Chapter 19 Changes in Partnership (1)

7/31/2019 Chapter 19 Changes in Partnership (1)

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CHANGES IN PARTNERSHIPIntroduction

A change in partnership occurs if there is a change in any of the fundamentalagreement among the partners. Changes in partnership include;

1. Admission of a partner2. Death or retirement of a partner3. Amalgamation4. Conversion to a limited company.

In a strict sense a change in partnership leads to formation of a new partnership(or company) separate from the old partnership. This entails valuation of the oldbusiness net assets and their transfer to the new business. This chapter isconcerned with the admission dearth or retirement of partners.

Objectives:

After studying this chapter you should be able to:1. Appreciate the causes of partnership changes2. Identify the accounting adjustment to effect changes3. Appreciate the concept of goodwill in partnership4. Account for admission of a partner5. Account for death or retirement of a partner6. Construct the profit and loss account, appropriation account and

balance sheet for a change in partnership

Admission of a Partner

When a new partner is admitted to a partnership, s/he joins in the ownership of

the business net asset and is therefore entitled to share in the future profits. Forthat reason he will be required to bring in capital equal to purchase of hispartnership share. This requires a revaluation of the business net assets so as toarrive at the partnerships true worth at the time of admission. It must be notedthat partnership accounts are drawn on the basis of the historical cost conventionin which the assets are accounted for at their historical cost less accumulateddepreciation. The book value of net assets does not reflect the current value ofthe business. The incoming partner should be charged for the current value ofthe assets and not their historical cost. The business normally would not haveaccounted for its goodwill. Goodwill is the value of a business over and above its

net separable assets. The value of the business as a going concern is normallyworth more than the value of it net separable assets. The value of the businessabove the value of its net separable assets (i.e. goodwill) should be recognisedbefore a new partner is admitted.

Value of net separable assets = Value of asset (other than goodwill) xxx


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Liabilities (xx)Net separable asset xxx

Book entries for admission of a partner:

Transaction Dr. Cr.1. Revaluation of asset Asset a/c Revaluationa/c

(Gain on revaluation)

2. Goodwill Goodwill a/c Revaluationa/c

3. Reduction in asset in value Revaluation a/c Asset a/c

4. Share revaluation to old Revaluation CapitalPartners at profit sharing ratio

5. Capital introduced by new Capital account ofPartner new partner: Bank

ExampleA and B have been in partnership sharing profits and losses in the ratio of 3:2respectively. Their balance sheet as at 31st December 2002 is as follows:

Capital A 5,000,000 Land and building 3,000,000B 4,000,000 Plant and machinery 2,000,000

Motor vehicle 2,500,000Creditors 2,000,000 Stock 1,500,000

Debtors 1,000,000Cash 1,000,000

11,000,000 11,000,000

On that date C was admitted and the following was agreed:i. Asset value

Land and buildings 3,500,000Plant and Machinery 2,300,000Motor vehicle 2,700,000Stock 1,600,000Debtors 900,000Goodwill 1,000,000


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ii) C is to bring in shs. 4,000,000 as his capital.

Required: Draw the relevant accounts to effect the change and the balance-sheet after admission.

RevaluationSh. Sh.

Debtors 100,000 Land & building 500,000Plant & Machinery 300,000

Capital A 1,200,000 Motor Vehicle 200,000B 800,000 Stock 100,000

Goodwill 1,000,000

2,100,000 2,100,000

Goodwill

Sh. Sh.Revaluation 1,000,000 Bal c/d 1,000,000

1,000,000 1,000,000

Capital a/c

A B C A B CSh Sh Sh Sh Sh ShBal. b/d 5,000,000 4,000,000Revaluation 1,200,000 800,000

Bal c/d 6,200,000 4,800,000 4,000,000 Bank 4,000,0006,200,000 4,800,000 4,000,000 6,200,000 4,800,000 4,000,000

A B and C Partnership.Balance sheet as at 31st December 2002

Capital A 4,000,000 Goodwill 1,000,000B 6,200,000 Land and buildings 3,500,000C 4,800,000 Plant and Machinery 2.300,000

Motor vehicle 2,700,000Stock 1,600,000Debtor 900,000


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Creditors 2,000,000 Cash 5,000,00017,000,000 17,000,000

Amortization of Goodwill

Partners may choose to write off goodwill immediately after admission. In such acase the amount of goodwill is written off to partners capital accounts in the newpartnership in the profit sharing ratio.

