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ADMISSION OF NEW PARTNER AND RETIREMENT OF AN EXISTING PARTNER IN CONTINUING BUSINESS

Financial Accounting

Partnership changes usually occur during a financial year and the accounting records are contrived without interruption. Final accounts are prepared at the end of the financial year. When a partner leaves the firm or a new partner joins, it marks the end of one partnership and the beginning of a new one. No records and entries are made in the books as at the period of change until the end of the financial year. In the process, revaluation of asset, valuation of goodwill and changes in the profit/loss sharing ratio may occur.

Illustration 5: Admission of a new partner

Dami and Lola have shared profits and losses in the ration of 3:2. On 1 October 2010, they decided to admit Bola as a partner. No entries to record Bola’s admittance as a partner were made in the books before the end of the financial year on 31 December 2010.

Information extracted from the books for the year ended 31 December 2010 include the following:

N
Turnover

Cost of sales

Wages

Rent

General expenses

Deprecation of fixed assets:

1 January to 30 December 2010

1 October to 31 December 2010

400,000

240,000

40,000

8,000

9,600

 

6,000

4,350

 

(based on the asset revaluation as shown below)

 

At December 2009, the balances on Dami and Lola’s capital and current accounts were as follows:

Capital Accounts Current Accounts
N N
Dami 50,000 2,000
Lola 30,000 3,000

 

On 1 October 2010, the partnership assets were revalued as follows:

N
Freehold premises

Other fixed assets

Current assets

50,000 increase

14,000 decrease

3,000 decrease

 

The partners agreed the value of goodwill on 1 October 2010 at N40,000 and decided that no goodwill account should be opened in the books.

On 1 October 2010, Bola paid N20,000 into the firm’s bank account as capital. On the same day, Dami lent the partnership N20,000. He is entitled to interest at a rate of 100% per annum on the loan.

The balances on the partners drawings account at 31 December 2010 were as follows:

N
Dami

Lola

Bola

23,000

17,000

3,000

The new partnership agreement provided for the following as from 1 October 2010.

  • Interest was allowed on the balances on capital accounts on 31 December each year at a rate of 5% per annum.
  • Lola was entitled to a salary of N12,000 per annum.
  • The balance of profits and losses were to be shared. Dami – , Lola   and Bola –

Required:

  • Prepared the capital accounts of Dami, Lola and Bola as at 31 December 2010.
  • Prepare the partnership trading, profit and loss and appropriate account for the year ended 31 December 2010.
  • Prepare the partners current accounts as at 31 December 2010.

Solution

Workings

Revaluation a/c

Particulars N Particulars N
Other fixed assets

Current asset

Profit to capital a/c

Dami (  x 33,000) =

Lola  (  x 33,000) =

14,000

3,000

 

19,800

13,200

50,000

Freehold premises 50,000

 

 

 

 

50,000

 

  1. Goodwill: Since the partners agreed that no goodwill account should be opened, then working of the share of goodwill to capital account is only shown as follows:

Value of goodwill N40,000 as at 1 October 2010 share to Dami and Lola in their old profit-sharing ratio as follows:

Dami (  x 40,000)      =          24,000

Lola (  x 40,000)        =          16,000

Goodwill to be written off immediately from the books as follows using new profit-sharing ratio:

Dami (  x 40,000)      =          16,000

Lola (  x 40,000)        =          16,000

Bola (  x 40,000)        =          8,000

  • Partners Capital Account
Dami

(N)

Lola

(N)

Bola

(N)

Dami

(N)

Lola

(N)

Bola

(N)

Goodwill w/off

Bal c/d

16,000

77,800

 

 

 

93,800

16,000

43,200

 

 

 

59,200

8,000

12,000

 

 

 

20,000

Bal. b/d

Bank

Profit on Revaluation Goodwill

 

Bal b/d

50,000

 

 

19,800

24,000

93,800

77,800

30,000

 

 

13,200

16,000

59,200

43,200

20,000

 

20,000

12,000

  • Dami, Lola and Bola

Trading, Profit and loss and Appropriation Account for the Year Ended 31 December, 2010

N

Turnover                               400,000

Less: Cost of Sales    240,000

Gross profit c/d                   160,000

 

            9 months to 30                      3 months to 31                      year to

September 2010                    December 2010                     31 December 2010

