accounting for partnerships 2

PARTNERSHIP ACCOUNTSPartnership is relationship that exists between two or more people carrying out the business with view of making profits.

Partnership Deed/AgreementIs a written document which specifies terms and conditions to be followed in partnership.

Contents of the Partnership Deeda) Name of the business/firmb) Nature of business – kind of business c) Amount of capital to be contributed by each partnerd) Profit or loss sharing ratioe) Amount drawings by each partnerf) Amount of salary to be paid to the Partnersg) Interest on capitalh) Commencement and duration of partnershipi) Interest on loansj) Valuation of Goodwill

In the absence of Partnership agreement the following terms may apply:a) Partners should contribute equal amount of capitalb) Profit or loss should be shared equally c) No Drawings is allowed in the partnershipd) No new partner is to be admitted in the partnership without consent of all partnerse) 5% is allowed as a rate of interest for Loans made to the partnershipf) No salary will be paid to a partner even the employed one

ADMISSION OF A NEW PARTNERFactors which influence admission of a new partner are:

a) To replace a position of a partner who is about to retireb) To take a place a partner who diedc) Need to expand a business – a new partner to contribute capital, talent, skills to the

partnership.

Before a new partner is admitted factors to be considered by existing partnership:a) Net Assets must be revalued and the net surplus or deficit must be apportioned between the

partnersb) Valuation of Goodwillc) Change in the Profit sharing ratio

What is goodwill? Reputation of a businessBenefits advantages, business connections enjoyed by a business Benefits can be locations, customersIf you are capable of supplying goods at right quality, quantity, time to the customers; this will increase Goodwill. Goodwill is a capability of a business to raise it reputation. Any of the following factors may raise goodwill of a business

Monopoly PowerGoodwill performance of a business quality and quantity of goods/services offered by a business to the customer

Location of business

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Patent right, trade mark, copy rights of the firm Reputation of the owners of the firm

Monopoly power means there is a single supplier of a goods, people have to buy your goods/services as there is only one supplierGood performance will result in rising up your profitsPatent rights is intellectual asset you discover – a unique way of service or produce goods e.g. cocacolaTrade mark is a symbol of a business which differentiate a business with another firm. It can be easy for customers to differentiate

How to Value GoodwillAverage profit approachSuper profit approachCapitalization approach

Average profit approachIn this method, the average of the last few years profit is computed multiplied by a specified number of years.

Example: Profits of A&B partnership in the last three years were as follows:

Year Profit

2006 15,000

2008 20,000

2009 25,000

Required: To calculate the amount of Goodwill on the basis of 2 years purchase of average profits of the last three years.

Average profit = (15,000+20,000+25,000)/3 = 20,000

Goodwill = Average Profit X Number of years

Goodwill = 20,000 X 2 = 40,000

Super Profit ApproachIn this method expected profits is computed in percentages of return to the capital employed. Capital employed = Fixed Assets (NCA) + Working CapitalWhere Working capital = Current Assets – Current LiabilitiesIn this method, the rate of expected return is computed on the agreed asset figure i.e. capital employed.The excess of the actual profit over expected return is considered to be super profit. The super profit is then capitalized at the specific risk rate and the resultant figure is the value of goodwill e.g. Actual Profit xxx Less: Expected Profit xxx Super Profit xxx Capitalized profits

The profit of AB&C partnership for the last 5 years average is 60,000/= per annum. Net Capital employed is 180,000/=. The expected rate of return is estimated at 15%. The risk factor is 5%. Required: calculate the value of Goodwill

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Expected returns/profit = 180,000 x 15% = 27,000/=

Super Profit Actual Profit = 60,000/= Less: Expected = 27,000/=Super Profit = 33,000/=

Expected returns/profit + Risk factors = 15% + 5% = 20%Goodwill

= (33,000 X 100)/20

= 165,000/=

Capitalization ApproachGoodwill = Net Assets – Value of Business

Value of Business = Actual Profit x 100 / Normal Profit

Suppose a firm earns a net profit of 50,000/= annually and normal rate of return is 10%. Calculate the value of the firm. If the net tangible Assets of the business amount to 600,000/=. Calculate the amount of Goodwill.

Value of Business = 50,000 ÷ 10% = 500,000 Goodwill = Net Assets - Value of Business

= 600,000 – 500,000= 100,000/=

Treatment of Goodwill in the Books of Accounts A Goodwill can be received in cash by Old Partners from the New Partners directly without being recorded in the books of accounts. But this is not a good method.

A Goodwill received in cash should be recorded in the books of Accounts.

DR. Cash A/C xxxxxx with the amount receivedCR. Goodwill A/C’s xxxxxx Cash brought by New Partiners

DR. Goodwill A/C xxxxxx with the amount receivedCR. Old Partner’s Capitals xxxxxx using old PSR

ACCOUNTING FOR PARTNERSHIPSThe use of the Appropriation account in:

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Computing and the division of the profit and loss among PartnersThe use of Partners’ Account and Current Accounts The formats for Profit & Loss Accounts and Balance Sheets

Example: Andrew, Gurnery and Martin are in partnership as camping equipment retailers. Their trial balance as at 31/12/2003 was:

DR CRFixed Assets at cost 24,300 Depreciation Provision at 31/12/2002 4,750 Stock at 31/12/2002 16,720 Sales 112,220 Debtors 1,340 Capital: Overheads 7,105 Andrew 12,020 Purchases 78,626 Guy 7,001 Drawings: Martin 1,000 Andrew 4,800 Creditors 9,820 Gurnery 7,100 Martin 5,600 Bank 1,220 Total 146,811 Total 146,811

Notes:a) Stock at 31st Dec 2003 was valued at 22,300b) Depreciation is at 20% a year on the reducing balance. c) The Partnership agreement provides that profits be shared:

Interest on capital 15% Salaries: Guy 3,000, Martin 2,000 Balance: 5:4:3

Required: Prepare trading and profit and loss and appropriation accounts for the year ending 31/12/2003.

The answerThe first stage is to prepare the Trading, Profit and Loss Account as with the accounts of a Sole TraderWith a sole trader all the profits belong to the sole trader, but in a partnership the profit is shared among the partners. An additional account is required to show the appropriation of the profits among the partners. The Profits is shared in accordance with the agreement

Andrew, Gurnery and MartinTrading and Profit and Loss Account for the year ending 31st December 2003

Sales 112,220 Less: Cost of Sales:

Opening Stock 16,720 Purchases 78,626 Available for Sales 95,346 Closing Stock 22,300 73,046

Gross Profit 39,174 Overhead 7,106 Depreciation 3,910 11,016 Net Profit 28,158

Appropriation AccountAndrew Gurnery Martin Total

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Interest on Capital 1,803 1,050 150 3,003 Salaries - 3,000 2,000 5,000 Balance 8,398 6,719 5,039 20,156

10,201 10,769 7,189 28,159

In the above example the partnership had made a profit and the profit was apportioned in unique way as per agreement.Suppose the firm had made a profit of only Tshs. 7,000/=. How would this profit be apportioned?

