Chapter 10 Partnership Revaluation

Chapter 10 Partnership Revaluation

QUESTION 1

Allan, Simon and John are in partnership, sharing profits and losses in the ratio of 3 : 2 : 1. The draft balance sheet as at 31 March 2011 is as follows:

Balance Sheet as at 31 March 2011
$ / $ / $ / $
Plant and equipment / 37,600 / Capital accounts
Vehicles / 20,000 / Allan / 38,000
Goodwill / 4,000 / Simon / 24,000
Inventory / 18,400 / John / 22,000 / 84,000
Accounts receivable / 24,800 / Current accounts
Less Allowance for doubtful / Allan / 3,840
accounts / (2,400) / 22,400 / Simon / 3,360
Bank / 20,240 / John / 2,240 / 9,440
Loan: Allan / 10,000
Accounts payable / 19,200
122,640 / 122,640

On 31 March 2011, Allan retired from the partnership. Simon and John continued to operate the business, sharing profits and losses equally.

It was agreed that the following adjustments were to be made to the balance sheet as at 31 March 2011:

(i)  Goodwill was to be revalued to $8,750.

(ii)  Plant and equipment were to be revalued to $48,900 and vehicles to $24,500.

(iii)  The allowance for doubtful accounts was to be increased by $650.

(iv)  Damaged inventory of $1,390 was to be written off.

(v)  Allan was to be paid $10,240 and the remaining balance due to him would remain as a loan to the partnership.

(vi) The goodwill account would no longer be kept in the books. Adjustment entries for transactions between the partners would be made in their capital accounts.

Required:

Prepare the following:

(a) Revaluation account (4 marks)

(b) Capital accounts of Allan, Simon and John in columnar form (6.5 marks)

(c) Balance sheet of Simon and John’s partnership as at 1 April 2011 (6.5 marks)

Answer:

(a)

Revaluation

/
$ / $ / $
Allowance for doubtful accounts / 650 / Goodwill ($8,750 – $4,000) / 4,750 / 0.5 0.5
Inventory / 1,390 / Plant and equipment ($48,900 – $37,600) / 11,300 / 0.5 0.5
Profit on revaluation — / Vehicles ($24,500 – $20,000) / 4,500 / 0.5
Capital: Allan ( ) / 9,255 / 0.5
Capital: Simon ( ) / 6,170 / 0.5
Capital: John ( ) / 3,085 / 18,510 / 0.5
20,550 / 20,550

(b)

Capital

/
Allan / Simon /

John

/ / Allan / Simon / John
$ / $ / $ / $ / $ / $
Bank / 10,240 / — / — / Balances b/f / 38,000 / 24,000 / 22,000 / 0.5 each
Loan / 40,855 / — / — / Revaluation — / 0.5
Goodwill — Write-off / — / 4,375 / 4,375 / Share of profit / 9,255 / 6,170 / 3,085 / 0.5 each
Balances c/f / — / 25,795 / 20,710 / Current / 3,840 / — / — / 0.5 each
51,095 / 30,170 / 25,085 / 51,095 / 30,170 / 25,085

(c)

Simon and John

/
Balance Sheet as at 1 April 2011
$ / $ / $
Non-current assets
Plant and equipment / 48,900 / 0.5
Vehicles / 24,500 / 0.5
73,400
Current assets
Inventory ($18,400 – $1,390) / 17,010 / 0.5
Accounts receivable / 24,800 / 0.5
Less Allowance for doubtful accounts ($2,400 + $650) / (3,050) / 21,750 / 0.5
Bank ($20,240 – $10,240) / 10,000 / 0.5
48,760
Less Current liabilities
Accounts payable / (19,200) / 0.5
Net current assets / 29,560 / 0.5
102,960
Financed by:
Capital account: Simon / 25,795 / 0.5
John / 20,710 / 46,505 / 0.5
Current account: Simon / 3,360 / 0.5
John / 2,240 / 5,600 / 0.5
52,105
Loan : Allan ($10,000 + $40,855) / 50,855 / 0.5
102,960

QUESTION 2

Kenny, Candy and Alan had been in partnership for a number of years, sharing profits and losses in the ratio of 3 : 2 : 2.

On 31 March 2011, the balance sheet of the partnership was as follows:

Balance Sheet as at 31 March 2011
$ / $ / $
Non-current assets
Premises / 67,000
Machinery, net book value / 69,200
Motor vehicles, net book value / 87,400
223,600
Goodwill / 20,000
243,600
Current assets
Inventory / 50,350
Accounts receivable / 37,200
Cash in hand / 300 / 87,850
Current liabilities
Accounts payable / 30,050
Bank overdraft / 1,790 / (31,840) / 56,010
299,610
Financed by:
Capital account: Kenny / 100,000
Candy / 90,000
Alan / 86,000 / 276,000
Current account: Kenny / 9,110
Candy / 9,500
Alan / 5,000 / 23,610
299,610

Additional information:

(i) Candy decided to retire from the partnership on 31 March 2011. On that date, assets were revalued as follows:

$

Goodwill 23,000

Machinery 70,000

Motor vehicles 72,000

Premises 80,000

Inventory 49,060

(ii)  It was agreed that a 5% allowance for doubtful accounts be created in respect of accounts receivable.

