Illustration of admissions and retirements, Financial Accounting

Illustration of Admissions and Retirements

Jim and Ken have been trading in partnership for several, sharing profits or losses equally after allowing for interest on their capitals at 8% p.a. At 1 September 19-7 their manager, Len, was admitted as a partner and was to have a one-fifth share of the profits after interest on capital. Jim and Ken shared the balance equally but guaranteed that Len’s share would not fall below £6,000p.a. Len was not required to introduce any capital at the date of admission but agreed to retain £1,500 of his profit share at the end of each year to be credited to his capital account until the balance reached £7,500, until that time no interest was to be allowed on his capital. Goodwill, calculated as a percentage of the profits of the last five years was agree at £15,000 at September 19-7, and Len paid into the business sufficient cash for his share. No goodwill accounts were to be left in the books. Land and building were professionally valued at the same date £28,400 and this figure was to be brought into the books, whilst the book value of the equipment and vehicles was, by mutual agreement, to be reduced to £15,000 at the date. Len had previously been entitled to a bonus of 5% of the gross profit payable half-yearly, the bonus together with his manager’s salary were cease when he became a partner. It was agreed to take out a survivorship policy and the first premium of £1,000 was paid on 1 September 19-7.

The trial balance at the end of the 19-7 financial year is given below. No adjustments had yet been made in respect of lens admission, and the amount he introduced for goodwill had been put into his current account. The drawings of all the partners have been changed to their current account. It can be assumed that the gross profit and trading expenses accrued evenly throughout the year. Depreciation on the equipment and vehicles is to be charges at 20% p.a. on the book value.

	£	£
Capital accounts Jim		30,000
Ken		15,000
Current accounts Jim	7,800
Ken	7,100
Len		1,800
Land and buildings	18,000
Equipment and vehicles	21,000
Inventory	9,200
Gross profit		42,000
Trading expenses	15,000
Managers salary	4,000
Managers bonus	1,050
Accounts receivables & Payables	4,850	3,100
Premium on survivorship policy	1,000
Bank balance	2,900
	91,900	91,900

Required:

(a) Prepare the profit and loss account and the partner’s capital and current accounts for the year ended 31 December 19-7 and a balance sheet as at that date.

Solution

Capital account
	JIM	KEN	LEN		JIM	KEN	LEN
Goodwill written off	6,000	6,000	3,000	Bal b/d	30,000	15,000	-

				Current a/c – capital	-	-	15,000
				Goodwill	7,500	7,500	-
				Current a/c – goodwill	-	-	3,000
Bal c/d	35,100	20,100	1,500	Revaluation gain	3,600	3,600	-
	41,100	26,100	4,500		41,100	26,100	4,500
Current account
	JIM	KEN	LEN		JIM	KEN	LEN
Balance b/d	7,800	7,100	-	Balance b/d	30,000	15,000	-
Capital a/c –capital	-	-	1,500	Accrued bonus	-	-	1,500
Capital a/c-goodwill	-	-	3,000	Interest on capital	7,500	7,500	-
Balance c/d	200			Profit share	-	-	3,000
				Balance c/d	3,600	3,600	-
	8,000	7,100	4,500		8,000	7,100	4,500

Revaluation account
Equipment and vehicles	3,200		Land and building	10,400
Capital account – JIM	3,600
KEN	3,600	7,200
		10,400		10,400

Jim, Ken and Len Partnership, Profit and Loss and Appropriation account For the year ended 31 December 19-7
	1^st 8 months		2^nd 4 months		TOTAL
	£	£	£	£	£	£
Gross profit		28,000		14,000		42,000
Expenses
Depreciation on equipment & vehicles	2,800		1,000		3,800
Trading expenses	10,000		5,000		15,000
Managers’ salary	4,000		-		4,000
Manager bonus	1,400		-		1,400
Premium on survivorship policy	-	(18,200)	1,000	(7,000)	1,000	(25,200)
NET PROFIT		9,800		7,000		16,800
Less: Interest on capital J	1,600		936		2,536
K	800		536		1,336
L	-	(2,400)	-	(1,472)	-	(3,872)
Balance of profits share in PSR		7,400		5,528		12,928
J	3,700		1,764		5,464
K	3,700		1,764		5,464
L	-	(7,400)	2,000	(5,528)	2,000	(12,928)

Jim, Ken and Len Partnership Balance Sheet as at 31 December 19-7
	Cost revaluation	Depreciation to date	Net book value
NON-CURRENT ASSETS
Land and buildings	28,400	-	28,400
Equipment and vehicles	15,000	(1,000)	14,000
	43,400	(1,000)	42,400
Life policy asset account			1,000
			43,400
CURRENT ASSETS
Inventory		9,200
Account receivables		4,850
Bank		2,900
		16,950
CURRENT LIABILITIES
Trade payables		(3,100)
Net current assets			13,850
			57,250
FINANCED BY:
Capital: J			35,100
K			20,100
L			1,500
			56,700
Current account J		200
K		(300)
L		(350)	(450)
Life policy fund account			1,000
			57,250

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