There are at least two possibilities:

Option 1.Andrew Gurnery Martin Total

Interest on Capital 1,803 1,050 150 3,003 Salaries - 3,000 2,000 5,000 Balance (418) (334) (251) (1,003)

1,385 3,716 1,899 7,000

Option 2. Andrew Gurnery Martin Total

Interest on Capital 1,803 1,050 150 3,003 Salaries - 2,398 1,599 3,997

1,803 3,448 1,749 7,000

In Option 2 Salaries has been reduced to absorb the remainder of the profits.

Another alternative is to give priority to salaries over interest on capital. Whichever is correct depends on a legal interpretation of the partnership agreement. To avoid such ambiguity the agreement had to cover all sizes of profits and losses

PROFIT SHARING IN THE ABSENCE OF AN AGREEMENT

If the partners had no agreement or the agreement does not stipulate how the profits will be shared: a) They could come into agreement in arrearsb) They could use the Partnership Act 1890, Section 24:

i. 5% interest on loans to the Partnership by Partnersii. No interest is to be allowed on capital

iii. Balance of profit to be shared equally

Capital and Current AccountsSome partnerships have capital and current accounts. Some have only Capital Accounts.

Capital Accounts where there are also Current AccountsAt the formation of a new Partnership, the Partners may agree to put into the partnership from their private resources, cash and/or other assets to an agreed value. The amount of such resources put in by a partner is his capital. Usually the partners agree that no partner will withdrawal resources from the partnership in such a way that the capital is reduced. A partner’s capital account will only change by agreement or on the occurrence of events such as a change in the profit sharing ratio or on the death or retirement of a partner or the admission of a new partner.

Current Accounts

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If a profit is made a partnership, it means that the net assets of the partnership have increased by the amount of the profit. Each partner’s share of the profit is credited to his current account. The balance standing to the credit of a partner’s current account represents the maximum amount that the partner can withdraw from the partnership assets. Thus a partner can only make drawings up to the amount of his accumulated share of profits. The current account represents undrawn profits.

Capital Accounts without Current AccountsMany partnerships simply have capital accounts without partners’ current accounts. In these cases, the capital account represents a mixture of capital subscribed and undrawn profits. There is therefore no maximum put on partners’ drawings by the division between capital and current accounts and restriction of another sort has to be agreed upon. (Perhaps a weekly amount and an annual drawing when profits have been calculated). In the question in example No 1, the partners’ capital account would appear thus:

Andrew, Guy and Martin PartnershipCapital Account as at 31st December 2003

Andrew Gurnery Martin Andrew Gurnery MartinDrawings 31/12/2003

4,800

7,100

5,600

Balance 31/12/2002 12,020 7,001 1,000

Balance 31/12/2003

17,421

10,670

2,589

Profit 31/12/2003 10,201 10,769 7,189

22,221

17,770

8,189 22,221 17,770 8,189

Formats The format for Trading and Profit and Loss account are the same as for sole trader. Additional features for partnership is the Appropriation Account and a suitable format is as follows:

Appropriation Account

Andrew Gurnery Martin TotalInterest on Capital 1,803 1,050 150 3,003 Salaries - 3,000 2,000 5,000 Balance 8,398 6,719 5,039 20,156

10,201 10,769 7,189 28,159

An alternative format is as follows:Appropriation Account

Interest Salary Balance TotalAndrew 1,803 - 8,398 10,201 Gurnery 1,050 3,000 6,719 10,769 Martin 150 2,000 5,039 7,189 3,003 5,000 20,156 28,159

Other formats are possible but any format should show the total share of profits given to each partner.

The Balance Sheet formats Same as for Sole Trader The difference is that instead of a single capital account for sole trader there are several accounts and perhaps current accounts, one for each partner. In simple cases the full accounts can be given, showing separately, opening balances, share of profit, drawings, closing balances.

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In more complex cases, the detail is usually put in a separate schedule and only the final balances put on the Balance Sheet.

An Example Kate and Brennan are in partnership as tree surgeons sharing profits 3:2. Their trial balance after computing profits at 31.12.2004 showed:

DR CR Fixed Assets 20,000 Creditors 6,280 Debtors/Creditors 15,400 Capital: Katie 10,000 Cash at Bank 1,100 Brennan 7,000 Stock 8,400 Current A/C 31/12/03 – Katie Brennan 3,100 Current A/C 31/12/03 - Katie 180 Loan at 15% Brennan 10,000 Drawings: Katie 4,600 Profit 2004 10,200 Brennan 5,200 Depreciation 8,300 54,880 54,880 Note:During 2004, each partner had subscribed an additional shs.3,000/=

Required:Draw up a balance sheet at 31st Dec 2004

Kate and BrennanSchedule of Capital and Current Accounts year ended 31st December 2004

Katie Brennan TotalCapital AccountsAs at 31.12.2003 7,000 4,000 11,000 Additions in 2004 3,000 3,000 6,000 As at 31.12.2004 10,000 7,000 17,000 Current AccountsAs at 31.12.2003 (180) 3,100 2,920 Profit Share 2004 6,120 4,080 10,200

5,940 7,180 13,120 Drawings 4,600 5,200 9,800

1,340 1,980 3,320

Total Interest in the net Assets of the Partnership as at 31/12/2004 11,340 8,980 20,320

Balance Sheet as at 31/12/2004 Fixed Asset at Cost 20,000

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Less: Depreciation 8,300 11,700

Current AssetsStock 8,400 Debtors 15,400 Cash at Bank 1,100

24,900 Current LiabilitiesCreditors 6,280 18,620

30,320

Partners' Interest as schedule 20,320 Long Term LiabilityLoan at 15% 10,000

30,320

Andrew, Guy and Martin PartnershipBalance Sheet as at 31st December 2003

Fixed Asset at Cost 24,300 Less: Depreciation 8,660

15,640 Current AssetsStock 22,300 Debtors 1,340 Cash at Bank 1,220


30,680

Andrew Guy Martin TotalCapital AccountsAs at 31.12.2003 12,020 7,001 1,000 20,021 Net Profit 10,201 10,769 7,189 28,159

22,221 17,770 8,189 48,180 Drawings 4,800 7,100 5,600 17,500

17,421 10,670 2,589 30,680

EXAMPLE 1: A and B are carrying business in partnership sharing profits and loss in the ratio of 3:2 respectively. Accounting period of the firm of the firm usually ends 31/12. C was admitted to the firm on 01/10/2006. The partnership agreement before Cs admission provided that 5% p.a. interest be charged on opening balances of Partner’s account and each partner was to receive a monthly salary of shs. 3,000/=. This condition did not change at the time of C’s admission the new profit sharing ration became 2:2:1 for A, B, C respectively.