ExampleSuppose in the above example the profit sharing ratio in the new partnership is2:1:1. The new partnership decided to write of goodwill immediately.

Suggested solutionGoodwill accounts

Revaluation 1,000,000 Capital A 500,000B 250,000C 250,000

1,000,000 1,000,000

Capital account

A B C A B CSh. 000 Sh. 000 Sh. 000 Sh. 000 Sh.000 Sh. 000

G/W 500 250 250 Bal b/d 6,200 4,800 4,000Bal c/d 5,700 4,550 3,750 C

6,200 4,800 4,000 6,200 4,800 4,000

A B and C partnership.Balance sheet

Capital A 5,700,000 Land and build. 3,500,000B 4,550,000 Plant and mach. 2.300,000C 3,750,000 Motor vehicle 2,700,000

Debtor 900,000Creditors 2,000,000 Cash 5,000,000

Stock 1,600,00016,000,000 16,000,000


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Example 2

A, B & C in partnership sharing profit and losses in the ratio 3: 2:1. They agree toadmit D when their Balance Sheet is as follows:

Balance Sheet as at 31/12/03

Sh. 000 Sh. 000Capital A 3,000 Land & building 4,000

B 2,000 Plant & Machinery 3,000C 1,000 Stock 2,000

Debtor 1,000Current A 500 Cash 500

B 500C 300

Creditors 3,20010,500 10,500

For the purpose of admitting D the following was agreed.1) Asset value

Land & Building 4,500,000Plant & Machinery 3,500,000Stock 2,200,000Goodwill 600,000

2) New profit sharing ratio is 3: 1: 1: 1 for A, B, C and D respectively.

3) D is to bring in capital so as to equal that of C after writing off goodwill.

Required: Draw the relevant books of accounts and balance sheet afteradmission.

Suggested solution

Revaluation A/CSh Sh

Capital A 900,000 Land and building 500,000B 600,000 Plant & machinery 500,000

C 300,000 Stock 200,000Goodwill 600,000

1,800,000 1,800,000

Goodwill

Revaluation 600,000 capital A 300,000


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B 100,000C 100,000

- D 100,000600,000 600,000

Capital a/cSh. Sh. Sh. Sh Sh. Sh. Sh. ShA B C D A B C D

G/W 300 100 100 100 Bal. b/d 3000 2000 1000Rev 900 600 300Bank 1,300

Bal c/d 3,600 2,500 1,200 1,2003,900 2,600 1,300 1,300 3,900 2,600 1,300 1,300

A, B, C and D PartnershipBalance sheet as at 31st December 2003

Capital A 3,600 Land and building 4,500B 2,500 Plant & Machinery 3,500C 1,200 Stock 2,200D 1,200 Debtors 1,000

Cash 1,800Current A 500

B 500C 300D -

Creditors 3,20013,000 13,000

Death or RetirementWhen a partner dies or retires, the assets of the business must be re-valued at thedate of death or retirement so as to adjust the capital accounts of all the partnersand arrive at the amount of claim to the outgoing partner. The administrator ofthe dead partners estate or the retired partner (as the case may be will be) paidhis share in manner agreed upon by the partners. He may be paid in full on thedate of retirement (or death) or soon thereafter. Payment may be in cash or bytaking away part of the partnership assets or a combination of the two. He maybe paid in part and the balance remaining as a loan to the partnership attractinginterest at an agreed rate.


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Example

XYZ have been in partnership sharing profits in the ratio 3: 2: 1. Z retired at atime when their balance sheet was as follows;

Balance sheet 31/12/02

Sh. 000 Sh. 000Capital X 3,000 Land and building 2,000

Y 2,000 Plant 1,500Z 1,000 Motor 1,200

Stock 1,300Current X 200 Debtors 500

Y 200 Cash 500Z 100

Creditors 500

7,000 7,000

1. Assets valueLand and building 2,500,000Plant 1,700,000Motor vehicle 1,400,000Goodwill 600, 000

2. X and Y are to continue in partnership sharing profits/losses at 2:1respectively

3. Z took a motor vehicle valued at Ksh 600,000, He was paid Sh. 400,000 ofall that he is owed and the balance to remain as a loan at 10% interest.4. Goodwill is written off in the new partnership

Required: Relevant books of accounts to effect the partnership change andbalance sheet after retirement.

