3:1:1 respectively, old profit and loss sharing ratio 3.2.

The Asset to be revealed.

Freehold = 27,000

Motor cars = 4,000

Office Equipment = 2500

Stock = 3750

Unrecorded liabilities = 500

Creditors’ overcast by 200

Required;

-Journal Entries

JOURNAL ENTRIES AS AT 1^ST JANUARY, 1998

DETAILS	DEBIT	CREDIT
Free hold property a/c	7,000.00
Revaluation a/c		7,000.00
Revaluation a/c	1,000.00
Motor car a/c		1,000.00
Revaluation a/c	500.00
office equipment a/c		500.00
stock a/c			750.00
Revaluation a/c		750.00
Revaluation a/c			500.00
Unrecorded liabilities a/c		500.00
Creditors a/c	200.00
Revaluation a/c		200.00

EXERCISE

Ofwang and Onyango are in partnership sharing Profit and loss equally. They decided to admit Othorong’ong’o on agreement that goodwill will value at Shs.600, 000/= is to be introduced in the books. Othorong’ong’o was required to produce capital equal to that of onyango after he has been credited with his share of goodwill. The new sharing is to be 4:3:3 respectively. The balance sheet before admission of Othorong’ong’o was as follows;

Fixed Assets		1,500,000
cash		200,000
		1,700,000
Financed by
capital – ojwang	800,000
– onyango	400,000	1,200,000
current liabilities		500,000
		1,700,000

Required

1. Journal Entries for Admission of Othorong’o
2. Immediate balance sheet after admission of Othorong’ong’o

Solution

                                     JOURNAL ENTRIES

DETAILS	DEBIT	CREDIT
Goodwill a/c	600,000.00
Partners capital
Ojwang A/c		300,000.00
Onyango A/c		300,000.00
Partners capital A/c
Ojwang A/c	240,000.00
Onyango A/c	180,000.00
Othorong’ong’o A/c	180,000.00
Goodwill A/c		600,000.00
Cash A/c	520,000.00
Othorong’ong’o A/c		520,000.00

OJWANG, ONYANGO AND OTHORONG’ONG’O STATEMENT OF FINANCIALPOSITION AS AT DATE.

Fixed Assets	1,500,000.00
Current assets
cash at bank	720,000.00
	2,200,000.00
Financed by;
Capital – Ojwang                       860,000
Onyango                     520,000
Othorong’ong’o           340,000	1,720,000.00
current liabilities	500,000.00
	2,200,000.00

Exercises (NECTA 2002)

1. Polpot and Golberg are in partnership with capitals of Shs 20,000,000 and shs.12, 000,000 respectively. The partnership agreement provided that profits shall be shared and after giving Goldberg a salary of shs 2,240,000 and giving both partner interest on capital at 8 percent annum.

The Net profit for the year was Shs.10, 320,000, Shs.40, 000 is to be written off the Goodwill Account.

Required,

– Write up the Appropriation Account for the years.

              DR               Profit and Loss Appropriation A/C           CR  

DETAILS	AMOUNT	DETAILS	AMOUNT
Partner salary		Net profit (from P&L)	10,320,000.00
Goldberg – 2,240,000	2,240,000.00
Interest on capital
Goldberg   960,000
Polpot       1,160,000	2,560,000.00
share of profit
Goldberg 3,450,000
Polpot       2,070,000	5,520,000.00
	10,320,000.00		10,320,000

1. Queen and Malkia are in partnership with capital of Tshs.10,000,000 and Tshs 6,000,000 respectively. The partnership agreement provides that profit and losses shall be shared and after giving Malkia a salary of Tshs 1,120,000 and giving both partners interest on capital at 8 percent per annum.

The results for the year show a net loss of Tshs. 1,824,000, sh. 200,000 is to be written off the goodwill a/c.

Required;–

• Write up Appropriation account for the year.

DR         PROFIT AND LOSS APPROPRIATION ACCOUNT   CR

	TSHS		TSHS
Net loss	1,824,000.00	share of loss
Interest on capital;		Queen (5/8 x 4,224,000)	2,640,000.00
Queen         800,000		Malkia (3/8 x 4,224,000)	1,584,000.00
Malkia         400,000	1,200,000.00
Partner salary
Malkia	1,200,000.00
	4224,000.00		4,224,000.00

RETIREMENT OF A PARTNER

This is when a partner leaves partnership firms due to various reasons e.g. Age, limit.

