- 20 Marks
FA – L1 – Q77 – Preparation of Partnership accounts
Question
X and Y are partners in a dental practice who share profits and losses in the ratio of 3:2. Their statement of financial position as on June 30, 20X9 is as follows:
| Assets | GH¢ |
|---|---|
| Non-current assets | 2,625,000 |
| Investments | 437,500 |
| Long term receivables | 875,000 |
| Current assets | 1,750,000 |
| Total Assets | 5,687,500 |
| Capital and liabilities | GH¢ |
|---|---|
| Capital account: | |
| X | 1,050,000 |
| Y | 700,000 |
| Total Capital | 1,750,000 |
| Long term loans | 1,750,000 |
| Current liabilities | 2,187,500 |
| Total Capital and Liabilities | 5,687,500 |
They agree to admit Z as a new partner with effect from July 1, 20X9 on the following terms and conditions:
(i) The goodwill of the firm is to be valued at 2 years’ purchase of the average profits of the firm for the last three years GH¢ (This means that the average annual profit over the last three years is to be multiplied by 2). The profits over the last three years are as follows:
- Year ended June 30, 20X7: GH¢675,000
- Year ended June 30, 20X8: GH¢(700,000)
- Year ended June 30, 20X9: GH¢1,000,000
(ii) Goodwill will not appear in the books of the firm.
(iii) Z will bring in cash amounting to GH¢1,460,000 which includes his share of goodwill in the firm.
(iv) Assets of the firm were agreed to be revalued as follows:
- Non-current assets (net of depreciation): GH₵3,100,000
- Long term receivables: GH₵875,000
- Current assets: GH₵1,575,000
Investments will be taken over equally by Smith and Jones at their fair market value of GH₵400,000.
(v) The new profit sharing ratio is to be 7:5:8.
Required:
(a) Prepare the following ledger accounts:
- Revaluation account
- Partners’ capital accounts
(b) Prepare the opening statement of financial position of the new firm as on July 1, 20X9.
Answer
Revaluation account
| Dr | GH₵ | Cr | GH₵ |
|---|---|---|---|
| Investments (437,500 – 400,000) | 37,500 | Non-current assets (3,100,000 – 2,625,000) | 475,000 |
| Profit transferred to: | |||
| Smith (3/5) | 262,500 | ||
| Jones (2/5) | 175,000 | ||
| 475,000 | 475,000 |
Partners’ capital account (GH₵ 000)
| Dr | Smith | Jones | Taylor | Cr | Smith | Jones | Taylor |
|---|---|---|---|---|---|---|---|
| Investment taken over | 200 | 200 | Balance b/d | 1,050 | 700 | ||
| Goodwill written off | 227.5 | 162.5 | 260 | Cash paid by Taylor | 1,460 | ||
| Revaluation | 262.5 | 175 | |||||
| Goodwill: | |||||||
| Smith (3/5) | 390 | ||||||
| Jones (2/5) | 260 | ||||||
| Balance c/d | 1,170 | 702.5 | 1,200 | ||||
| 1,597.5 | 1,065 | 1,460 | 1,597.5 | 1,065 | 1,460 |
(b)
Smith, Jones & Taylor
Statement of financial position as at 1st July 20X9
| Assets | GH₵ |
|---|---|
| Non-current assets | 3,100,000 |
| Long term receivables | 875,000 |
| Current assets (1,575,000 + 1,460,000) | 3,035,000 |
| Total assets | 7,010,000 |
| Liabilities | |
| Capital account: | |
| Smith | 1,170,000 |
| Jones | 702,500 |
| Taylor | 1,200,000 |
| 3,072,500 | |
| Long term loans | 1,750,000 |
| Current liabilities | 2,187,500 |
| Total liabilities | 7,010,000 |
Workings
Goodwill calculation:
- Profits: GH₵675,000 + GH₵(700,000) + GH₵1,000,000 = GH₵975,000
- Average profit per year: GH₵975,000 / 3 = GH₵325,000
- Goodwill of the firm (x2): GH₵325,000 × 2 = GH₵650,000
Goodwill in original profit sharing ratio:
- Share of Smith in firm’s goodwill: 60% (3/5) = GH₵390,000
- Share of Jones in firm’s goodwill: 40% (2/5) = GH₵260,000
Goodwill in new profit sharing ratio:
- Share of Smith in firm’s goodwill: 35% (7/20) = GH₵227,500
- Share of Jones in firm’s goodwill: 25% (5/20) = GH₵162,500
- Share of Taylor in firm’s goodwill: 40% (8/20) = GH₵260,000
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