Accounting for partnership
HKDSE(2014, 5) (Partnership)
Abby and Bobby are partners sharing profit and losses in the ratio of 2:3 respectively. The following terms are included in the partnership agreement:
—Interest on partners' capital is 8% per annum.
—Interest on partners' drawings is charged at 10% per annum.
—Abby is entitled to an annual salary of $60,000.
The following balances were extracted from the books of the partnership as at 31 December 2013:
Dr / Cr$ / $
Capital accounts – Abby / 150,000
– Bobby / 300,000
Current accounts – Abby / 43,000
– Bobby / 27,000
Partners' salary – Abby / 20,000
9% bank loan / 280,000
Inventory / 84,000
Accounts receivable / 250,000
Accounts payable / 126,000
Net profit for the year / 165,000
Drawings – Abby (withdrawn on 1 March 2013) / 18,000
– Bobby (withdrawn on 1 September 2013) / 12,000
Additional information:
(i)Interest on the 9% bank loan for the quarter ended 31 December 2013 had not been paid or provided for.
(ii)During the year, goods invoiced at $20,000 were sent to a customer on a sale-or-return basis. These goods had been marked up at 25% on cost and recorded as sales for the year. As at 31 December 2013, only 80% of these goods were accepted by the customer.
REQUIRED:
(a)Prepare a statement to calculate the partnership's adjusted net profit for the year ended 31 December 2013.
(b)Prepare the partnership's appropriation account for the year ended 31 December 2013.
(c)Update the partners' current accounts in columnar form as at 31 December 2013.
HKDSE(2013, 4) (Partnership)
Carrie and Daisy have been in partnership sharing profits and losses in the ratio of 3 : 2. On 1 January 2012, Carrie retired from the partnership and Ellen was admitted as a new partner. The balances of the partnership before the retirement and admission were as follows:
Dr / Cr$ / $
Capital accounts at 1 January 2012 – Carrie / 700,000
– Daisy / 650,000
Current accounts at 1 January 2012 – Carrie / 72,000
– Daisy / 247,000
Property, net / 1,250,000
Equipment, net / 600,000
Trade receivables / 550,000
Trade payables / 275,000
Cash at bank / 100,000
Bank loan (repayable on 31 March 2016) / 700,000
2,572,000 / 2,572,000
Upon the retirement of Carrie and the admission of Ellen, the partners agreed on the following:
(i)Ellen brought in $850,000 cash into the partnership.
(ii)The balance of Carrie’s current account was to be transferred to her capital account on her retirement date.
(iii)Property was to be revalued at $2,320,000 and the net book value of equipment was to be decreased by 20%.
(iv)An allowance for doubtful debts of 4% was to be made.
(v)A cheque for $230,000 would be paid to Carrie immediately after her retirement and the remaining balance owed would be left as along-term interest-free loan to the new partnership.
(vi)Goodwill was to be valued at $350,000. No goodwill account was to be maintained in the books.
(vii)Interest on capital at 4% per annum was to be allowed and Daisy was entitled to a salary of $5,000 per month.
(viii)Daisy and Ellen were to share profits and losses equally.
REQUIRED:
(a)Prepare the partners’ capital accounts in columnar form as at 1 January 2012, showing the retirement of Carrie and admission of Ellen.
(b)Prepare a statement of financial position as at 1 January 2012 after the retirement of Carrie and admission of Ellen.
(c)If the net profit for the year 2012 was $300,000, prepare the partners’ current accounts in columnar form for the year ended 31 December 2012.
(d)Give one reason why asset revaluation is necessary upon the retirement of a partner.
