Reference no: EM131537824

Question: Re-printed by courtesy of the Society of Incorporated Accountants (SIA)

Two professional firms agree to amalgamate their practices. The first firm consists of three partners. A, Β and C, who share profits in the ratio 5:4:3 with a total capital of £6,000 shared in the same proportions. The second firm has two partners, D and E, sharing profits and a total capital of £5,000 in the ratio 3:2. In the combined practice, A, Β and D are each to take one-quarter and C and Ε one-eighth of the profits after providing for a salary of £900 per annum to both C and E. The Capital of the new firm is to be £16,000, shared A, Β and D £4,000 each and C and Ε £2,000 each. For the puφoses of adjustment between the partners it is agreed that the goodwill of each of the old practices shall be valued at four years purchase of the average profits of the firm for the previous five years. No Goodwill is to appear in the books of the new firm, and partners are to bring in or withdraw cash at the end of the first year to give effect to these arrangements. It is also agreed that partners shall be deemed to be interested in the Goodwill of the new firm in the ratio of their participation in the first years profits, including salaries where applicable. The first years profits before charging partners; salaries amounted to £16,200. The profits of the five years preceding the amalgamation were: A, Β and C, £9,070, £9,500, £10,850, £10,330 and £10,495. D and E, £4,120, £5,215, £6,125, £6,375 and £6,140. Prepare the Capital Account of each partner as at the end of the first year, assuming that all adjustments on Capital Account were passed through the new firm's books.