The Trial Balance extracted as at 31/12/2006:

DR CR

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Fixed Assets 2,500,000 Debtors/Creditors 800,000 250,000 Sales 6,000,000 Cost of Sales 3,500,000 Selling expenses 300,000 Admin Expenses 200,000 Drawings: A: 50,000 B: 150,000 C: 25,000 Capital Account A: 750,000 B: 1,000,000 C: 1,250,000 Stock 200,000 Cash 300,000 Goodwill 1,225,000 9,250,000 9,250,000

REQUIRED

a) Trading and Profit and Loss for the Partnership for the year ended 31/12/2006.b) Profit and Loss Appropriation account for the year ended 31/12/206c) The Balance Sheet as at that date.

A, B and C PartnershipTrading and Profit and Loss for the Partnership for the year ended 31/12/2006

9 Month 3 Month Total 9 Month 3 Month Total

Sales 6,000,0

00

Less: Cost of Sales

3,500,000

Gross Profit 2,500,0

00

Selling Expenses 225,0

00 75,00

0 300,000 Gross Profit 1,875,0

00 625,00

0 2,500,0

00

Admin Expenses 150,0

00 50,00

0 200,000

Net Profits 1,500,0

00 500,00

0 2,000,000

1,875,0

00 625,00

0 2,500,000

Profit and Loss Appropriation Account for the year ended 31/12/2006

Interest on Capital Net Profits 1,500,0

00 500,00

0 2,000,0

00

9

A 28,12

5 9,37

5 37,500

B 37,50

0 12,50

0 50,000

C - 15,62

5 15,625

Salaries

A 27,00

0 9,00

0 36,000

B 27,00

0 9,00

0 36,000

C - 9,00

0 9,000

Share of Profits

A 828,2

25 174,20

0 1,002,425

B 552,1

50 174,20

0 726,350

C - 87,10

0 87,100

1,380,3

75 435,50

0 1815875

1,500,0

00 500,00

0 2,000,000 1,500,0

00 500,00

0 2,000,0

00

A, B and C PartnershipCapital Account

DR CR A B C A B C

Drawings 50,000 150,000 - Balance b/forward 750,000 1,000,000 -

Cash

Appropriation Interest 28,125 37,500 -

Appropriation Salaries 27,000 27,000 -

Balance before Admission 1,583,350 1,466,650 -

Appropriation Profits 828,225 552,150 -

1,633,350 1,616,650 1,633,350 1,616,650 -

Drawings - - 25,000 Balance before Admission 1,583,350 1,466,650 -

Cash 1,250,000

Appropriation Interest 9,375 12,500 15,625

Appropriation Salaries 9,000 9,000 9,000

Balance Carried down 1,775,925 1,662,350 1,336,725

Appropriation Profits 174,200 174,200 87,100

1,775,925 1,662,350 1,361,725 1,775,925 1,662,350 1,361,725

A, B and C PartnershipBalance Sheet as at 31st December 2007

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Fixed AssetsFixed Assets 2,500,000Goodwill 1,225,000Current Assets:Stocks 200,000Debtors 800,000Cash 300,000

1,300,000Less: Current Liabilities 250,000 1,050,000

4,775,000

FINANCED BY:Capital: A: 1,775,000

B: 1,662,350C: 1,336,725

4,775,000

Example 2:

W and X are carrying business in partnership sharing profit and loss in the ratio 3:2. But during the year ended 31/12/2005, other members were admitted Y and Z on July 1st and September 30th 2005 respectively. Net Sales during the year amounted to shs. 500,000/=; selling and distribution expenses shs. 50,000/= and administration expenses amounted to shs. 24,000/=. The following is the breakdown of the trend of sales during the year.

January 1st to March 31, 2005 125,000April 1st to June 30, 2005 187,500July 1st to September 30, 2005 62,500October 1st to December 31, 2005 125,000

The firm usually fixes the Gross profit at 25% above cost. The Profit and Loss sharing ratio were:

W: X: Y: 2: 2: 1W: X: Y: Z 4: 3: 2: 1

Required:

Prepare Profit and Loss Appropriation account for the year ended 31/12/205

Let Cost of Sales be x.Cost + 25% Cost = SalesX + 25% X = = 500,0004X +X = 2,000,000X = 400,000Gross Profit = 100,000

PERIOD SALES GROSS PROFIT SELL EXPENSE ADM EXPENSES NET

PROFIT Jan - March 125,000 25,000 12,500 6,000 6,500 April - June 187,500 37,500 18,750 6,000 12,750 July - Sept 62,500 12,500 6,250 6,000 250

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Oct - Dec 125,000 25,000 12,500 6,000 6,500 500,000 100,000 50,000 24,000 26,000

PROFIT AND LOSS APPROPRIATION ACCOUNT

JAN-JUNE

JULY - SEP

OCT-DEC

JAN-JUNE

JULY - SEP

OCT-DEC

Share of Profit

Net Profit 19,250 250 6,500

W(3) 11,550 X(2) 7,700 W(2) 100 X(2) 100 Y(1) 50 W(4) 2,600 X(3) 1,950 Y(2) 1,300 Z(1) 650

19,250 250 6,500 19,250 250 6,500

PERIOD W X Y Z Total Jan - June 11,550 7,700 - - 19,250 July - Sept 100 100 50 - 250 Oct - Dec 2,600 1,950 1,300 650 6,500

14,250 9,750 1,350 650 26,000

INTEREST ON DRAWINGS

Assume that a fixed amount of shs.10,000/= was drawn by a partner very month. Compute interest on drawings when drawing was made:

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a) At the beginning b) At the and of each month From 1st January to 31st DecemberThe interest rate is 10%.

