- 10 Marks
FA – L1 – Q79 – Preparation of Partnership accounts
Question
A summarized statement of financial position of ABC Partnership as on January 31, 20X9 is given below:
| Debit | GH₵ | Credit | GH₵ |
|---|---|---|---|
| Non-current assets | 1,700,000 | Current liabilities | 1,900,000 |
| Current assets | 4,700,000 | James, Capital | 1,000,000 |
| Emma, Capital | 1,500,000 | ||
| Liam, Capital | 2,000,000 | ||
| 6,400,000 | 6,400,000 |
James, Emma, and Liam share profits in the ratio of their capital in the partnership.
On January 31, 20X9, James retired from the partnership. For the purposes of his retirement, goodwill of the partnership was estimated at GH₵1.89 million. It was agreed that James would take cash from the business equal to the value of his closing capital after the goodwill adjustment.
On February 1, 20X9, Sophia was admitted to the partnership. The new profit sharing ratio was agreed at 3:4:2 for Emma, Liam, and Sophia respectively. Sophia agreed to bring in cash equivalent to her share of assets (excluding goodwill) in the new partnership plus an additional amount of GH₵0.5 million for goodwill.
Required:
Prepare journal entries to record the above transactions under the following assumption:
(a) Goodwill is not recorded in the books of account.
(b) Goodwill is recorded in the books of account.
Answer
(a)
Journal Entries when Goodwill is not recorded in the books:
Retirement of James:
Journal 1: Recognise goodwill in old profit sharing ratio (W1)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Goodwill | 1,890,000 | |
| James’s capital account (2/9) | 420,000 | |
| Emma’s capital account (3/9) | 630,000 | |
| Liam’s capital account (4/9) | 840,000 |
Journal 2: Remove goodwill in new profit sharing ratio (W1)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Emma’s capital account (3/7) | 810,000 | |
| Liam’s capital account (4/7) | 1,080,000 | |
| Goodwill account | 1,890,000 |
Alternative to Journals 1 and 2
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Emma’s capital account | 180,000 | |
| Liam’s capital account | 240,000 | |
| James’s capital account | 420,000 |
Journal 3: Withdrawal of James’s interest in the partnership (W2)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| James’s capital account | 1,420,000 | |
| Current assets (cash/bank) | 1,420,000 |
Admission of Sophia:
Journal 4: Recognise goodwill in old profit sharing ratio (W1)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Goodwill (W3) | 2,250,000 | |
| Emma’s capital account (3/7) | 964,286 | |
| Liam’s capital account (4/7) | 1,285,714 |
Journal 5: Remove goodwill in new profit sharing ratio (W1)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Emma’s capital account (3/9) | 750,000 | |
| Liam’s capital account (4/9) | 1,000,000 | |
| Sophia’s capital account (2/9) | 500,000 | |
| Goodwill account | 2,250,000 |
Alternative to Journals 4 and 5
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Sophia’s capital account | 500,000 | |
| Emma’s capital account | 214,286 | |
| Liam’s capital account | 285,714 |
Journal 6: Payment of cash into the partnership by Sophia
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Cash (W4) | 1,380,000 | |
| Sophia’s capital account | 1,380,000 |
(b)
Journal Entries when Goodwill is recorded in the books:
Retirement of James:
Journal 1: Recognise goodwill in old profit sharing ratio (W1)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Goodwill | 1,890,000 | |
| James’s capital account (2/9) | 420,000 | |
| Emma’s capital account (3/9) | 630,000 | |
| Liam’s capital account (4/9) | 840,000 |
Journal 2: Withdrawal of James’s interest in the partnership (W2)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| James’s capital account | 1,420,000 | |
| Current assets (cash/bank) | 1,420,000 |
Admission of Sophia:
Journal 3: Recognise additional goodwill (W3) in old profit sharing ratio (W1)
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Goodwill | 360,000 | |
| Emma’s capital account (3/7) | 154,286 | |
| Liam’s capital account (4/7) | 205,714 |
Journal 4: Payment of cash into the partnership by Sophia
| Account | Dr (GH₵) | Cr (GH₵) |
|---|---|---|
| Cash (W4) | 1,380,000 | |
| Sophia’s capital account | 1,380,000 |
- Uploader: Samuel Duah