HKDSE(2012, 7) (Partnership)
Andy, Bob and Carol were in partnership sharing profits and losses in the ratio of 2:3:5. The summarised balance sheet as at 31 December 2011 was as follows:
Andy, Bob and CarolBalance Sheet as at 31 December 2011
$ / $
Assets
Plant and machinery, net / 129 000
Office equipment, net / 134 500
Inventories / 92 000
Trade receivables / 40 500
Cash at bank / 2 200
398 200
Liabilities
Loan from Andy / 60 000
Loan from Bob / 50 000
Trade payables / 50 200
Accrued expenses / 11 500 / 171 700
226 500
Financed by
Capital accounts:
Andy / 178 000
Bob / 22 000
Carol / 12 000 / 212 000
Current accounts:
Andy / 14 300
Bob / 6 500
Carol / (6 300) / 14 500
226500
As profits of the partnership had been declining, the partners decided to dissolve the partnership on 1 January 2012.On the date of dissolution,
(i)Andy took over all the office equipment as full settlement of his loan to the partnership.
(ii)Carol took over half of the inventories at $11 500.
(iii)Bob had collected from customers a total of $36 100 after deducting bad debts of $4400. He agreed that the amount collected would be used as part of the settlement of his loan to the partnership.
In the course of dissolution, all the remaining assets were sold for $285 700 and all the liabilities were settled by cheque. Cash discounts amounting to $720 were allowed by suppliers and realization expenses of $4920 were paid.
For the purpose of dissolution, all the balances of the partners’ current accounts were to be transferred to their respective capital accounts before any adjustment was to be made.
REQUIRED:
(a)Prepare the following accounts of the partnership to record the above:
(1)realisation account
(2)cash at bank account
(3)the partners’ capital accounts in columnar form
(b)Explain one advantage of maintaining both current accounts and capital accounts in a partnership.
HKDSE(sample 2 2A, 6) (Accounting for partnership)
Alice, Brian and Clara had been in partnership for 10 years, sharing profits and losses in the ratio of 3:2:1 respectively. The balance sheet as at 31 December 2011 of the partnership was as follows:
$ / $Premises, net / 850,000 / Capital accounts
Plant and equipment, net / 64,000 / —Alice / 276,000
Motor vehicles, net / 82,100 / —Brian / 468,000
Inventory / 33,600 / —Clara / 395,000
Trade receivables, net / 23,800 / Accrued expenses / 21,400
Bank / 135,500 / Trade payables / 28,600
1,189,000 / 1,189,000
Alice retired from the partnership on 31 December 2011. Brian and Clara were to share profit and losses equally after Alice’s retirement. Additional information was provided as follows:
(i)In recognition of Alice’s long service to the partnership, a motor vehicle with a net book value of $22,000 was to be given to her free of charge and the amount was to be borne equally by Brian and Clara.
(ii)The premises and the plant and equipment were to be revalued to $1,400,000 and $107,000 respectively.
(iii)The allowance for doubtful debts was to be increased by $2,600 and inventory costing $2,400 was to be written off due to obsolescence.
(iv)Goodwill was to be valued at $420,000. No goodwill account was to be maintained in the books.
(v)It was agreed that $100,000 of the amount due to Alice upon her retirement was to be paid by cheque immediately while the remaining balance was to be left as a three-year loan to the new partnership.
REQUIRED:
(a)Prepare
(1)the revaluation account;
(2)the partners’ capital accounts, in columnar form, as at 31 December 2011, showing all the adjustments regarding the retirement of Alice; and
(3)the balance sheet of Brian and Clara as at 1 January 2012.
After her retirement from the partnership, Alice joined Dali Ltd as the sales director. She believed that her professional knowledge in the industry would bring benefits to the company. Therefore, she suggested valuing her expertise at $6,000,000 and recognizing it in the financial statements as an intangible asset.
REQUIRED:
(b)With reference to one relevant accounting principles / concepts, briefly explain to Alice whether the amount of $6,000,000 should be recognized in the financial statements as an intangible asset.
HKDSE Sample 1 (Paper 2A, 5) (Accounting for partnership)
Leung had run a trading company as a sole trader for many years. The company made huge sales revenue amounting to $1,260,000 for the 3 months ended 31 March 20X6. He found that more than 80% of the revenue was contributed by sales team headed by Chan, the sales manager. As the sales team was a valuable asset to the company, Leung suggested recording this at $420,000, which equals 1 month’s sales revenue, in the company’s statement of financial position as at 31 March 20X6.
REQUIRED:
(a)Comment on Leung’s suggestion with reference to an appropriate accounting principle or concept.
