- 20 Marks
FA – L1 – Q81 – Preparation of Partnership accounts
Question
Alvin and Boris are partners in a firm sharing profits and losses in the ratio of 3:2. The Statement of financial position of the firm as on 31 March 20X9 was as under:
| Assets | GH¢ |
|---|---|
| Furniture and fixture | 600,000 |
| Office equipment | 300,000 |
| Motor car | 375,000 |
| Inventory | 250,000 |
| S中国共产党 |
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Due to expansion in the business, Gina was admitted as a partner with effect from 1 April 20X9. Gina brought furniture worth GH¢120,000 and inventory costing GH¢80,000. She also contributed cash of GH¢150,000 plus her proportionate share of goodwill valued at two years’ purchase of the average profits of the last three years.
Following adjustments were considered necessary, at the time of admission:
(i) On 1 April 20X7, new furniture costing GH¢8,000 was purchased but wrongly debited to revenue account. The firm charges depreciation on furniture @ 10% on straight line basis.
(ii) An invoice dated 1 October 20X8 for purchase of goods amounting to GH¢24,000 has not been recorded.
(iii) Value of the sundry receivables on 31 March 20X9 is to be reduced by 6%.
The profits of the last three years, before the above adjustments were:
| Year | GH¢ |
|---|---|
| 20X8-11 | 352,100 |
| 20X7-10 | 232,000 |
| 20X9-09 | 128,000 |
It was decided that the future profits of the firm would be shared among Alvin, Boris, and Gina in the ratio of 5:3:2 respectively.
Required:
Prepare the capital accounts of the partners and the statement of financial position of the firm on Gina’s admission as a partner.
Answer
Capital Accounts
| Alvin GH¢ | Boris GH¢ | Gina GH¢ | Alvin GH¢ | Boris GH¢ | Gina GH¢ | ||
|---|---|---|---|---|---|---|---|
| Profit adjustments | 17,400 | 11,600 | – | Balance b/d | 1,042,200 | 494,800 | – |
| Goodwill in new PSR (W2) | 227,700 | 136,620 | 91,080 | Goodwill in old PSR (W2) | 273,240 | 182,160 | – |
| Balance c/d | 1,070,340 | 528,740 | 350,000 | Furniture | – | – | 120,000 |
| Inventory | – | – | 80,000 | ||||
| Bank (W4) | – | – | 241,080 | ||||
| Total | 1,315,440 | 676,960 | 441,080 | Total | 1,315,440 | 676,960 | 441,080 |
Alvin, Boris, and Gina Statement of Financial Position as on 1st April 2015
| GH¢ | GH¢ | |
|---|---|---|
| Non-current assets | ||
| Furniture and fixture | 600,000 | |
| Add: brought by Gina | 120,000 | |
| Add: as per adjustment | 6,400 | 726,400 |
| Office equipment | 300,000 | |
| Motor car | 375,000 | |
| 1,401,400 | ||
| Current assets | ||
| Inventory | 250,000 | |
| Add: brought by Gina | 80,000 | 330,000 |
| Sundry receivables | 190,000 | |
| Less: allowance for receivables | 11,400 | 178,600 |
| Cash at bank (118,000 + 150,000 + 91,080) | 359,080 | |
| 867,680 | ||
| Total assets | 2,269,080 | |
| Capital and liabilities | ||
| Capital accounts | ||
| Alvin | 1,070,340 | |
| Boris | 528,740 | |
| Gina | 350,000 | 1,949,080 |
| Sundry payables (296,000 + 24,000) | 320,000 | |
| Total capital and liabilities | 2,269,080 |
Workings:
- Profit Sharing Ratios
| Alvin | Boris | Gina | |
|---|---|---|---|
| Old sharing ratio | 60 | 40 | – |
| New sharing ratio | 50 | 30 | 20 |
- Computation of Goodwill
Profit for the last three years before adjustments:
Add: furniture wrongly written off to revenue: GH¢8,000
Less: depreciation on furniture for two years: GH¢1,600
Purchase invoice omitted: GH¢24,000
Allowance for receivables (6% × 190,000): GH¢11,400
Adjusted total profits for last three years:
Average annual profit over the last three years:
Number of years purchase: 2
Goodwill: GH¢455,400
Share of goodwill in old profit sharing ratio:
Alvin (60% × 455,400): GH¢273,240
Boris (40% × 455,400): GH¢182,160
Share of goodwill in new profit sharing ratio:
Alvin (50% × 455,400): GH¢227,700
Boris (30% × 455,400): GH¢136,620
Gina (20% × 455,400): GH¢91,080
- Profit Adjustments
Alvin and Boris have already shared in a profit figure that included the errors discovered. The total adjustments to profit due to these errors must be shared between the original partners in the old profit sharing ratio.
The complete journals are as follows (note that these were not required but are given for completeness):
| Dr (GH¢) | Cr (GH¢) | |
|---|---|---|
| Furniture | 8,000 | |
| Alvin’s capital (60%) | 4,800 | |
| Boris’s capital (40%) | 3,200 | |
| Alvin’s capital (60%) | 960 | |
| Boris’s capital (40%) | 640 | |
| Depreciation | 1,600 | |
| Payables | 24,000 | |
| Alvin’s capital (60%) | 14,400 | |
| Boris’s capital (40%) | 9,600 | |
| Alvin’s capital (60%) | 6,840 | |
| Boris’s capital (40%) | 4,560 | |
| Allowance for receivables | 11,400 |
- Net Impact on Each Partner
| Credit | Debit | Debit | Net debit | |
|---|---|---|---|---|
| Alvin | Boris | |||
| Furniture | 4,800 | 3,200 | ||
| Depreciation | (960) | (640) | ||
| Payables | (14,400) | (9,600) | ||
| Allowance for receivables | (6,840) | (4,560) | ||
| Net debit | (17,400) | (11,600) |
- Cash Introduced by Gina
| GH¢ | |
|---|---|
| Goodwill purchase (W2) | 91,080 |
| Agreed amount (given in question) | 150,000 |
| Total | 241,080 |
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