Suggested solution

Revaluation

Motor Veh. 200,000

Capital X 750,000 Land & Build 500,000Y 500,000 Plant 200,000Z 250,000 Goodwill 600,000

1,500,000 1,500,000

Capital accounts


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X Y Z X Y ZGoodwill 400 200 Bal b/f 3,000 2,000 1,000Cash 400 Revaluation 750 500 250M/V 600 Current a/c 100Loan a/c 350

Bal.c/d 3,350v 2,300

3,750 2,500 1,350 3,750 2,500 1,350

X and Y partnershipBalance sheet as at 31st December 2002

Capital X 3,350 Land and Building 2,500Y 2,300 Plant 1,700

Motor 800

Current X 200 Stock 1,300Y 200 Debtor 500

Cash 100Creditors 500Loan 350

6,900 6,900

ExampleA, B, and C are in partnership sharing profits and losses in the ratio 3: 2: 1. D wasadmitted on 30th June 2002. The trial balance as at 31st December 2002 is:

Dr. Cr.Fixed Assets 9,000Capital A 4,000

B 3,000C 2,000

CurrentA 2,000B 1,000C 500

D (drawings) 500

Sales 15,000Opening stock 2,000Purchases 8,000Expenses 5,000Debtors 5,000


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Cash 2,000Creditors 2,000Cash paid by D 3,000

32,000 32,000Additional information

1. Fixed assets were revalued on 30/6/02 at a gain of 1,200,000.2. For the purpose of admission, goodwill is valued at 1,500,000.3. New profit sharing ratio is 3:2:2:14. Goodwill is to be written off.5. Sales are evenly distributed throughout the year but the expenses were

spread at ratio of 2:3 between 1st and 2nd half of the year.6. Interest on capital is provided at the rate of 10% p.a.7. No adjustments have been made in the books for the purpose of admitting

D.

Required:i) Draw capital account to show changesii) Trading profit and loss appropriation accountiii) Partners current accountiv) Balance sheet as at 31/12/02

Suggested solution

Revaluation Account

Sh 000 Sh. 000Capital A 1,350 Fixed assets 1,200

B 900 Goodwill 1,500C 450

2,700 2,700

Capital account

A B C D A B C DSh 000 Sh 000 Sh 000 Sh 000 Sh 000 Sh000 Sh 000 Sh000

G/W 562.5 375 375 187.5 Bal/b/d 4,000 3,000 2,000 -Rev 1,350 900 450

Bal c/d 4,787.5 3,525 2,075 2,812.5 Bank 3,0005,350 3,900 2,450 3,000 5,350 3,900 2,450 3,000


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Trading account

Sh. 000 Sh. 000Sales 15,000

Opening stock 2,000

Purchases 8,000 (10,000)Gross profit 5,000

Profit and loss and Appropriation accountFor year ended 31/12/02

Sh. 000 Sh. 000 Sh. 000 Sh. 000Gross profit 2,500 2,500Less expenses (2,000) (3,000)

Net profit /loss 500 (500)

Less Interest on capitalA 200 200B 150 150C 100 100D - (450) 150 (600)

50 (1,100)Profit (Loss) share

A 25 412.5B 16.7 275C 8.3 275D - (50) 137.5 1,100

-

Current accountA B C D A B C D

Bal b/d 500 500 Bal. b/d 2,000 1,000Loss 412.5 275 275 137.5 Int.on capital 400 300 200 150Share

Profit share 25 16.7 8.3

Bal. c/d2,012.5 1041.7 Bal c/d 566.7 487.52,425 1,316.7 725 637.5 2,425 1,316.7 77.5 637.5

Balance sheet


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Sh 000 Sh. 000

Fixed assets 10,200

Debtors 5,000

Cash 2,0007,000

Less creditors (2,000) 5,00015,200

Financed by:

Capital accountA 4,787.5B 3,525C 2,075D 2,812.5

13,200Current account

A 2,012.5B 1,041.7C (566.7)D (487.5) 2,000

15,200

Examination QuestionsQuestion One

Awino , Chebet and Enzibo have been in partnership sharing profits in the ratio5 : 3 : 2 respectively. On 30 June 1998 Awino retired and Chebet and Enzibodecided to continue the partnership, sharing profits equally. The partnership trialbalance as at 31 December 1998, was as follows:

Ksh KshLand at cost 120,000Buildings: cost 320,000Buildings: depreciation at 1 January 1998 24,000Shop and office equipment: Cost 48,000

Depreciation at 1 January 1998 11,000Accounts receivable 68,400Allowance for doubtful debts 1 January 1998 2,100Cash at bank 4,200Accounts payable 81,200Capital accounts at 1 January 1998: Awino

