- 20 Marks
FA – L1 – Q77 – Preparation of Partnership accounts
Prepare partnership accounts for X and Y Dental Practice admitting a new partner, including goodwill valuation and capital adjustments.
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.
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