On 1 April 20X6, Leung invited Chan to form a partnership. Their partnership agreement contains the following clauses:
(i)An interest of 10% per annum is paid on capital.
(ii)Leung and Chan share profits and losses in the ratio of 2 : 1.
(iii)Chan is entitled to a partner’s salary of $300,000 per annum.
Goodwill was agreed at $60,000 on 1 April 20X6 and it was decided that no goodwill account would be kept in the books. The fixed capital of the partnership was $360,000, to be divided between Leung and Chan in their profit and loss sharing ratio. Chan would not inject any cash as capital. The excess or deficiency in fixed capital would be transferred to or from the respective partner’s current account.
The partnership continued to use the books of accounts of Leung’s business. The following is the trial balance as at 31 December 20X6 before making any adjustment for goodwill on Chan’s admission as a partner:
$’000 / $’000Sales / 4,200
Cost of goods sold / 2,460
Operating expenses / 660
Chan’s salary payments during the year / 318
Drawings: Leung / 160
Chan / 14
Capital: Leung / 280
Current assets / 750
Non-current assets / 811
Current liabilities / 693
5,173 / 5,173
All sales were made on a fixed mark up and operating expenses were accrued evenly over the year.
REQUIRED:
(b)Prepare the trading and profit and loss account of Leung’s sold trader business for the three months ended 31 March 20X6.
(c)Prepare the partnership’s trading, profit and loss and appropriation account for the nine months ended 31 December 20X6.
(d)Draw up Leung and Chan’s capital accounts for the year 20X6.
Longman(2014, 5)(Partnership)
5Ko, Law and Mokwere partners, sharing profit and losses in the ratio of 3 : 2 : 1. The following is the partnership’s statement of financial position as at 30 June 2014:
Ko, Law and MokStatement of Financial Position as at 30 June 2014
$ / $
Assets
Goodwill / 100,000
Machinery and equipment, net / 163,750
Motor vehicles, net / 325,000
Inventory / 31,875
Trade receivables / 102,175
Bank / 28,450
751,250
Liabilities
Trade payables / 87,500
Loan from Ko / 42,500 / 130,000
621,250
Financed by:
Capital accounts: / Ko / 315,000
Law / 293,750
Mok / 10,000 / 618,750
Current accounts: / Ko / 6,000
Law / (1,500)
Mok / (2,000) / 2,500
621,250
The partners agreed to dissolve their partnership on 30 June 2014. On the date of dissolution:
(i)Goodwill was written off.
(ii)Some machinery and equipment were taken over by the following partners at book value:
$Ko / 50,000
Law / 60,000
The remaining machinery and equipment were sold for 70% of book value.
(iii)The motor vehicles were disposed of at a profit of $59,500.
(iv)The trade receivables were realised for $95,000.
(v)Ko took over the entire inventory at book value.
(vi)The trade payables were taken over by Law and settled with a 10% discount.
(vii)Dissolution expenses totalled $18,750.
(viii)As Mok was insolvent, her capital deficiency was borne by Ko and Law according to their profit and loss sharing ratio.
On dissolution, all partners’ loan and current account balances were transferred to their respective capital accounts before adjustments were made.
Required:
(a)Prepare the following accounts:
(i)Realisation account
(ii)Bank account
(iii)Partners’ capital accounts in columnar form
(b)What is goodwill? Name two situations where adjustments for goodwill are required in the books of a partnership.
Longman(2013, 5)(Partnership)
1Kevin, Lucy and Donald are partners. The following information was extracted from the partnership’s books as at 1 January 2013:
Kevin / Lucy / DonaldProfit and loss sharing ratio / 5 / 2 / 3
Capital accounts / $800,000 / $600,000 / $400,000
Current accounts / ($73,500) / $129,000 / $86,700
Additional information:
(i)The partnership’s draft accounts for the year ended 31 December 2013 showed a net profit of $1,720,000 before adjustments for depreciation and doubtful accounts and appropriation items.