180,000


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Capital accounts at 1 January 1998: Chebet170,000

Enzibo 160,000Current accounts at 1 January 1998: Awino3,000

Current accounts at 1 January 1998: Chebet2,000

Enzibo 2,000Drawings accounts:

Awino (to 30 June 1998) 21,000Chebet (to 31 December 1998) 37,000Enzibo (to 31 December 1998) 36,000

Inventory at 1 January 1998 81,000Purchases 291,000Sales revenue 494,000

Staff wages 58,600Rent 25,000General administrative expenses 14,200Bad debts written off 900

1,127,300 1,127,300

Notes(1) Profits are to be assumed to accrue equally in the periods before and afterAwinos retirement.(2) The balance due to Awino is to remain in the partnership from 1 July 1998 as

a loan carrying no interest until 1 January1999.(3) The value of the partnership goodwill at 30 June 1998 was agreed by all threepartners at Ksh200,000.Goodwill is not toappear in the balance sheet after the adjustments necessary at30 June 1998.(4) It was decided, as part of the process of valuing Awinos share of thepartnership, to revalue the land at30 June fromKsh120,000 to Ksh160,000. The increased value is to be included in

the balance sheet.(5) The inventory at 31 December 1998 was Ksh90,000.(6) Accruals and prepayments at 31 December 1998 were:

Rent: paid in advance to 31 March 1999 Ksh5,000.General administrative expenses:prepayments Ksh 1,800accruals Ksh 6,200

(7) The allowance for doubtful debts is to be increased to Ksh2,400.(8) Depreciation is to be provided as follows:

Buildings 2% per annum straight line


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Shop and office equipment 15% per annum straight line.(9)No adjustments has been made with respect to Awinos retirement .

Required:(a) Prepare the income statement and a statement showing the division of the

profit for the year ended 31 December 1998 and balance sheet as at that date; (16marks)(b) Show the partners capital and current accounts for the year and Awinos loanaccount.

(8 marks) (Total 24 marks)

Awino Chebet and EnziboTrading profit and loss account for the year ended 31 December 1998Sales 494,000

Opening stock 81,000Purchases 291,000Closing stock (90,000) (282,000)Gross profit 212,000Staff wages 58,600Rent 20,000Bad debts 900General expenses 18,600Depreciation building 6,400Shop & office 7,200

Allowance for bad debts 300 (112,000)Net profit 100,000

Profit and loss appropriation account1st half 2nd half50,000 50,000

Awino (25,000)Chebet (15,000) (25,000)Enzibo (10,000) (25,000)

Capital account

A B E A B E

Goodwill 100,000 100,000 Balance b/f 180,000 170,000 160,000

Loan 307,000 Revaluation 120,000 720,000 48,000

Balancec/f

142,000 108,,000 Current a/c 7,000

307,000 242,000 208000 307,000 242,000 208,000


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Current account

A B C A B C

Drawings 21,000 37,000 36,000 Balanceb/f

3,000 2,000 2,000

Capital

a/c

7,000 Profit 25,000 40,000 35,000

Balancec/f

5,000 1,000

28,000 42,000 37,000 28,000 42,000 208,000

Chebet and EnziboBalance sheet as at 31 December 1998

Cost Depreciation NBVLand 160,000 160,000Buildings 320,000 30,400 289,600

Shop & furniture 48,000 18,200 29,800479,400

Stock 90,000Prepayment 6,800Accounts receivables 66,000Cash 4,200 167000

Creditors 81,200Accruals 6,200 (87,400) 79,600

559,000

Loan (307,000)Net assets 252,000Financed by:Capital

Chebet 142,000Enzibo 108,000250,000

Current a/cChebet 5,000Enzibo 1,000 6,000

252,000

Question Two

Kyamba, Onyango and Wakil were partners in a manufacturing and retailbusiness and shared profits and losses in the ratio 2:2:1 respectively.

Given below is the balance sheet of the partnership as at 31 March 2001:


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Balance Sheet as at 31 March

2001Assets Sh. Sh.Non-current assets:

Fixed assets 465,000Current assets:Stocks 294,000Debtors 209,000

503,000968,000

Capital and liabilities

Capital accounts:Kyamba 160.000

Onyango 140,000Wakil 200,000500,000

Current accountsKyamba 65,300Onyango 49,000WakiL 53,000

167,300667,300

Current liabilities:Bank overdraft 48,700Trade creditors 252,000

300,700968,000

Additional information1. On I April 2001, Wakil retired from the partnership and was to start a

business as sole trader while Kyamba and Onyango continued in partnership.