(a) Beginning of month (b) End of Month January 10000x10%x12`month 12 month 10000x10%x11`month 11 monthFebruary 10000x10%x11`month 10000x10%x10`month March 10000x10%x10`month 10000x10%x9`month April 10000x10%x9`month 10000x10%x8`month May 10000x10%x8`month 10000x10%x7`month June 10000x10%x7`month 10000x10%x6`month July 10000x10%x6`month 10000x10%x5`month August 10000x10%x5`month 10000x10%x4`month September 10000x10%x4`month 10000x10%x3`month October 10000x10%x3`month 10000x10%x2`month November 10000x10%x2`month 10000x10%x1`month December 10000x10%x1`month 1 month 10000x10%x0`month 0 month

Guarantee of Profit by Partners

If a partner newly admitted is guaranteed a minimum share of profit for year and after division of the profit for the particular year, a partner gets less than the minimum guaranteed share, then the difference has to be born by the guaranteeing partners in their profit sharing ratio.

Example A and B are carrying on business in partnership since 2003 and their profit sharing ratio is 3:2. on January 1st 2006 C was admitted to the partnership and the new profit sharing ratio was agreed to be 2:2:1 for A, B, and C respectively. At the time of admission B guaranteed C a minimum share of profit of shs.72,000/= per annum. However the profit during the year ending December 31st 2006 amounted to shs.240,000/=.

Required:To prepare the statement of Profit and Loss Appropriation

A B C TotalProfit as per Sharing Ratio 96,000 96,000 48,000 240,000 (24,000) 24,000 Guaranteed Profit for C 96,000 72,000 72,000

Therefore, according to the profit sharing ratio A,B, and C will get shs,96,000/=; shs,96,000/= and shs,48,000/= respectively. But because B had guaranteed C to get shs.72,000/= then difference has to come out of B’s share of profit.

X and Y has been practicing as Lawyers and sharing profit and Losses in the ratio of 1:1. In 2004 Z was admitted into the firm commencing on 1st July 2004 taking half of Y’s share of profits in the business. In addition to that, X, and Y guaranteed Z a minimum share of profit of shs.180,000/= out of the partnership every year. The profits for the year ended 31st December 2004 amounted to shs.576,000/. The accounting year for the firm ends 31st December.

Required:To prepare the statement of Profit and Loss Appropriation

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Profit and Loss Appropriation X Y Z Total

Jan - June 144,000 144,000 - 288,000 July - Dec 144,000 72,000 72,000 288,000 (12,000) (6,000) 18,000 276,000 210,000 90,000

Guarantee for six month is shs.90,000/=The difference has be borne by partners X and Y in their profit sharing ratio 2:1

Capital and Current AccountsSome partnerships have capital and current accounts. Some have only Capital Accounts.

Capital Accounts where there are also Current AccountsAt the formation of a new Partnership, the Partners may agree to put into the partnership from their private resources, cash and/or other assets to an agreed value. The amount of such resources put in by a partner is his capital. Usually the partners agree that no partner will withdrawal resources from the partnership in such a way that the capital is reduced. A partner’s capital account will only change by agreement or on the occurrence of events such as a change in the profit sharing ratio or on the death or retirement of a partner or the admission of a new partner.

Current AccountsIf a profit is made a partnership, it means that the net assets of the partnership have increased by the amount of the profit. Each partner’s share of the profit is credited to his current account. The balance standing to the credit of a partner’s current account represents the maximum amount that the partner can withdraw from the partnership assets. Thus a partner can only make drawings up to the amount of his accumulated share of profits. The current account represents undrawn profits.

Capital Accounts without Current AccountsMany partnerships simply have capital accounts without partners’ current accounts. In these cases, the capital account represents a mixture of capital subscribed and undrawn profits. There is therefore no maximum put on partners’ drawings by the division between capital and current accounts and restriction of another sort has to be agreed upon. (Perhaps a weekly amount and an annual drawing when profits have been calculated). In the question in example No 1, the partners’ capital account would appear thus:

Andrew Guy Martin Andrew Guy Martin

Drawings 31/12/2003 4,8

00 7,

100 5,

600 Balance 31/12/2002 12,0

20 7,0

01 1,0

00

Balance 31/12/2003 17,4

21 10,

670 2,

589 Profit 31/12/2003 10,2

01 10,7

69 7,1

89

22,2

21 17,

770 8,

189 22,2

21 17,7

70 8,1

89

Formats The format for Trading and Profit and Loss account are the same as for sole trader. Additional features for partnership is the Appropriation Account and a suitable format is as follows:


Andrew Guy Martin Total

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Interest on Capital 1,803 1,050 150 3,003 Salaries - 3,000 2,000 5,000 Balance 8,398 6,719 5,039 20,156

10,201 10,769 7,189 28,159

An alternative format is as follows:


Interest Salary Balance TotalAndrew 1,803 - 8,398 10,201 Guy 1,050 3,000 6,719 10,769 Martin 150 2,000 5,039 7,189 3,003 5,000 20,156 28,159

Other formats are possible but any format should show the total share of profits given to each partner.

The Balance Sheet formats Same as for Sole Trader The difference is that instead of a single capital account for sole trader there are several accounts and perhaps current accounts, one for each partner. In simple cases the full accounts can be given, showing separately, opening balances, share of profit, drawings, closing balances. In more complex cases, the detail is usually put in a separate schedule and only the final balances put on the Balance Sheet.

An Example Kate and Brennan are in partnership as tree surgeons sharing profits 3:2. Their trial balance after computing profits at 31.12.2004 showed:

DR CR Fixed Assets 20,000 Creditors 6,280 Debtors/Creditors 15,400 Capital: Katie 10,000 Cash at Bank 1,100 Brennan 7,000 Stock 8,400 Current A/C 31/12/03 - Katie Brennan 3,100 Current A/C 31/12/03 - Katie 180 Loan at 15% Brennan 10,000 Drawings: Katie 4,600 Profit 2004 10,200 Brennan 5,200 Depreciation 8,300 54,880 54,880

Note:During 2004, each partner had subscribed an additional shs.3,000/=

Required:Draw up a balance sheet at 31st Dec 2004

Kate and BrennanSchedule of Capital and Current Accounts year ended 31st December 2004

Katie Brennan TotalCapital AccountsAs at 31.12.2003 7,000 4,000 11,000 Additions in 2004 3,000 3,000 6,000 As at 31.12.2004 10,000 7,000 17,000

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Current AccountsAs at 31.12.2003 (180) 3,100 2,920 Profit Share 2004 6,120 4,080 10,200

5,940 7,180 13,120 Drawings 4,600 5,200 9,800

1,340 1,980 3,320

Total Interest in the net Assets of the Partnership as at 31/12/2004 11,340 8,980 20,320

Balance Sheet as at 31/12/2004 Fixed Asset at Cost 20,000 Less: Depreciation 8,300



