FA Nov 2019 – L2 – SB – Q5 – Partnership Accounts

This question involves the preparation of a profit and loss account and a statement of financial position for a partnership firm based on the given partnership agreement and trial balance.

Question

Three brothers; Wa, Zo, and Bia are in partnership, trading under the name and style WaZoBia. The partnership agreement provides for:

%	N’000
i. Annual commission payable to:
– Wa	4,000
– Bia	8,000
ii. Annual salary payable to:
– Wa	5,000
– Zo	8,000
iii. Interest on partners’ fixed capital	5%
iv. Interest on partners’ drawings	5%
v. Equal share of profit or loss (1:1:1)

The extract of the partnership balances for the period under review is as follows:

WaZoBia Trial Balance for the year ended October 31, 2019	Debit (N’000)	Credit (N’000)
Partners’ capital as at November 1, 2018:
– Wa		60,000
– Zo		60,000
– Bia		50,000
Partners’ drawings:
– Wa	5,000
– Zo	4,000
– Bia	2,000
Gross profit for the year		116,000
Trade receivables	55,000
Trade payables		27,560
Irrecoverable debt	1,000
Utility	8,600
Postage and communication	3,200
Allowances for bad debt at November 1, 2018		6,000
Property, plant and machinery	270,400
Staff cost	18,360
Distribution cost	5,000
Other income		4,000
Finance cost	1,000
5% Loan notes		50,000
Inventory at October 31, 2019	6,000
Accumulated depreciation on freehold properties		16,720
Accumulated amortisation of leasehold property		2,000
Rent and rates	3,360
Cash and cash equivalent	9,360
Total	392,280	392,280

The following information is also relevant for the preparation of the financial statements:

Allowances for doubtful debts should be adjusted to 10% of trade receivables.
Accrued expenses for the period:
- Utility N400,000;
- Postage and communication N200,000.
Prepaid expenses for the period:
- Rent and rates N600,000;
- Staff cost N300,000.
PPE includes a leasehold property of N20,000,000, which is amortised over 10 years. Depreciation charge for the year on freehold PPE has been estimated to be N5,000,000.
Finance cost in the trial balance includes interest paid on 5% loan notes amounting to N500,000.

Required:

a. Prepare the statement of profit or loss for the year ended October 31, 2019. (12 Marks)

b. Prepare the statement of financial position as at October 31, 2019. (8 Marks)

Answer

a. Statement of Profit or Loss for WaZoBia Partnership for the year ended October 31, 2019:

Description	N’000
Gross Profit	116,000
Add: Other Income	4,000
Total Income	120,000
Less: Expenses
Irrecoverable Debt	(1,000)
Utility	(8,600)
Add: Accrued Utility	(400)
Net Utility	(9,000)
Postage and Communication	(3,200)
Add: Accrued Postage and Communication	(200)
Net Postage	(3,400)
Distribution Cost	(5,000)
Staff Cost	(18,360)
Less: Prepaid Staff Cost	300
Net Staff Cost	(18,060)
Rent and Rates	(3,360)
Less: Prepaid Rent and Rates	600
Net Rent and Rates	(2,760)
Depreciation on Freehold PPE	(5,000)
Amortisation of Leasehold PPE	(2,000)
Finance Cost	(1,000)
Interest on Loan Notes	(500)
Total Expenses	(45,080)
Net Profit	74,920

Appropriation of Profits:

Description	N’000
Net Profit	74,920
Commission to Wa	4,000
Commission to Bia	8,000
Salary to Wa	5,000
Salary to Zo	8,000
Interest on Capital (Wa 5%, Zo 5%, Bia 5%)
Wa (5% of 60,000)	3,000
Zo (5% of 60,000)	3,000
Bia (5% of 50,000)	2,500
Interest on Drawings (Wa 5%, Zo 5%, Bia 5%)
Wa (5% of 5,000)	(250)
Zo (5% of 4,000)	(200)
Bia (5% of 2,000)	(100)
Share of Profit (Equally)
Wa	12,777
Zo	12,777
Bia	12,776
Total Appropriation	74,920

b. Statement of Financial Position of WaZoBia Partnership as at October 31, 2019:

Assets	N’000
Non-Current Assets
Freehold Property (net of depreciation)	228,680
Leasehold Property (net of amortisation)	16,000
Total Non-Current Assets	244,680
Current Assets
Inventory	6,000
Trade Receivables	49,500
Prepaid Rent and Rates	600
Prepaid Staff Cost	300
Cash and Cash Equivalent	9,360
Total Current Assets	65,760
Total Assets	310,440

Equity and Liabilities	N’000
Equity
Capital Accounts:
Wa	79,527
Zo	79,577
Bia	71,176
Total Equity	230,280
Non-Current Liabilities
5% Loan Notes	50,000
Current Liabilities
Trade Payables	27,560
Accrued Utility	400
Accrued Postage and Communication	200
Accrued Finance Cost	2,000
Total Current Liabilities	30,160
Total Equity and Liabilities	310,440