(ii)Information on non-current assets is as follows:
Cost / Accumulated depreciation / Depreciation basisFurniture and equipment / $600,800 / $305,000 / 20% on carrying amount per annum
Machinery / $750,000 / $315,000 / Units of output
The machinery was acquired on 1 January 2010. An estimated 1,000,000 units would be able to be produced over its useful life and the residual value was $50,000. For the year ended 31 December 2013, a total of 150,000 units were produced.
(iii)The partnership’s policy was to keep the allowance for doubtful accounts at 4% of accounts receivable. As at 31 December 2013, accounts receivable totalled $1,290,500 while the allowance for doubtful accounts amounted to $67,392. A sum of $5,700 was to be written off as a bad debt.
(iv)Kevin and Donald were entitled to annual salaries of $120,000 and $84,000, respectively.
(v)Rate of interest on capital: 8% per annum.
(vi)Rate of interest on drawings: 10% per annum.
(vii)Drawings made on 1 July 2013: Kevin $39,000; Donald $28,000.
(viii)Lucy loaned $190,000 to the partnership on 1 April 2013 and charged interest at 12% per annum.
Required:
(a)Prepare the profit and loss appropriation account for the year ended 31 December 2013. (Calculations to the nearest dollar)
Longman(2012, Dec, 7)(Partnership)
7.Ivy and Gary were partners, sharing profits and losses in the ratio of 3 : 1. The balance sheet of the partnership as at 31 December 2011 was as follows:
Ivy and GaryBalance Sheet as at 31 December 2011
$ / $
Non-current assets
Premises, net / 958,000
Equipment, net / 315,700
1,273,700
Current assets
Inventory / 295,900
Trade receivables / 357,000
Bank / 120,900
773,800
Less / Current liabilities
Trade payables / (148,700)
Net current assets / 625,100
1,898,800
Financed by:
Capital account: / Ivy / 1,200,000
Gary / 220,000 / 1,420,000
Current account: / Ivy / 674,300
Gary / (195,500) / 478,800
1,898,800
On 1 January 2012, Tony was admitted to the partnership on the following terms:
(i)Tony was required to contribute capital of $250,000, with one-quarter of it paid by cheque and the balance settled by way of a personal loan from Ivy through a transfer between the capital accounts.
(ii)The new profit and loss sharing ratio would be Ivy 3: Gary 1: Tony 1.
(iii)Goodwill was to be valued at $400,000. A goodwill account was to be opened.
(iv)Tony would be entitled to a salary of $6,000 per month.
REQUIRED:
(a)Draw up the partners’ capital accounts in columnar form to record the admission of a new partner.
(b)What are partners’ current accounts used for?
For the year ended 31 December 2012, the partnership incurred a net loss of $560,000 before appropriations. Depreciation charges of $47,000 and $57,600 had been made on premises and equipment, respectively. Tony did not receive any salary payment during the year and no drawings were made by the partners. The following balances were also extracted from the partnership’s books as at 31 December 2012:
$Trade payables / 95,700
Trade receivables / 200,100
Inventory / 117,050
Bank / 10,750
In light of deteriorating economic conditions, the partnership was dissolved on 31 December 2012 as follows:
(i)Ivy took over the premises at 110% of the net book value.
(ii)Tony took over the inventory at a discount of 20%.
(iii)The equipment was sold for $210,800.
(iv)Ivy collected all the trade receivables at a discount of 10% and retained the money.
(v)Dissolution expenses amounted to $17,500.
(vi)The trade payables were settled with a 5% discount.
(vii)Gary was in financial difficulty and could only contribute $20,000 towards his capital deficiency. Ivy and Tony were to share his deficiency in their profit and loss sharing ratio.
REQUIRED:
(c)Draw up the realisation account.
(d)Draw up the partners’ capital accounts in columnar form
(Calculations to the nearest dollar)
1ST Mock Exam 2012-2013(Accounting for partnership)
7.Abby, Billy and Cathy were trading in partnership for many years, sharing profit and losses in the ratio of 2 : 1 : 2 respectively. According to the partnership deed, Abby, Billy and Cathy would receive a salary of $30,000, $24,000 and $18,000 per annum respectively.
