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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.
£
30,000
Ken
15,000
7,800
7,100
Len
1,800
Land and buildings
18,000
Equipment and vehicles
21,000
Inventory
9,200
Gross profit
42,000
Trading expenses
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
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
Goodwill written off
6,000
3,000
Bal b/d
-
Current a/c – capital
Goodwill
7,500
Current a/c – goodwill
Bal c/d
35,100
20,100
1,500
Revaluation gain
3,600
41,100
26,100
4,500
Current account
Balance b/d
Capital a/c –capital
Accrued bonus
Capital a/c-goodwill
Interest on capital
Balance c/d
200
Profit share
8,000
Revaluation account
3,200
Land and building
10,400
Capital account – JIM
7,200
Jim, Ken and Len
Partnership, Profit and Loss and Appropriation account
For the year ended 31 December 19-7
1st 8 months
2nd 4 months
TOTAL
28,000
14,000
Expenses
Depreciation on equipment & vehicles
2,800
3,800
10,000
5,000
Managers’ salary
Manager bonus
1,400
(18,200)
(7,000)
(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
(7,400)
2,000
(5,528)
(12,928)
Jim, Ken and Len Partnership
Balance Sheet as at 31 December 19-7
Cost revaluation
Depreciation to date
Net book value
28,400
(1,000)
43,400
42,400
Life policy asset account
Account receivables
Bank
16,950
Trade payables
(3,100)
Net current assets
13,850
57,250
FINANCED BY:
Capital: J
56,700
Current account J
(300)
(350)
(450)
Life policy fund account
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