Example; NECTA 2007

A, B, and C were carrying on a business as partner’s sharing profit in the ratio of 5:3:2 respectively on 31^st March 1991 their balance sheet stood as follows;

LIABILITIES	Tshs	ASSETS	Tshs
A	100,000.00	free hold premises	75,000.00
B	60,000.00	furniture &fittings	22,500.00
C	35,000.00	stock	69,840.00
Trade creditors	31,180.00	Trade debtors	26,900.00
outstanding expenses	2,745.00	Bills	10,000.00
		cash at bank	24,635.00
	228,925.00		228,925.00

C Retired on the above mentioned date on the following terms;

(a)  Freehold Premises to be appreciated by 20%

(b)  Furniture & Fitting to be reduced by Tshs 2,255

(c)  Provision for doubtful debts to be created on trade debtors at 5%

(d)  Goodwill account be raised by Tshs 60,000 the agree value of the firm’s goodwill. The amount finally due to C be paid immediately A and B brings in Tshs 20,000 each to facilitate the payment. A and B agree to share profits in the ratio of 3:2 respectively immediately after c’s retirement and write off goodwill account.

You are required to prepare;

-Partner’s capital a/c

-Cash Book.

-The balance sheet of A and B for the year ended March 1994

             DR                               PARTNER’S CAPITAL ACCOUNT                   CR

DETAILS	A	B	C	DETAILS	A	B	C
Goodwill A/c	36000	24,000	–	Balance b/d	100,000	60,000	35,000
cash A/c	–	–	49,280	Revaluation A/c
Balance c/d	119700	77420	–	share of profit	5700	3420	2280
				Goodwill A/c	30,000	18,000	12,000
				cash A/c	20,000	20,000	–
	155,700	101,420	49280		155,700	101,420	49,280

DR                                                  CASH AT BANK                                                       CR

Balance b/d	24,635	To c’s capital	49,280
A’s capital	20,000	Balance c/d	15,355
B’s capital	20,000
	64,635		64,635

       BALANCE SHEET FOR THE YEAR ENDED 31^ST MARCH 1994

LIABILITIES	AMOUNT	Fixed Assets	AMOUNT
Capital		Freehold premises	90,000
A – 119,700		furniture & fittings	20,295
B – 77,420	197,120	Current Assets
		stock	69,840
Current liabilities		Bills	10,000
trade creditors	31,180	Trade debtors           26,900
outstanding expenses	2745	less;prov.for BD         1345	25,555
		cash at bank	15,355
	230,145		230,145

RETIREMENT OF A PARTNER:

We have discussed the accountancy problems that arise on admission of a new partner.

In this character, we shall look at the problems that arise on retirement or death of a partner which are;

(a)   Treatment of Goodwill

(b)     Revaluation of Assets and liabilities

1. a) Treatment of Goodwill;

on the retirement or death of a partner, his share of Goodwill will have to be valued in according with the terms of the partnership Deed, and in the absence of such provision in the Deed, by mutual agreement or understanding among the partner. Then one of the following courses may be adopted to give to the distribution in the Books of Accounts.

1. 1. Goodwill raised in the Books:

Entries are

Debit; Goodwill Account,

Credit: are all partners’ (including retiring) Capital Accounts in their profit sharing    proportions.

1. ii)   Goodwill raised in the Books but immediately written off Entries are;

Debit; Goodwill Account

         Credit; All partners’ (including retiring) capital Access in their profit sharing    proposition.

         Debit; Remaining partner’ (In new profit sharing proportion)

Credit: Goodwill Account.

iii).   Only Goodwill share of the retiring partner is brought into books. The entry is,

Debit; Goodwill Account

   Credit; Retiring partner (with his share)

It is advisable to write – off the goodwill to the remaining partners in the ratios in which they gain on the retirement.

It may be noted carefully that if Goodwill Account already exists in the books, entries for raising Goodwill should be made only for difference.

Illustration; Mukosa, Mosoke and Ochieng are partners sharing profit in the proportion of and respectively. Mosoke retires and the Goodwill is valued at Tshs 21,600/=. No Goodwill Account appears in the books of the firm. Assuming that Mukasa and Ochieng share future profit in the ratio of 5:3, pass entries for Goodwill if (a) Goodwill is raised in the books (b)Goodwill is raised and written – off (c)Goodwill share of the retiring partner only is brought into the books.