On retirement of Wakil, the manufacturing business was transferred to him

while Kyamba and Onyango continued with the retail business.

2. The assets and liabilities transferred to Wakil were as follows:Net book value Transfer valueSh. Sh.

Fixed asset 260,000 306,000Stocks 166,000 157,000


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Debtors 172,000 165,000Creditors 156,000 156,000

Wakil obtained a loan from a commercial bank and paid into the partnershipthe net amount due from him.

3. On retirement of Wakil from the partnership, goodwill was valued at Sh.200,000 but was not to be maintained in the books of the partnership ofKyamba and Onyango.

4. After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed onthe following terms and details of the new partnership:

Kyamba and Onyango to introduce additional capitals of Sh. 48, 000 and Sh.68,000 respectively.

Each partner was entitled to interest on capital at 10% per annum with effectfrom 1 April 2001 and the balance of profits was to shared equally afterallowing for annual salaries of Sh. 72,000 to Kyamba and Sh. 60,000 toOnyango.

5. The profit of the new partnership before interest on capitals and partnerssalaries was Sh. 240,000 for the year ended 31 March 2002.

6. The profits made by the new partnership increased stocks by Sh. 100,000;debtors by Sh. 90,000 and bank balance by Sh. 50,000.

7.

Drawings by the partners in the year were Kyamba Sh. 85,000 and OnyangoSh. 70,000.

Required:

(a)Profit and loss and appropriation account for the year ended 31 March 2002.(4 marks)

(b)Capital accounts for the year ended 31 March 2002 (4 marks)(c)Current accounts for the year ended 31 March 2002 (4 marks)(d)Balance sheet of the new partnership as at 31 March 2002 (8 marks)

(Total: 20 marks)a)Kyamba and OnyangoProfit and loss appropriation

Net profit 240,000


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InterestK 20,000O 20,000 40,000

Salary:K 72,000

O 60,000 132,000Share of profit:

K 34,000O 34,000 68,000 (240,000)

b) Kyamba, Onyango and Wakil

Revaluation Account

Stocks 9,000 Fixed assets 46,000Debtors 9,000 Goodwill 200,000Capital:K 92,000O 92,000W 46,000

246,000 246,000

Capital Account

K O W K O W

F. Assets 306,000 Balance b/f 160,000 140,000 200,000Stock 157,000 Creditors 156,000Debtors 165,000 Revaluation 92,000 92,000 46,000Goodwill 100,000 100,000 Current a/c 53,000Balancec/f

200,000 200,000 Cash 48,000 68,000 173,000

300,000 300,000 628,000 300,000 300,000 628,000

c)Current account

K O W K O WDrawings 85,000 70,000 Bal. b/f 65,300 49,000 53,000Capitala/c

53,000 Interest 20,000 20,000

Balancec/f

106,300 93,000 - Salary 72,000 60,000

Profit 34,000 34,000


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Furniture and fittings (cost) 300,000Debtors 225,000Accountancy and audit fees 105,000Wages 550,000Rent, rates and electricity 310,000

General expenses (Sh. 352,400 for the sixmonths to 31 October 2000) 660,000Cash introduced-Tonui1,250,000Sales (Sh. 3,500,000 to 31 October 2000) 8,750,000Accumulated depreciation: 1 May 2000

Motor vehicle300,000Furniture and fittings100,000

Creditors ________ 1,070,00013,420,000 13,420,000

Additional information:1. On 1 November 2000, Tonui was admitted as a partner and from that date,

profits and losses were to be shared in the ratio 2:2:1. For the purpose of thisadmission, the value of goodwill was agreed at Sh. 3,000,000. No account forgoodwill was to be maintained in the books, adjusting entries for transactionsbetween the partners being made in their current accounts. On that date,Tonui introduced Sh. 1,250,000 into the firm of which Sh. 375,000 comprised

his fixed capital and the balance was credited to his current account.2. Interest on fixed capitals was still to be allowed at the rate of 10% per annumafter Tonuis admission. In addition after Tonuis admission, no interest wasto be charged or allowed on current accounts.

3. Any apportionment of gross profit was to be made on the basis of sales.Expenses, unless otherwise indicated, were to be apportioned on a time basis.

4. A Charge was to be made for depreciation on motor vehicle and furnitureand fittings at 20% and 10% per annum respectively, calculated on cost.