N N N N N N
Gross profit b/d 120,000 40,000 160,000
Wages 30,000 10,000 40,000
Rent 6,000 2,000 8,000
General expenses 7,200 2,400 9,600
Interest on loan 500 500
Depreciation 6,000 (49,200) 4,350 (19,250) 10,250 (68,450)
Net profit 70,800 20,750 91,550
Interest on capital at 5% p.a.      
Dami –   973   973  
Lola –   540   540  
Bola –   150   150  
  1,663   1,663  
Salary – Lola   3,000   3,000  
  (4,663) (4,663)
70,800 16,087 86,887
Share of profit      
Dami (3/5), (2/5) 42,480   ( ½ ) 6,435   48,915  
Lola (2/5), (2/5) 28,320   (  ) 6,435   34,755  
Bola (1/5)   (  ) 3,217   3,217  
70,800 16,087 86,887
  • Partners’ Current Account
Dami Lola Bola Dami Lola Bola
N N N N N N
Drawings 23,000 17,000 3,000 Bal. b/d 2,000 3,000
Bal. c/d 29,388 24,295 367 Loan interest 500
Int. on capital 973 540 150
Salary 3,000
Share of profit 48,915 34,755 3,217
52,388 41,295 3,367 52,388 41,295 3,367
      Bal. b/d 29,388 24,295 367

 

Essay Type Questions

  1. (a) Define ‘partnership’.

(b) Is it possible for a partnership to exist without agreement? If so, why do you consider a written agreement to be desirable?

(c)  Is it possible for a person

(i)        To receive a share in the profits of a business without being liable as a partner therein;

(ii)       To be liable as partner without receiving a share of the profits of a business?

 

  1. The following trial balance has been extracted from the books of Sam and Dan at 30 April 2011.
N N
Sales 425,000
Purchases 200,000
Stock at 1 May 2010 30,000
Wages 98,000
Rent 25,000
Heating and lighting 16,000
Office expenses 12,600
Vehicle expenses 5,510
Advertising 3,500
Bad debts written off 416
Plant & machinery at cost 125,000
Provision for depreciation plant & machinery 36,000
Motor vehicle at cost 41,000
Provision for depreciation of motor vehicle 22,000
18,000
Trade debtors and creditors 45,750
Provision for doubtful debts 1,000
Bank balance 15,724
Loan from Sam 60,000
Capital a/c                             – Sam

– Dan

Current a/c                            – Sam

– Dan

Drawings a/c                         – Sam

– Dan

 

 

 

 

30,000

13,500

50,000

40,000

7,000

3,000

662,000 662,000

 Additional Information

  • Stock at 30 April, 2011 is valued at N27,000
  • Sam is to be credited with interest on the loan at a rate of 10% per annum.
  • The bank reconciliation shows that bank interest of N314 and bank charges of N860 have been debited in the bank statements. These amounts have not been entered in the cash book.
  • On 30 April 2011, rent of N1,500 and advertising of N2,000 have been paid in advance.
  • Depreciation is to be provided as follows:
    1. Plant and machinery 10% per annum on cost.
    2. Motor vehicles 20% per annum on their written down values.
  • The partners are to be charged interest on drawings and allowed interest on capital at a rate of 10% per annum.
  • Partnership salaries are to be allowed as follows: Sam N10,000 per annum, Dan N8,000 per annum.
  • The balance of profits and losses is to be shared as follows: Sam – 3/5; Dan 2/5.

Required:

  • Prepare the partnership trading, profit and loss and appropriate accounts for the year ended 30 April 2011.
  • Prepare the partners’ current accounts for the year ended 30 April 2011.
  • Prepare the balance sheet as at 30 April 2011.

 

  1. Bose, Bukky and Biola are partners sharing profit and losses in ratio 3:2:1 respectively.

The partners’ trial balance as at 31 December 2010 is as follows:

Dr (N) Cr (N)
Capital account

–            Bose

–            Bukky

–            Biola

Current account

–            Bose

–            Bukky

–            Biola

Premises

Plant

Vehicles

Furniture

Loan – Biola

Creditors

Stock

Debtors

Bank

 

 

 

 

 

 

 

5,018

 

180,000

74,000

30,000

4,000

 

 

125,758

69,960

 

487,736

 

170,000

130,000

70,000

 

7,428

 

9,356

 

 

 

 

56,000

38,072

 

 

6,880

487,736

Biola retires on 31 December 2010 and Shola was admitted as a partner on that date.

The following matters were agreed on:

  • Assets revalued – premises N24,000 plant N60,000 and stock N108,358.
  • Goodwill of N84,000 is to be recorded in the books on the day Biola retires.
  • Provision is to be made for doubtful debts of N 6,000.
  • The partners in the new firm do not wish to maintain goodwill account
  • Bose and Bukky are to share profits in the same ration as earlier and Shola is to have the same share of profit as Bukky.
  • Biola is to take over car at its book value of N7,800 in part payment and the balance of all she is owed by the firm in cash except N40,000 which she is willing to leave as a loan.
  • The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned.
  • Shola is to contribute cash to bring the capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.
  • 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.

Required:

  • Prepare account for the above transactions including goodwill and retiring partners account.
  • Balance sheet of the new partnership of Bose, Bukky and Shola as at 31 December 2010.

See also

GOODWILL

ISSUE OF SHARES

THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES

COMPANY ACCOUNTS

DISSOLUTION OF PARTNERSHIP

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