1968	Particular	Debit	Credit
CASE A	Goodwill account raised
	Goodwill A/c	21600
	To Mukasa capital A/c(4/9)		9600
	To Musoke’s capital A/c(3/9)		7200
	To Ochieng’s A/c (2/9)		4800
	(value of Goodwill raised
	on Musoke’s retirement
CASE B	Goodwill Account raised but w.off
	I) Goodwill A/c	21600
	To Mukasa’s capital A/c (4/9)		9600
	To Musoke’s capital A/c(3/9)		7200
	To ochieng’s capital A/c (2/9)		4800
	value of Goodwill raised on
	Musoke’s retirement
	II) Mukasa’s capital A/c (5/8)	13500
	Ochieng’s capital A/c(3/8)	8100
	To Goodwill A/c		21600
	C Goodwill written off to
	remaining partners in their
	new profit sharing ratio
CASE C	Only Musoke’s share of
	Goodwill
	I) Goodwill account	7200
	To Musoke’s capital account		7200
	C Musoke’s share (3/9) of
	Goodwill will be paid.
	II) Mukasa’s capital A/c(13/24)	3900
	Ochieng’s capital A/c(11/24)	3300
	Musoke’s capitl A/c		7200

REVALUATION OF ASSETS AND LIABILITIES

After ascertaining the share of good will payable to the retiring partner. The next problem that arises in the revolution of assets and liabilities for the purpose of ascertaining the fair amount due to the out-going partner in respect of his share of firm’s assets.

Even if the partnership deed is silent on this point Assets and liabilities should normally be valued. The partner can, of course, agree not to revolve the assets and liabilities either on retirement or death or on both but such provision in the Deed is, that the balance of his capital Account represents his true interest in the partnership. Apart from the question of Goodwill which has already been dealt with some of the assets may have appreciated in value without any adjustment having been made in the books, whilst others may have been insufficiently depreciated or completely written-off.

A Revolution Account for profit and loss Adjustment (is prepared to which all differences in value are debited or credited as the case may be and the resultant balance is transferred to all the partners including retiring) in the old profit sharing ratios. The Assets and liabilities appear in the books of the new firm at the changed values.

But if it’s desired that Assets and liabilities should continue to appear in the books at the old values. A memorandum Revolution Account is prepared. It’s balance will be transferred to all the partner in the profit sharing ratio’s, and then the same account will be put on the reverse side and transferred to the remaining partners in the new profit sharing ratio.

Important Hints, Any reserve or accumulated profit appearing in the books should be transferred to all partners in their old profit sharing ratios. Alternatively only the retiring partner may be credited with his share and the remaining reserve side and transferred to the remaining reserve side and transferred to the remaining reserve may continue to appear in the books and the reduced figure.

Payment to the retiring partner.

When the accounting formalities are over, the final balance standing to the credit of a retiring partner’s capital Account in paid either in cash (if cash position permit) or transferred to his loan account until it paid off. In the modern business world, some other method s are also evolved for payment of the amount such as÷

(i)   Policy of survivorship assurance.

(ii)   Annuity method.

(iii)   Installment method

Example 1.

The balance sheet of A and B partnership, who are sharing profits and losses in the ratio 2:1 between A and B respectively as on 31^st Dec 1984.

BALANCE SHEET AS AT 31^ST DEC 1984

capital                       A	100,000.00	Fixed Assets
B	50,000.00	plant & machinery	90,000.00
		furniture and fittings	20,000.00
current a/c                A	75,000.00	vehicles	50,000.00
B	(5,000.00)
Long-term liabilities	40,000.00
current liabilities	20,000.00
	280,000.00		280,000.00

On 1^st January 1985 they decided to admit (into Partnership on the following terms;

(i)     “C” to bring in Tshs.75, 000 in cash for his capital.

(ii)     Profit sharing ratio to be 3:2:1 as for A, B and C respectively

(iii)   Goodwill to be revalued at shs12, 000/= but is not be maintained in the books “C” is to pay for his share of goodwill

(iv)   Plant and Machinery Furniture and Fittings and Vehicle to be revalued at Shs120, 000, 15,000 and 70,000 respectively.

(iv)   5% of stock is absolute. 10% of Debtors to written off

(v)     Current liabilities amounting to Tshs 500/= was overlooked

(vi)     Long term liabilities to forge Tshs.2000/=

(vii)   A and B are to pay Tshs 8,000/= in respect of the revaluation costs

Required;

show the following: – 1. Revaluation account   2.Bank account.