5. On 30 April 2001, the stock was valued at Sh. 1,275,000.6. Salaries included the following partners drawings:

Rotich Sh. 150,000, Sinei Sh. 120,000 and Tonui Sh. 62,500

7. A difference in the books of Sh. 48,000 had been written off at 30 April 2001 togeneral expenses, which was later found to be due to the following clericalerrors:


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Sales returns of Sh. 32,000 had been debited to sales returns but had not beenposted to the account of the customer concerned;

The purchases journal had been undercast by Sh. 80,000.8. Doubtful debts (for which full provision was required) amounted to Sh.

30,000 and Sh. 40,000 as at 31 October 2000 and 30 April 2001 respectively.

9. On 30 April 2001, rates and rent paid in advance amounted to Sh. 50,000 anda provision of Sh. 15,000 for electricity consumed was required.

Required:

(a)Trading and profit and loss account for the year ended 30 April 2001. (9marks)

(b)Partners current accounts for the year ended 30 April 2001. (4marks)(c)Balance sheet as at 30 April 2001. (7 marks)

(Total: 20 marks)

Suggested solution

Rotich, Sinei and TonuiTrading and profit and loss account for the year ended 30 April 2001

Sales 8,750,000

Opening stock 1,200,000Purchases 4,180,000Closing stock (1,275,000) (4,105,000)Gross profit 4,465,000

31/10/00 30/4/2001Gross profit 1,858,000 2,787,000Salaries (483,750) (483,750)Accountancy (52,500) (52,500)Wages (275,000) (275,000)Rent rates &electricity (137,500) (137,500)

General expenses (306,000) (306,000)DepreciationMotor vehicles (160,000) (160,000)Furniture (15,000)) (15,000)Provision for bad debts (30,000) (10,000)Net profit 398,250 1,347,250Interest on capital


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R (37,500) (77,500)S (25,000) (15,000)T - (13,750Share of profitR (223,833) (496,400)

S (111,917) (496,400)T - (248,200)

398,250 1,347,250

Capital account

R S T R S T

Goodwill 1,200,000 1,200,000 600,000 Bal. b/f 750,000 500,000

Cash 875,000

Bal. c/f 1,550,000 300,000 275,000 Goodwill

2,000,000 1,000,000

2,750,000 1,500,000 875,000 2,750,000 1,500,000 875,000

Current account

R S T R S T

Drawings 150,000 120,000 62,500 Bal. b/f 400,000 300,000

Interest 115,000 40,000 13,750

Profit 720,233 608,317 248,200

Balancec/f

1,085,233 828,317 574,450 Bank - - 375,000

1,235,233 948317 636,950 1,235,233 948317 636,950

Rotich, Sinei and TonuiBalance sheet as at 30 April 2001

Cost Depn NBVLeasehold premises 2,250,000 - 2,250,000Motor vehicles 1,600,000 620,000 980,000Furniture 300,000 130,000 170,000

3,400,000

Current assetsStock 1,270,000Debtors 153,000Prepayment 50,000Bank 820,000 2,298,000

Current liabilitiesCreditors 1,070,000


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Accruals 150,000 (1,085,000) (1,213,000)Net assets 4,613,000Financed by:CapitalR 1,550,000

S 300,000T 275,000 2,125,000Current accountR 1,085,233S 828,317T 574,450 2,488,000

4,613,000Question four

Atieno, Babu and Chesire have been trading in partnership sharing

profits/losses in the ratio of 5:3:2 respectively. On 1 April 2000 they admittedtheir manager. Dagana as a partner and the profit sharing ratio was changed to4:3:2:1 for Atieno, Babu, Chesire and Dagana respectively.

The partners valued the goodwill at Sh. 510,000. Dagana paid in Sh. 200,000 ascapital and his share of goodwill, which should be based on capitalcontributions.

The partners do not wish to retain the goodwill account after admission ofDagana. The admission of Dagana has not been fully recorded other than the

cash receipt of Sh. 376,500.

The following is the trial balance of the partnership as at 31 March 2001.Sh. Sh.