The trial balance as at 31 March 2011 was as follows:
$ / $Capital – Abby / 400,000
– Billy / 350,000
– Cathy / 400,000
Current – Abby / 50,000
– Billy / 30,000
– Cathy / 20,000
Drawings – Abby / 15,000
– Billy / 16,000
– Cathy / 8,000
Net Profit before appropriations / 55,500
Accounts receivable / 80,000
Salary – Abby / 5,000
– Cathy / 8,000
10% loan: Abby (borrowed on 1 October 2009) / 150,000
12% loan: Billy (borrow on 1 April 2010) / 260,000
On 31 March 2011, Billy retired on the following terms:
(i)Inventory was revalued downwards by $18,000
(ii)Goodwill was to be valued at $3,9750. It was agreed than no account for goodwill was to be maintained in the books.
(iii)An allowance for bad debts should be made at 4% accounts receivable instead of 6%.
(iv)A customer who owned the partnership $15,000 had declared bankrupt in November but no entry had been made to record it.
(v)A motor vehicle was revalued upwards by $55,000.
(vi)Billy agreed that the amount due to him be considered as a loan to the partnership. The loan interest is 5% per annum.
(vii)Abby and Cathy were to share the profits and losses in the ratio of 1 : 2 respectively.
(viii)After all adjustments, both Abby and Cathy’s capital should remain at $400,000. Any surplus or deficit was to be transferred to or from the individual’s current account.
REQUIRED:
(a)Draw up a revaluation account.
(b)Draw up Abby, Billy and Cathy’s capital accounts for the year 2011.
(c)Draw up Abby, Billy and Cathy’s current accounts for the year 2011.
Pre-Mock Exam 2012-2013 (Accounting for partnership)
3.Ng, Chan and Wong had been in partnership for a number of years, sharing profits and losses equally. The trial balance as at 31 March 2011 was as follows:
$ / $Motor vehicle / 108,000
Inventory / 27,800
Bank / 1,700
Prepaid rates / 500
Accounts receivable and payable / 42,000 / 27,200
Allowance for doubtful debts / 1,800
Accumulated depreciation – Motor vehicle / 18,000
Capital – Ng / 50,000
– Chan / 30,000
– Wong / 20,000
Current – Ng / 18,250
– Chan / 18,750
– Wong / 4,000
On 31 March 2011, the partnership was dissolved on the following terms:
(i)Chan was to take over the motor vehicle at $18,000 and he was also personally liable for the discharge of accounts payable of the partnership. He later discharged the accounts payable with a discount of $1,200.
(ii)Inventory was to be taken over by Ng at a valuation of $24,980.
(iii)Amount received from debtors was arrived after deducting discounts allowed of $1,200 and bad debts of $3,000. Prepaid rates were forfeited.
(iv)Wong was insolvent and unable to contribute to the firm.
REQUIRED:
(a)Draw up the realization account.
(b)Draw up the capital accounts of the partners in columnar form.
LongmanMock (5, 2011) (Accounting for partnership)
Tammy and Roy were in partnership, sharing profits and losses in the ratio of 4 : 1. At the end of the financial year, 31 March 2012, the partnership’s balance sheet was as follows:
Tammy and RoyBalance Sheet as at 31 March 2012
$ / $ / $
Non-current assets
Premises / 497,860
Equipment / 282,110
779,970
Current assets
Inventory / 258,900
Accounts receivable / 320,500
579,400
Less / Current liabilities
Accounts payable / 281,560
Bank overdraft / 47,770 / (329,330)
Net current assets / 250,070
1,030,040
Financed by:
Capital:Tammy / 839,540
Roy / 190,500
1,030,040
As there was disagreement between the partners, they decided to dissolve the partnership on 31 March 2012.
Tammy took over the premises for $620,000 and Roy took over the equipment for $238,000. Tammy was responsible for collecting the accounts receivable and was entitled to a commission of 5% on all sums received. Consequently, bad debts of $4,500 were written off and cash discounts of $6,000 were allowed. Inventory was sold for $227,850 and the accounts payable were paid off with a 10% discount. Dissolution costs of $17,376 were paid.