DR                     REVALUATION ACCOUNT               CR

furniture & fittings	5,000.00	plant & machinery	30,000.00
stocks	4,000.00	vehicles	20,000.00
provision for bad debts	3,000.00	long term liabilities	2,000.00
revaluation costs		current liabilities	5,000.00
A – 5333
B- 2667	8,000.00
To partners current A/c
A – 24,667
B-12,333	37,000.00
	57,000.00		57,000.00

            DR                               PARTNER’S CURRENT ACCOUNT                                 CR

Details	A	B	C	Details	A	B	C
Balance b/d	–	5000	–	Balance b/d	75,000	–	–
				revaluation costs	5333	2667
balance c/d	105,000	10,000	–	revaluation(profit)	24667	12,333	–
	105,000	15,000	–		105,000	15,000

                             A, B & C     BALANCE SHEET AS AT DATE

Capital A/c     A –     102,000		Assets
B – 50,000		furniture &fittings	15,000
C – 73,000	225,000	plant &machinery	120,000
		vehicles	70,000
CURRENT A/C		Current Assets
A – 105,000		stock	76,000
B – 10,000	115,000	bank	85,000
Long-term liabilities	38,000	debtors                       30,000
current liabilities	15,000	less; provision .for BD 3000	27,000
	,
	393,000		393,000

BALANCE SHEET AS AT 1^ST JAN 1998

Capital   S; 23750		Fixed Assets
D; 12,380		Freehold premises	90,000.00
J; 10,000	45,950.00	Motor cars	4,000.00
		office equipment	2,500.00
CURRENT LIABILITIES		Current Assets
Creditors	4,800.00	stock	3,750.00
Unrecorded liabilities	500.00	Debtors	2,500.00
		cash at bank	11,500.00
	51,250.00		51,250.00

PARTNERSHIP (CONTRACT).

Death of a partner:

From the Accountancy point of view, the only difference between retirement and the death of the partner is that in the former case the retiring partner’s share if not paid at once is credited to “loan Account’’ in the name of the outgoing partner, where as in the case of a partner is death, the adjusted balances of a capital and current Accounts of the deceased partner are transferred to an account called “Executor’s to Deceased” pending payment.

There are no special problems of death except that death may occur any time of the year and this would mean Executors of the deceased partner would be entitled to his share of profit arising after the last closing up to the date of his death.

Death/Retirement.

Treatment of Goodwill

Goodwill Account existed before retirement or death.

(i)   Increase in values Goodwill

DR; Goodwill A/c

CR; All partners’ capital A/c, In old sharing ratios

(ii)   Decrease in values of Goodwill.

DR; All partners’ capital A/c

C/R; Goodwill A/c, In old sharing ratios.

Admission of New Partner.

Treatment of Goodwill

A new partner pays as his/her share of Goodwill. If a new partner to pay a portion of his Goodwill in cash, such cash paid is called PREMIUM.

Entries;

Cash received from a new partner as his share of Goodwill

DR; Cash/Bank A/c

CR; Premium A/c

Premium is divided between old partners in old profit sharing ratio.

DR; Premium A/c

CR; Old partner’s capital A/C

DISSOLUTION OF A PARTNERSHIP.
Is the situation whereby the firm ceases its operation and its property are disposed off.

REASONS FOR DISSOLUTION
Partnership firm or organization may dissolve due to the following reasons;
(a) If entered into for a specific reason they by expire of that term.

(b) If entered for a single adventure by termination of that adventure.

(c) If entered for undefined time but one partner giving notice to other one his intention to dissolve partnership.

Upon dissolution the following are formulae to follow

(a) Open a realization account and debt it with the total of assets  except cash or a debit balance of partners capital.

(b) Open account for cash, creditors, partner’s loan (if any) partner’s capital.

(c) Debit cash and credit realization account with the proceeds from sell of asset.

(d) Credit cash and debit realization account if any of the assets are not sold but are taken over by one of the partner then debit that partner capital account and credit realization account with the agreed value.

(e) Credit cash and debit realization account with the expenses of winding up.

(f) Pay off (a) creditors (b) partners loans i.e credit cash and debit these accounts.

(g) Balance the realization account and transfer the balance profit/ loss the partner’s capital accounts.

(h) Balance partner’s capital accounts and divide cash according to this credit balances of capital.

Example 1

Pendo and Upendo decided to dissolve their partnership on 31^st Dec 2010. They shared profit and equally. Their balances as the date on dissolution were as follows.