Capital accounts Atieno700,000

Babu 600,000 Chesire 400,000

Current accounts Atieno350,000

Babu 325,000

Chesire 195,000Drawings Atieno 250,000

Babu 260,000 Chesire 250,000 Dagana 175,000

Land and buildings at cost 2,000,000Furniture and fittings at cost 500,000


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Provision for depreciation on future and fittings150,000

Motor vehicles 860,000Provision for depreciation on motor vehicles

480,000

Trade debtors and creditors 365,000823,500

Dagana account 376,500Purchases and sales 3,380,000

5,975,000Stock 1 April 2000 465,000Salaries and wages 295,000Rates 137,000Telephone and postage 116,000Vehicles running expenses 396,000

Insurance and subscriptions 162,000General expenses 72,000Bank charges and interests 124,000Bad debts 68,000Returns inwards and outwards 61,00075,000Cash in hand 24,000Cash at bank 490,000_________

10,450,000 10,450,000

Notes:1. Depreciation on furniture and fittings and motor vehicles is at 10% and 20%on reducing balance respectively.

2. The closing stocks were valued at Sh. 560,000.3. Accrued salaries and wages and telephone bills amounted to Sh. 24,000 and

Sh. 14,000 respectively.4. Prepaid subscriptions and rates amounted to Sh. 5,000 and Sh. 25,000

respectively.5. The partners decided that Dagana should be given a monthly salary of Sh.

20,000 for the whole year from 1 April 2000 to 31 March 2001.6. Dagana took goods for own use at cost amounting to Sh. 185,000. No entry

has been made in the books.7. The old partners shared the cash paid by Dagana for part of his goodwill.Required:(a)Trading, profit and loss account for the year ended 31 March 2001. (10

marks)(b)Partners capital accounts. (2 marks)


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(c)Partners current accounts. (3 marks)(d)Balance sheet as at 31 March 2001. (5 marks)(Total: 20 marks)

Suggested solution

a)Atieno, Babu ,Chesire and DaganaTrading, profit and loss account for the year ended 31 March 2001

Sales (net) 5,914,000Opening stock 465,000Purchase 3,325,000Drawings (18,500)Closing stock (560,000) (4,368,500)Gross profit 3,025,000

Salaries & wages 319,000Rates 112,000Telephone &Postage 130,000Vehicle expense 396,000Insurance &subscriptions157,000General expense 72,000Bank charges 124,000Bad debts 68,000Depreciation:furniture 35,000

Motor vehicles 76,000 (1,489,000)Net profit 1,400,000Salaries 240,000Profit Share: A 464,000

B 348,000C 232,000D 116,000 1,400,000

b) Current account

A B C D A B C D

Drawings 250,000 260,000 250,000 175,000Balb/f 350,000 325,000 195,000

Stock 185,000 Cash 176,

Salary 240,


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Bal c/f 564,000 413,000 177,000 172,500 Profit 464,000 348,000 232,000 116,

814,000 673,000 427,000 532,500 814,000 673,000 427,000 532,

c) Capital account

A B C D A B C DCapitalA 25,500

Balb/f 700,000 600,000 400,000

CapitalB 15,300 Cash 200,00

CapitalC 10,200 D cap. 25,500 15,300 10,200

Bal c/f 725,500 615,300 410,200 149,000

725,500 615,300 410,200 200,000 725,500 615,300 410,200 200,00

WorkingsCash paid by Dagana 376,500Capital and goodwill (200,000)Balance to Daganas current account 176,500

Capital and Goodwill 200,000Goodwill share (510,000 *1/10) (51,000)Balance to Daganas capital account 149,000

Partners share of Gaganas goodwill

Atieno: 51,000* 5/10 = 25,500 Babu: 51,00 * 3/10= 15300 andChesire : 51,000 * 2/10 = 10,200

d)Atieno, Babu ,Chesire and DaganaBalance sheet as at 31 March 2001

Fixed assets Cost Depn NBVLand & building 2,000,000 2,000,000Furniture 500,000 185,000 3,150,000

Motor vehicle 860,000 556,000 304,0002,619,000Stock 560,000Debtors 365,000Prepayment 30,000Bank 490,000Cash 24,000 1,469,000


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Creditors 823,500Accruals 38,000 (861,500) 607,500

3,226,500Net assetsFinanced by

Capital A 725,500B 615,300C 410,200D 149,000 1,900,000

Current A 564,000B 413,000C 177,000

D 172,500 3,226,500

Question Five

Kamau and Kimani are partners sharing profits and losses in the ratio 3:2respectively. The partnership agreement provides for Kimani to receive a salaryof Sh. 4,000,000 per annum and interest on capitals for both partners at 5% perannum. The partnership balance sheet as at 31 December was as follows:

Sh. 000 Sh. 000 Sh. 000 Sh. 000Capital accounts PremisesKamau 16,000 Less depreciation

20,800

Kimani 10,000 26,000 Equipment at cost8,000Depreciation (4,800)3,200

24,000

Current accountsKamau 3,200Kimani (300) 2,900 Stock 5,600

Debtors 2,200Creditors accruals 3,300 Cash 400 8,200

32,20032,200

On 1 April 1999 Kimata was admitted to the partnership. He had been a salariedemployee, earning Sh. 8,000,000 per annum. The terms of his admission to thepartnership were as follows:1. Kimata should introduce Sh. 12,000,000 in cash as capital into the business.