30,320

Partners' Interest as schedule 20,320 Long Term LiabilityLoan at 15% 10,000

30,320

Andrew, Guy and Martin PartnershipBalance Sheet as at 31st December 2003

Fixed Asset at Cost 24,300 Less: Depreciation 8,660



30,680

Andrew Guy Martin TotalCapital AccountsAs at 31.12.2003 12,020 7,001 1,000 20,021 Net Profit 10,201 10,769 7,189 28,159

22,221 17,770 8,189 48,180 Drawings 4,800 7,100 5,600 17,500

17,421 10,670 2,589 30,680

EXAMPLE:

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Sele, Idrisa and Tango are partners in woodland, boards, business sharing profits in the ratio 5:3: 2 respectively. Their capital and Current accounts balances on 1st January 1992 were:

Capital Account Current Account

Sele 24,000 2,000 Idrisa 8,000 (1,000)Tango 13,000 1,500

Interest at 10% p.a. is given on the fixed capitals, salaries of shs.8,000/= p.a. are credited to Idrisa and Tango. Expansion of the business was hindered by lack of Working Capital, so Sele made a personal loan of Tshs.20,000/= to the partnership on 1st July 1992. The loan was to be repaid in full on 30th June 1995 and loan interest at the rate of 15% p.a. is to be credited to Sele’s account every half year. The partnership profits before charging loan interest for the year ended 31/12/1992 was Tshs.63,000/= and the partnership had made drawings of Sele Tshs.16,000/=, Idrisa Tshs.16,500/=, Tango Tshs.19,000/= during the year.

REQUIRED:Prepare the P&L appropriation account, the partners capital and Current account and the Partnership Balance Sheet in respect of the year ended 31/12/1992.

SOLUTION:

PARTNERSHIP PROFIT AND LOSS APPROPRIATION ACCOUNT

Profit before Interest 63,000 Less: Loan Interest 20000x15%x 0.5 1,500 Net Profit (Adjusted) 61,500

Salaries:Idrisa 8,000 Tango 8,000 16,000

Interest on CapitalSele 24000x10% 2,400 Idrisa 18000x10% 1,800 Tango 13000x10% 1,300 5,500 21,500

40,000 Profit Sharing

Sele 40000x5/10 20,000 Idrisa 40000x3/10 12,000

40000x2/10 8,000 40,000 -

PARTNERS’ CAPITAL ACCOUNTS

DR CR SELE IDRISA TANGO SELE IDRISA TANGO

Balance b/f 24,000 18,000 13,000

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PARTINERS CURRENT ACCOUNT

DR CR

SELE IDRISA TANGO SELE IDRISA TANGO

Balance B/F - 1,000 - Balance b/f 2,000 - 1,500

Drawings 16,000 16,500 19,000 Interest on Loan 1,500 - -

Salaries - 8,000 8,000

Interest on Capital 2,400 1,800 1,300

Profit Sharing 20,000 12,000 8,000

Balance c/d 9,900 4,300 - Balance c/f - - 200

25,900 21,800 19,000 25,900 21,800 19,000

Balance B/F - - 200 Balance b/f 9,900 4,300 -

PARTNERSHIP BALANCE SHEET

Net Assets 89,000

FINANCED BY:

Capitals:Sele 24,000 Idrisa 18,000 Tango 13,000 55,000

Current Accouns:Sele 9,900 Idrisa 4,300 Tango (200) 14,000

Partner's Loan 20,000 89,000

PROBLEMS ARISING

RETIREMENT OR DEATH OF A PARTNER When there is a retirement or death of a partner, the following should be observed:

a) Shares of retiring partner must be calculated and transferred either in cash or by agreement retained in the partnership as a loan.

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b) All assets including Goodwill and Liabilities must be valued at retirement date and appropriate adjustments made.

c) Where revised value are not to be incorporated in the books of the partnership, credit/debit partnership capital or current accounts in the OLD PROFIT SHARING RATIO with the surplus/deficit and debit/credit the remaining partners with the same total surplus/deficit in the profit sharing ratio.

d) The basis for valuing Goodwill will usually be stated in the partnership deed.

ADMISSION OF A NEW PARTNER a) Old Partners will have to be credited with their entitlement to all profits made up to date

of admission of the New Partner, including unrealized Surplus and Goodwill.b) Where these revised values are not to be incorporated into the accounts, surpluses are

credited to OLD PARTNERS in OLD PROFIT SHARING RATIO and debited to new partners in new profit sharing ratio.

c) Similar adjustment must be made for any unrealized losses. d) Any cash introduced by new partner including any amount paid for his share of

Goodwill is debited to Cash and credited to his Capital account.

EXAMPLE Maisha, Bora and Tumaini are in Partnership sharing profits and losses in the ratio 3:2:1 respectively. The balance sheet for the partnership as at 30/6/2004 is as follows:

FIXED ASSETS

Premises 90,000

Plant 37,000

Vehicles 15000

Fixtures 2,000 144,000

CURRENT ASSETS

Stock 62,379

Debtors 34,980

Cash 760 98,119 242,119

CAPITALMaisha 85,000 Bora 65,000 Tumaini 35,000 185,000

CURRENT ACCOUNTMaisha 3,714 Bora (2,509)Tumaini 4,678 5,883

LOAN – Tumaini 28,000 Creditors 19,036 Bank Overdraft 4,200

242,119

Tumaini decides to retire from the business on 30/6/2004 and Subira is admitted as a partner on that date. The following are agreed:

a) Certain assets were revalued Premises 120,000Plant 35,000Stock 54,179

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b) Provision is to be made for doubtful debts in the sum of Tshs.3,000/=c) Goodwill is to be added in the books on the day Tumaini retires in the sum of

Tshs.42,000/=. The Partners in the new firm do not wish to maintain a goodwill account so that account is to be written back against the new partners’ accounts.

d) Maisha and Bora are to share profits in the same ratio as before and Subira is to have the same share of profits as Bora.

e) Tumaini is to take his car at its book value of Tshs.3,900/= in part payment and the balance of all he is owed by the firm in cash, except Tshs.20,000/= which he is willing to leave as a loan account.

f) The partners in the firm are to start on equal footing as capital and current accounts are concerned. Subira is to contribute cash to bring his capital and current accounts in the same amount as the original partner from the old firm who has the lower investment in the business.

g) The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

REQUIREDAccounts for the above transactions, including Goodwill and retiring partners accounts.Draft Balance Sheet for the Partnership of Maisha, Bora, & Subira as at 30/06/2004.

