Reference no: EM132719795

Revaluation, determining goodwill, and admission of new partner

The partners shared profits and losses 60:40 respectively. They agreed to admit Defarge to the partnership as from 1 July 2001. She was to be entitled to one-sixth share of the profits while Manette and LaForce were to share the remainder in the same proportions as before.

Defarge was to contribute the assets of her business at the following valuations: debtors $12 000 (subject to an allowance of 5% for doubtful debts); inventory $20 800; and the goodwill of her business valued at $3000. Defarge's capital in the new firm was to be $40 000 and she was to bring in cash for any further contribution required.

The assets of Manette and LaForce were revalued as follows:

1. Inventory increased by $5000.

2. Office equipment and motor vehicles reduced by $3000 and $3600 respectively.

3. Allowance for doubtful debts created at 5% on trade debtors.

4. Goodwill raised to the full agreed value of $50 000. It was agreed among the three partners that capitals in the new firm should be fixed in proportion to the profit-sharing ratios using Defarge's capital as the base and with Manette and LaForce adjusting their capitals by cash payment or cash withdrawal.

Required:

Question A. Show necessary journal entries to record the above transactions.

Question B. Prepare the statement of financial position of the new firm as at 1 July 2003, after all of the above arrangements have been completed.