- 20 Marks
Question
a) Mensah and Asamoah have been in partnership for several years. Up to 30th September 2015, the partnership agreement stated that there should be no partners’ salaries and partners should not receive any interest on capital put into the business. It was agreed that profit and losses were shared equally between Mensah and Asamoah.
Asamoah made a loan to the partnership during the year ended 31st May 2015 and no repayments have been made.
From 1st October 2015, the partners decided to change the partnership agreement and the terms were as follows:
i) Interest on the partner’s loan account is to be 4% per annum.
ii) Interest on partners’ capital accounts is to be 6% per annum.
iii) Interest on partners’ total drawings is to be charged at 3% per annum. (For the period 1st October 2015 to 31st May 2016, interest on drawings were: Mensah GHȼ542; Asamoah GHȼ422).
iv) Mensah’s partnership salary is to be GHȼ13,200 per annum.
v) Profits and losses will be split between Mensah and Asamoah in the proportion 3:1 respectively.
vi) No account has been taken of the interest on Asamoah’s loan. The draft profit for the year ended 31st May 2016 was GHȼ38,760. Profits were accrued evenly before allowing for loan interest.
vii) The following balances were extracted from the books of account for the year ended 31st May 2016.
| Mensah (GHȼ) | Asamoah (GHȼ) | |
|---|---|---|
| Capital accounts | 94,200 | 74,300 |
| Drawings for the year | 27,100 | 21,100 |
| Current accounts at 1st June 2015 | 10,520 | (8,276) |
| Partner’s loan account | 10,800 |
Required: Prepare the partners’ appropriation account for the year ended 31st May 2016, showing clearly the appropriation of profit for the periods: i) 1st June 2015 – 30th September 2015 and ii) 1st October 2015 – 31st May 2016. (11 marks)
b) For each of the following statements, identify the accounting concept involved and briefly explain the correct accounting treatment in each case. i) A business has good industrial relations and wishes to record this in the accounts at a value of GHȼ10,000. (3 marks) ii) A business has bought two door mats costing GHȼ2 each. These are expected to last many years and have been recorded under non-current assets. (3 marks) iii) Goods to the value of GHȼ3,000 were dispatched to a customer in the final month of the financial year. The invoice for these goods has been issued but no cash has been received from the customer. No entry has been made in the accounts at the financial year end. (3 marks)
Answer
a) Calculation of adjusted profit:
| 4 months ended 30 September 2015 (GHȼ) | 8 months ended 31 May 2016 (GHȼ) | |
|---|---|---|
| Profit for the year (net profit) | 12,920 W1 | 25,840 |
| Less: Interest on loan | 144 W2 | 288 W3 |
| Adjusted profit for the year | 12,766 | 25,552 |
Mensah and Asamoah Appropriation account for the year ended 31 May 2015:
| 4 months ended 30 September 2015 (GHȼ) | 8 months ended 31 May 2016 (GHȼ) | |
|---|---|---|
| Adjusted profit for the year | 12,776 | 25,552 |
| Add: Interest on drawings | Mensah: 542;
Asamoah: 422 |
|
| 12,776 | 26,516 | |
| Interest on capital | Mensah: (3,768) W4 | |
| Asamoah: (2,972) W4 | ||
| Less: Salary (Mensah) | (8,800) W5 | |
| Remaining profit | 12,776 | 10,976 |
| Profit split | Mensah: 6,388 W6 | 8,232 W7 |
| Asamoah: 6,388 W6 | 2,744 W7 |
Workings:
W1: Net profit:
GHȼ38,760 x 4/12 = GHȼ12,920
GHȼ38,760 x 8/12 = GHȼ25,840
W2: Interest on loan:
GHȼ10,800 x 4% x 4/12 = 144
W3: Interest on loan:
GHȼ10,800 x 4% x 8/12 = 288
W4: Interest on capital:
Mensah: GHȼ94,200 x 6% x 8/12 = GHȼ3,768
Asamoah: GHȼ74,300 x 6% x 8/12 = GHȼ2,972
W5: Partner Salary:
GHȼ13,200 x 2/3 = GHȼ8,800
W6: Split profit:
GHȼ12,776/2 = GHȼ6,388
W7: Split profit:
Mensah: GHȼ10,976 x 75% = GHȼ8,232
Asamoah: GHȼ10,976 x 25% = GHȼ2,744
(11 marks)
b) i) Monetary measurement concept. This convention states that the accountant only records those facts that are expressed in money terms. Any facts, however relevant they may be to the user of the information, are ignored by the accountant if they cannot conveniently be expressed in money terms. Since it is difficult to express in monetary terms good industrial relations, the value of GHȼ10,000 should not be recorded in the accounts of the business. (3 marks)
ii) Materiality concept. This concept implies that insignificant items should not be given the same emphasis as significant items. The insignificant items are, by definition, unlikely to influence decisions or provide useful information to decision-makers, but they may well cause complication and confusion to the user of accounts. The convention can be applied to the classification of items as ‘revenue expenditure’ rather than ‘capital expenditure’. For example, the purchase of the door mats is strictly capital expenditure as they will be used over several years (and therefore they should be depreciated over their estimated useful life). However, their value is very small and therefore it is justifiable to treat them as revenue expenditure and include them in the income statement in the period in which they were bought. (3 marks)
iii) Realisation concept. This convention states that we recognise sales revenue as having been earned at the time when goods or services have been supplied and a sales invoice issued. Sales revenue is not realised when a customer places an order, as at that stage it is too early to say whether an eventual sale will be made. On the other hand, we should not wait until the cash is received from a customer before recognising that a sale has been made. Since the goods have been sent to the customer and an invoice has been issued, sales revenue and a receivable of GHȼ3,000 should be recognised in the financial statements. (3 marks)
- Tags: Accounting Concepts, Appropriation Account, Partnership, Profit Sharing
- Level: Level 1
- Uploader: Theophilus