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2. Goodwill should be valued at Sh. 14,000 for the purpose of his admission. Itwas agreed that goodwill should not be included in the balance sheet of thenew partnership.

3. Kimata should receive a salary as a partner of Sh. 6,000,000 per annum.Kimanis salary should be raised to Sh. 6,000,000.

4. Interest on capital should be raised from 5% to 6% per annum and calculatedon the capital accounts after the elimination of goodwill.

5. The new profit sharing ratio for Kamau, Kimani and Kimata should be 4:2:1respectively.

In preparing the draft financial statements for the year ended 31 December 1999,the partnership accountant, Otieno calculated that the partnerships profit for theyear was Sh. 55,155,000, and that the working capital of the business as at 31December 1999 was:

Sh. 000

Stock 12,555Debtors 3,500Cash 8,800Creditors and accruals 3,480

Profit is assumed to accrue evenly during the year.Partners cash drawings for the year were Kamau Sh. 23,705,000, Kimani Sh.19,525,000 and Kimata Sh. 8.250,000.Required:(a)The profit and loss appropriation account for the year ended 31 December

1999. (8 marks)(b)The current and capital accounts of the partners for the year ended 31

December 1999. (7marks)

(c)Balance Sheet as at 31 December 1999. (5 marks) (Total: 20 marks)Question Six

A, B & C have been in partnership sharing profit in the ratio of 3:2:2. on31/12/04, they decided to admit D into the partnership on payment of capital ofKshs. 5,000,000

The balance sheet on that date was as follows:Land and building 10,000


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Motor vehicles 5,000Furniture 4,000Current Assets:Stock 3,000.00Debtors 2,000.00

Cash and bank 1,000.00 6,000.00

Current Liability:Creditors 2,000.00Accruals 1,000.00 (3,000.00) 3,000.00Net assets 22,000.00Financed by:Capital: A 7,000.00B 5,000.00C 3,000.00 15,000.00

Current: A 3,000.00B 2,000.00C 2,000.00 7,000.00

22,000.00Additional information:i) For the purpose of admission the assets were revalued as follows:Good will 90,000Land and building 12,000,000Motor vehicles 4,000,000Stock 3,500,000

Debtors 1,500,000

ii) The new partnership does not wish to retain goodwill in its accountsiii) The new profit sharing ratio is 3:3:2:1 to A, B, C, D respectively.

Required: a) Partners capital accountsb) Revaluation accountc) Balance sheet after admission.

Suggested solution

Dr. Revaluation a/c Cr.000

Motor vehicle1,000,000Debtors500,000Capital: A

000Balance b/d10,000Income & Expenditure26,000

36,000


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BC 31,200

36.000

Dr. Goodwill a/c Cr.

Revaluation 900,000 Capital A 300,000B 300,000C 200,000D 100,000

900,000 900,000

Dr. Capital a/cCr.

Goodwill

300,000 300,000 200,000

100,000 Bal b/f 7,000,000

5,000,000 3,000,000

Rev.supl

814,285 542,851 542,858

Cash 5,0000

Balc/f

7,514,285

5,242,857

3,242,858

4,900,000

7,814,285

5,542,857

3,542,858

5,000,000

7,841,285

5,542,850,

3,542,858

5,0000

Balance sheet (after admission)Land & building 12,000,000

Motor vehicles 4,000,000

Furniture 4,000,000

Stock 3,500,000

Debtors 1,500,000

Cash & bank 6,000,000 11,000,000

Creditors 2,000,000Accruals 1,000,000 (3,000,000) 8,000,000

Net assets 28,000,000

Financed by:

Capital A 7,514,285

B 5,242,857


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C 3,342,858

D 4,900,000 21,000,000

Current A 3,000,000

B 2,000,000,

C 2,000,000 7,000,00028,000,000

Chapter 19 Changes in Partnership (1)

Documents

Transcript of Chapter 19 Changes in Partnership (1)