SOLUTIONWe need to open up revaluation account. DR. Premises a/c 30,000CR. Revaluation a/c 30,000

DR. Revaluation a/c 2,000CR. Plant a/c 2,000

DR. Revaluation a/c 2,000CR. Stock a/c 2,000

DR REVALUATION ACCOUNT CR

Plant 2,000 Premises 30,000Stock 8,200Provision for Doubtful Debts 3,000

Maisha: 16,800x3/6 8,400Bora: 16,800x2/6 5,600Tumaini: 16,800x1/6 2,800

30,000 30,000

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DR PARTNERS CAPITAL ACCOUNT CRMAISHA BORA TUMAINI SUBIRA MAISHA BORA TUMAINI SUBIRA

Goodwill 18,000 12,000 - 12,000 Balance b/f 85,000 65,000 35,000 - Goodwill 21,000 14,000 7,000

Retirement A/C - - 42,000 - Balance c/d 88,000 67,000 - - Balance b/f - - - 12,000

106,000 79,000 42,000 12,000 106,000 79,000 42,000 12,000

Balance b/d - - - 12,000 Balance b/f 88,000 67,000 - - Bank 21,000 - - - Bank - - - 79,000 Balance c/d 67,000 67,000 - 67,000

88,000 67,000 - 79,000 88,000 67,000 - 79,000

Balance c/d 67,000 67,000 - 67,000

DR PARTNERS CURRENT ACCOUNT CRMAISHA BORA TUMAINI SUBIRA MAISHA BORA TUMAINI SUBIRA

Balance b/d - 2,509 - - Balance b/f 3,714 - 4,678 -

Revaluation 8,400 5,600 2,800 Balance c/d 12,114 3,091 7,478 -

12,114 5,600 7,478 - 12,114 5,600 7,478 -

Retirement - 7,478 - Balance b/f 12,114 3,091 7,478 - Bank 9,023 - - - Bank - - - 3,091 Balance c/d 3,091 3,091 - 3,091

12,114 3,091 7,478 3,091 12,114 3,091 7,478 3,091

Balance c/d 3,091 3,091 - 3,091

Recording of Goodwill

DR. Goodwill A/C 42,000CR. Capital A/C’s

Maisha 21,000Bora 14,000Tumaini 7,000

Write-Off of Goodwill

DR. Capital A/C’sMaisha 18,000Bora 12,000Subira 12,000

CR. Goodwill 42,000

DR. Tumaini Retirement Account CR.Car (Vehicle) 3,900 Partnership Current A/C 7,478 Bank 53,578 Partnership Capital A/C 42,000

Loan – Tumaini 8,000 57,478 57,478

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Car taken by the retiring Partner (Tumaini):

DR. Retirement A/C 3,900CR. Car Vehicle 3,900

Loan to the Partnership:

DR. Loan A/C 8,000CR. Retirement A/C 8,000

Capital brought in by the new partner - Subira:

DR. Bank A/C 79,000CR. Capital A/C - Subira 79,000

Capital withdrawn by Maisha to reduce his Capital to 67,000/=:

DR. Capital Account - Maisha 21,000CR. Bank A/C 21,000

Capital withdrawn by Maisha to reduce his Current A/C to 3,091/=:

DR. Current Account - Maisha 9,023CR. Bank A/C 9,023

DR. Car Vehicle Account CR.Balance b/f 15,000 Tumaini Retirement A/C 3,900

Balance c/f 11,100 15,000 15,000

DR. Bank Account CR.Capital – Subira 79,000 Balance b/f 4,200 Current A/C 3,091 Capital A/C - Maisha 21,000 Balance c/f 5,710 Current A/C - Mmaisha 9,023

Retirement A/C 53,578 87,801 87,801

MAISHA, BORA AND SUBIRA PARTNERSHIPBALANCE SHEET AS AT 31ST DECEMBER 2005

FIXED ASSETSPremises 120,000 Plant 35,000

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Vehicles 11,100 Fixtures 2,000 168,100

CURRENT ASSETSStock 54,179 Debtors 31,980 Cash 760 86,919

Less: CURRENT LIABILITIESCreditors 19,036 Bank Overdraft 5,710 24,746 NET CURRENT ASSETS 62,173

230,273 LESS: TUMAINI'S LOAN 20,000

210,273

FINANCED BY:CAPITAL ACCOUNT

MAISHA 67,000 BORA 67,000 SUBIRA 67,000 201,000

CURRENT ACCOUNTMAISHA 3,091 BORA 3,091 SUBIRA 3,091 9,273

210,273

CHANGES DURING THE PERIOD

If there is a change during the period, what is required is:To prepare profit and loss account in two stagesWhere sufficient details are not given to enable the profit to be calculated accurately it should be apportioned on a time basis.

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The appropriation account should reflect the different terms of apportionment of profits, salaries, etc. Where an employee is admitted to partnership during the year, his salary whilst on employment is an expense of the business for the first part of the year. Any salary subsequent to admission is an appropriation of profits and if paid out increases the partners drawings.

Example Salary for an employee is 12,000/= p.a.; the employee has been introduced to the partnership 9 months. 9/12 x 12,000/ = 9.000/=. This is treated as normal expense3/12 x 12,000/= 3,000/= this is treated as drawings.

AMALGAMATION

Amalgamation could occur if:1. A sole trader is joining partnership2. Two or more sole traders amalgamating with an existing partnership3. Two or more partnerships amalgamating to form a new partnership.

PROBLEMS ARISING ON AMALGAMATION

1. Revaluing assets, goodwill, establishing new profit shares, ascertaining amount of new capital introduced, etc.

2. The old firm’s assets and liabilities are realized by sale to the new firm and generally the books of the old firm are closed and net assets transferred to the new partnership.

EXAMPLE

UPENDO, FURAHA and AMANI were three small haulage contractors. Their assets and liabilities on 31st May 2004 were as follows:

UPENDO FURAHA AMANI TOTALPremises 13,000 15,000 8,000 36,000 Vehicles 10,000 18,000 6,000 34,000 Equipment 4,000 8,000 3,000 15,000 Debtors 1,300 1,800 600 3,700 Bank 1,400 2,700 800 4,900 29,700 45,500 18,400 93,600 Capital 29,300 44,250 18,220 91,770 Creditors 400 1,250 180 1,830 29,700 45,500 18,400 93,600

The three decided to amalgamate into one partnership which took over all assets and liabilities.An independent valuer agreed the book values of all fixed assets, but considered a provision for doubtful debts should be made in each as follows:

UPENDO 1% of debtors FURAHA 2% of debtorsAMANI Shs. 200/=

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He valued the business as going concern as follows: UPENDO 35,000/= FURAHA 50,000/=AMANI 25,000/=

The new partnership came into existence on 1st June 2004.

REQUIREDSet out the opening Balance Sheet at that date.