Liabilities;		Assets
capital		Premises             120,000
Pendo     250,000		fittings                   25,000	145,000
Upendo   200,000	450,000
		Current Assets
current liabilities	150,000	cash                       30,000
		stock                       250,000
		Debtors                 175,000	455,000
	600,000		600,000

Additional Information’s

(i)   Sale proceeds were as follow from their Assets

(ii) Premises 140,000 stock was Tshs 270,000

(iii) Stock was 270,000 Debtors was 170,000

(iv) Upendo took over the fittings at an agreed Price of 20,000

(v) Dissolution expenses was Tshs.10, 000

Cash at bank Tshs.30, 000

Required;

Prepare the Necessary book of Accounts

DR                                          REALIZATION ACCOUNT                     CR

Details	Amount	Details	Amount
premises	120,000.00	premises	140,000.00
fittings	25,000.00	stock	270,000.00
stock	250,000.00	Debtor	170,000.00
Debtors	175,000.00	Upendo (fittings)	20,000.00
Dissolution expenses	10,000.00
To partners capital
profit on realisation
Upendo – 10,000
pendo – 10,000	20,000.00
	600,000.00		600,000.00

DR                                                   CASH ACCOUNT                             CR

DETAILS	AMOUNT	DETAILS	AMOUNT
Balance b/d	30,000.00	Dissolution Expenses	10,000.00
Premises	140,000.00	creditors	150,000.00
stock	270,000.00	Pendo	260,000.00
Debtors	170,000.00	Upendo	190,000.00
	610,000.00		610,000.00

     DR                                PARTNER’S CAPITAL ACCOUNT                            CR                                          

DETAILS	PENDO	UPENDO	DETAILS	PENDO	UPENDO
Realization (fittings)	–	20,000.00	Balance b/d	250,000.00	200,000.00
cash	260,000.00	190,000.00	profit on realization	10,000.00	10,000.00
	260,000.00	210,000.00		260,000.00	210,000.00

LOSS ON REALIZATION

Any Partner with a deficit capital Account must paying efficient cash to clear the deficit cash

GARNER VERSUS MURRAY’S RULE CASE;

This rule states that, in the event of a partner’s insolvency share of deficiency shall be borne by solvent partner in their capitals and not in their P & L sharing ratio.

Example

Assume capital Account of A;B;C Tshs 200,000, Tshs 300,000, Tshs 100,000, C’s capital A/c run top a debit balance of Tshs 95,000 thousand out of which he is able to pay 45,000 on his own bank A/c. This will leave a deficiency of Tshs. 50,000 in his capital a/c and this deficiency will be borne by A and B in the ratio of their capital immediately before dissolution.

Soln;

1. Tshs 200,000
2. Tshs 300,000

A share to C – x 50,000 =20,000

B share’s to C= x 50,000=30,000

JOURNAL ENTRIES

DETAILS	DEBIT	CREDIT
Bank	45,000
C’s capital		45,000
A’s capital	20,000
B’s capital	30,000
C’s capital		50,000

DR                             PARTNER’S CAPITAL ACCOUNT                                       CR

DETAILS	A	B	C	DETAILS	A	B	C
C’s capital	20,000	30,000		Balance b/d	200,000	300,000	100,000
Motor van	10,000			A’s capital	–	–	20,000
Investment	–	80,000	–	B’s   capital	–	–	30,000
loss on realization	19,500	19,500	19,500	Realization expenses	–	600	–
	–	1,000	–	Cash	25,000	–	45,000
Balance c/d	175,000	175,500	175,500
	225,000	306,000	195,000		225,000	306,000	195,000
				Balance b/d	175,000	175,000	175,000

AMALGAMATION OF PARTNERSHIPS

Amalgamation, this is when two or more firms join together to form a partnership firm.

Amalgamation can be between;-

1. A sole trader and sole trader
2. A sole trader and partnership
3. A partnership and a partnership

• Each business must choose its own books of accounts and transfer them to a new partnership firm
• But before closing the books of the following adjustment might own; Reserves are shared by partners in profit or loss sharing ratios of the old business.

CONDITION NECESSARY FOR PARTNERSHIP TO AMALGAMATE.

(a)  To see each other Balance sheet presents a true statement of financial position of each business.

(b)   Asset must be stated at their fair value and all liabilities to be disclosed.

Unequal goodwill of the business will be assessed accordingly at the time of amalgamation by making the right allowances to compensate the owner of the more valuable business.

( c)  Balance sheet business is redrafted taken into consideration the adjustment agreed up and this re-drafted balance sheets is then combined to form the initial balance sheet of the partnership. Statement used in the process of Amalgamation.

Statement used on the Process of Amalgamation

(a)  A completed and signed copy of form of articles of amalgamation

(b)  A completed and signed copy of form of initial registered office address and first board of directors.

(c )  A statutory declaration from a director or office of each amalgamation/corporation

(d)   Name search report unless the amalgamated corporation will use the corporate name of the amalgamation corporation

(e)   B/sheet of the two amalgamations

READ TOPIC 2

...