SOLUTION

Adjustments required should be dealt withClose the records of three sole tradersOpen the records of the new business (Partnership)

SOLE TRADERS

DR. Creditors 1,830DR. Business Consideration 110,000

CR. Fixed Assets 85.000CR. Current Assets 8,351CR. Gain on disposal 18,479

PARTNERSHIP

DR. Goodwill 18,479DR. Fixed Assets 85,000DR. Current Assets 8,351

CR. Capital Accounts UPENDO 35,000FURAHA 50,000AMANI 25,000

CR. Creditors 1,830

Analysis of Assets

UPENDO FURAHA AMANI TOTALNet Assets before Amalgamation 29,300 44,250 18,220 91,770 Adjustments Provision for Doubtful debts 13 36 200 249 Net Assets after amalgamation 29,287 44,214 18,020 91,521 Consideration 35,000 50,000 25,000 110,000 Goodwill 5,713 5,786 6,980 18,479

UPENDO, FURAHA, AMANI PartnershipBalance Sheet as at 30th June 2004

UPENDO FURAHA AMANI TOTAL Goodwill 5,713 5,786 6,980 18,479

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Premises 13,000 15,000 8,000 36,000 Vehicles 10,000 18,000 6,000 34,000 Equipment 4,000 8,000 3,000 15,000 Debtors 1,287 1,764 400 3,451 Bank 1,400 2,700 800 4,900 35,400 51,250 25,180 111,830 Capital 35,000 50,000 25,000 110,000 Creditors 400 1,250 180 1,830 35,400 51,250 25,180 111,830

DISSOLUTION OF PARTNERSHIP

Dissolution refers to the breaking of Partnership business, and this can 1. Take place by sale of firm to a company or by breaking up the business entirely. 2. All assets must be either sold or taken over by individual partners on agreed amount.

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3. All outside Creditors must be paid in full after which any balances should be divided among the partners.

Accounting Procedures

1. Complete Current Accounts up to dissolution, including all profits, losses and drawings. 2. Transfer Current Account balances to Capital Account3. Record all assets disposal to the cash account and the realization Account 4. Transfer all assets except cash to the realization account at book value 5. Debit Partners Capital Accounts with agreed value of any asset taken over and Credit

Realization Account. 6. Settle Liabilities with available cash. Any discounts received are credited to realization account. 7. Debit Realization Expenses to Realization Account. 8. Balance on realization Account is Profit or Loss on Dissolution and should be transferred to the

partners’ capital accounts in the profit sharing ratio. 9. the cash due to Partners is distributed and all Accounts therefore closed:

where a partner has a debit balance on his capital account, he must contribute cash to the partnership

if the partner is insolvent and cannot contribute the necessary cash, the amount of deficiency on her capital account has to be borne by the other partners in the ratio of their last agreed CAPITAL ACCOUNT BALANCE i.e. Capital Account balances before the dissolution of the partnership agreement - GARNER Vs MURRAY RULE

GARNER Vs MURRAY RULEPARTNERSHIP AGREEMENT can specifically exclude the Garner Vs Murray Rule and specify that the deficiency be shared on some other basis i.e. the Garners Vs Murray Rule applies by default, in the absence of a specific agreement.

WORKED EXAMPLE

Anna, Betty and Charles were in Partnership sharing profits and losses 2:2:1. As a result of disagreement as to the future trading policies they decided to dissolve the partnership in 1st April 2005. After taking into account the profit and Partner’s drawings for the year ended on that day the balance Sheet of the Partnership was:

Fixed AssetsFreehold Premises 20,000Equipment 11,000 31,000

Current AssetsStock 2,500Debtors 3,000Bank 8,000 13,500

Less: Current Liabilities: 10,500 3.000 34,000

Loan – Partner Anna 9,000 25,000

FINANCED BY:CAPITAL ACCOUNTS

Anna: 10,000Betty: 6,000Charles: 4,000 20,000

CURRENT ACCOUNT

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Anna: 3,000Betty: 4,500Charles: (2,500) 5,000

25,000

THE FREEHOLD PREMISES WERE SOLD FOR 28,000/=. Betty took over the Equipment (NBV) 4,000/= at an agreed valuation of shs. 2,000/=, while the remaining equipment was sold for shs. 6,000/=. Anna took over the stock at book value and the debtors realized shs. 2,800/=. Liabilities were paid as were dissolution expenses amounting to shs. 600/=.

REQUIRED

Show the realization Account, bank account and Partners accounts recording the partnership dissolution.

Example 1Grace, Amani and Shukuru started in partnership as Office Cleaners on 1/1/2005. their verbal agreement was:

5% interest on capitals 15% interest charged on drawings 10% commission on turnover to Grace to reflect her ability to get business A salary to Amani of 30,000/= to reflect her longer work time on partnership affairs.

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Balance of profits to be divided 2:2:1Shukuru had made a loa to the partnership of 100,000/= at 10%. At the end of the first year turnover was found to be 400,000/= and net profit (after loan interest paid to Shukuru 146,400/= .

Capital were:Introduced Introduced Withdrawn

1/1/05 30/6/05 30/6/05Grace 20,000 60,000 Amani 60,000 10,000 Shukuru 50,000

Drawings were:1/1/05 30/6/05 30/6/05

Grace 5,000 9,000 10,000 Amani 8,000 8,000 7,000 Shukuru 9,000 2,000 9,000

Required:The Partnership appropriation account for the year ending 31/12/2005.The Partner’s capital and current accounts for the same period. Recast (a) and (b) on the basis that the interest on capital was 7%, interest on drawings was 20%, and interest on loan was 5%.

Example 2Adili & Akili have formed two separate partnerships. The profit sharing agreements and other information are:

Partnership 1 Partnership 2

Interest on Capital 10% 15%Interest on Loan 15% 12%Salary Adili 2,000,000 Salary Akili 4,000,000 Capital – Adili 15,000,000 6,000,000 Capital - Akili 7,000,000 2,000,000 Profit 2006 after loan interest 26,500,000 Profit 2006 before loan interest 6,000,000Loan from Adili 20,000,000 Drawings 2006 - Adili 6,500,000 4,700,000 Drawings 2006 - Akili 3,000,000 4,100,000 Residual profits share

Adili 3/5 2/5Akili 2/5 3/5

Required:

Appropriation Account for 2006 for each partnershipCapital Account for each partner. No current Account are kept.

Example 3

The Partnership of Amani and Baraka at 31/12/2004 showed:

Capital Accounts Fixed Assets 14,000 Amani 10,000 Current AssetsBaraka 9,000 Stock 6,800

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Current Accounts Debtors 4,750 Amani 1,900 Cash 150 Baraka 1,700 11,700

Creditors 3,100 25,700 25,700

The partnership was dissolved at 31/01/20051. The motorcars included in Fixed assets were taken by the partners at agreed values as Amani

2,000/= Baraka 3,000/=2. The remainder of the fixed assets were sold for 12,000/=3. The stock was sold at auction for 4,300/=4. Debtors realized 4,600/=5. The creditors were paid off less a 5% discount6. Expenses of realization were 250/=7. The profit sharing formula is 10% interest on capital, balance 3:2

Required:Show relevant Accounts in the Dissolution (Realization, Cash, Capital, Assets’ Accounts)

Example 4

Tom, Rodger and James are in Partnership sharing profits equally. Their balance sheet at 31st May 2004 was:

Tom 3,500 Fixed Asset 6,006 Rodger 3,500 Stock 9,500 James 416 Debtors 7,800

Creditors 6,250 Overdraft 9,640

23,306 23,306

On 1st June 2004 the Partnership was dissolved and the following happened:The assets were sold to ABB Ltd for 20,000/=The Creditors were settled for 6103/=James was declared bankruptcy with no assets.Required:Show the realization Account, Cash Account and Partners capital account to record the dissolution.

DR REALISATION ACCOUNT CR

Fixed Asset 6,006 ABB Ltd 20,000 Stock 9,500 Creditors 6250

Debtors 7,800 Loss on Realisation Cash paid to creditors 6103 Tom 1053

Rodger 1053

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James 1053

29,409 29,409

CASH ACCOUNT

ABB Ltd 20,000 Balance b/f 9,640 Creditors 6,103

Tom 2,583

Rodger 1,674

20,000 20,000

PARTNER'S ACCOUNT

T R J T R J Loss on Realisation

1,053

1,053

1,053 Balance b/f

4,000

3,000

416

Garner Vs Murray

364

273 Garner Vs Murray

637

Cash 2,583

1,674

4,000 3,000 1,053 4,000 3,000 1,053

PIECE MEAL REALIZATION

Usually the disposal of assets ad the payment of Creditors takes place over a period of time, and the partners often want to withdraw some cash as soon as it is available for distribution. It is necessary to limit individual withdrawals so that no partner receives more than would be his entitlement should the remaining assets prove to be worthless.Therefore technique to determine payments due to partners after all creditors and partners advances have been repaid:a) Calculate expected loss which could arise if all remaining assets proved worthless. b) Divide this loss in the profit sharing ratio between the partners.c) The remaining balance on each partner’s capital account can now be paid out in cash.d) Any debit balance arising must be apportioned between the other partners using “Garner Vs

Murray Rule” or the “Alternative agreed basis and the cash distributed by reference to the remaining balances.

e) The procedure is repeated for subsequent realization.

Example

Alpha Beta and Gamma were in partnership sharing profits in the ratio 3:1:1

BALANCE SHEET AS AT 31ST DISSOLUTION

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Sundry Assets 14,000 Cash 1,000

15,000 Capital

Alpha 8,000 Beta 4,000 Gamma 1,000 13,000

Creditors 2,000 15,000

Proceeds of the first four realization of the assets were:a) shs. 3,000/=b) shs. 2,000/=c) shs. 4,000/=d) shs 2,500/=

Assume that Alpha Beta and Gamma partnership agreement does not exclude Garner Vs Murray and that the given capital balance are the last agreed capital balances. Show the partners’ distribution statement and the partners’ accounts.

SOLUTION:

Profit Sharing ratio 3:1:1Garner Vs Murray 8:4:1

BANK TOTAL ALPHA BETA GAMMACapital 13,000 8,000 4,000 1,000 Balance b/f 1,000 (1,000)First Realization 3,000 (3,000)Creditors (2,000) 2,000

2,000 11,000 (6,600) (2,200) (2,200)Capital Balance 1,400 1,800 (1,200)Gamma Deficiency (800) (400) 1,200 Cash Distribution 2,000 600 1,400 -

CONVERSION TO A LIMITED COMPANY

The Partnership business can be either

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a) Taken over by a completely independent company which pays cash to the Partners leaving them with no further interest in the business.

b) Taken over by a company formed specially for the purpose, with existing partners becoming shareholders of the New Company.

The accounting approach is as follows:a) Record the disposal of the Partnership and closure of its records via realization account. (see

Dissolution of Partnership).b) Record the acquisition of the net assets of the Partnership by the Company at their FAIR

VALUE and record the CONSIDERATION paid.

EXAMPLEAmani and Huruma are in Partnership selling beverages sharing profits in the ratio 3:2. their Draft Balance sheet as at 31st December 2004 is as follows:

FIXED ASSETSPremises 30,000 Fixture and fittings 1,000 Motor Vehicles 3,000 34,000

CURRENT ASSETSDebtors 20,000 Cash 600 20,600

LessCURRENT LIABILITIES 12,600 8,000 NET ASSETS 42,000

FINANCED BY CAPITAL ACCOUNTS

Amani 20,000 Huruma 2,500 22,500

CURRENET ACCOUNTSAmani 3,000 Huruma 500 3,500

LOAN FROM AMANI 16,000 42,000

AMAHURU is incorporated for the purpose of taking over the business. The company acquired the premises for 40,000/= and other assets (with exception of cash and motor vehicles) at book value. The company will also take over the current liabilities.The purchase consideration of 60,000/= is to be settled by 30,000/= ordinary share and cash of 30,000/= to be raised by the company by Bank loan. Huruma is to take over motor vehicle at a valuation of 2,500/= and the partners have agreed to divide the shares in their profit sharing ratio. Amani is to be repaid out of partnership cash.

Required: Show the ledger Accounts recording the above transactions in the partnership books.

DR REALISATION ACCOUNT CR

Premises 30,000Current Liability 12,600

Furniture & Fittings 1,000AMAHURU Ltd (Purchase consideration)

60,000

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Motor Vehicles 3,000Capital Account - Hruma 2,500 Debtors 20,000

Capital Amani 12,660Huruma 8,440

75,100 75,100

DR CASH ACCOUNT CR

Balance b/f 600 Loan Amani 16,000 AMAHURU Ltd (Cash) 30,000 Capital - Amani 17,660

Capital - Huruma 3,060

33,660 33,660

CAPITAL ACCOUNT AMANI HURUMA Balance b/f 20,000 2,500 Current Account 3,000 500 Realization (Gain) 12,660 8,440 35,660 11,440 AMAHURU Ltd Shares (18,000) (12,000) Motor Vehicle (2,500) 17,660 (3,060) Cash - receipt - 3,060 Cash - payment (17,660) - - -

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accounting for partnerships 2

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