(iii)  Motor vehicles valued at $32,000 were taken over by Candy.

(iv)  Candy was paid $50,000 and the balance of her capital account was to be transferred to a loan account.

(v)  Kenny and Alan each introduced additional capital of $30,000. The new profit and loss sharing ratio was 2 : 1.

Required:

(a) In the books of the partnership, prepare the following:

(i)  The revaluation account to deal with the entries required for Candy’s retirement. (4.5 marks)

(ii)  Partners’ capital accounts in columnar form, showing the related adjustments. (7 marks)

(b) Prepare the balance sheet of Kenny and Alan’s partnership as at 1 April 2011. (7.5 marks)

Answer:

(a) (i)

Revaluation

/
2011 / $ / 2011 / $ / $
Mar 31 Motor vehicles ($87,400 - $72,000) / 15,400 / Mar 31 Goodwill ($23,000 - $20,000) / 3,000 / 0.5 0.5
" 31 Inventory ($50,350 - $49,060) / 1,290 / " 31 Machinery ($70,000 - $69,200) / 800 / 0.5 0.5
" 31 Allowance for doubtful accounts / 1,860 / " 31 Premises ($80,000 - $67,000) / 13,000 / 0.5 0.5
($37,200 × 5%) / " 31 Loss on revaluation —
Capital: Kenny ( ) / 750 / 0.5
Capital: Candy ( ) / 500 / 0.5
Capital: Alan ( ) / 500 / 1,750 / 0.5
18,550 / 18,550

(ii)

Capital

/
Kenny / Candy / Alan / Kenny / Candy / Alan
2011 / $ / $ / $ / 2011 / $ / $ / $
Mar 31 Revaluation — / Mar 31 Balances b/f / 100,000 / 90,000 / 86,000 / 0.5 each
Share of loss / 750 / 500 / 500 / " 31 Bank / 30,000 / — / 30,000 / 0.5 each
" 31 Motor vehicles / — / 32,000 / — / " 31 Current / — / 9,500 / — / 0.5 0.5
" 31 Bank / — / 50,000 / — / 0.5
" 31 Loan / — / 17,000 / — / 0.5
" 31 Balances c/f / 129,250 / — / 115,500 / 0.5
130,000 / 99,500 / 116,000 / 130,000 / 99,500 / 116,000

(b)

Kenny and Alan
Balance Sheet as at 1 April 2011
$ / $ / $
Non-current assets
Premises / 80,000 / 0.5
Machinery / 70,000 / 0.5
Motor vehicles ($72,000 – $32,000) / 40,000 / 0.5
190,000
Goodwill / 23,000 / 0.5
213,000

Current assets

/ / /
Inventory / 49,060 / 0.5
Accounts receivable / 37,200 / 0.5
Less Allowance for doubtful accounts / (1,860) / 35,340 / 0.5
Bank ($60,000 – $50,000 – $1,790) / 8,210 / 0.5
Cash in hand / 300 / 0.5
92,910

Current liabilities

Accounts payable / (30,050) / 0.5
Net current assets / 62,860
275,860
Financed by:
Capital account: Kenny / 129,250 / 0.5
Capital Alan / 115,500 / 244,750 / 0.5
Current account: Kenny / 9,110 / 0.5
Current Alan / 5,000 / 14,110 / 0.5
Loan from Candy / 17,000 / 0.5
275,860

QUESTION 3

Margaret and Nelson were partners, sharing profits and losses in the ratio of 3 : 2. Their balance sheet as at 31 December 2010 is as follows:

Margaret and Nelson
Balance Sheet as at 31 December 2010
$ / $
Non-current assets
Furniture and fittings (net) / 80,000
Motor vehicles (net) / 60,000
140,000
Goodwill / 50,000
190,000
Current assets
Inventory / 20,000
Accounts receivable / 15,000
Bank / 18,000
53,000
Less / Current liabilities
Accounts payable / (23,000)
Net current assets / 30,000
220,000
Financed by:
Capital: Margaret / 120,000
Nelson / 100,000
220,000

On 1 January 2011, Olivia was admitted to the partnership. She was required to contribute $80,000 as capital. The new profit and loss sharing ratio for Margaret, Nelson and Olivia was 3 : 2 : 1, respectively.

Upon Olivia’s admission, furniture and fittings were to be revalued to $85,000, motor vehicles to $50,000 and goodwill to $60,000. No goodwill account was to be kept.

Required:

(a)  Draw up the revaluation account. (2.5 marks)

(b) Draw up the partners’ capital accounts in columnar form. (7.5 marks)

Answer:

(a)

Revaluation
$ / $ / $
Motor vehicles ($60,000 – $50,000) / 10,000 / Furniture and fittings ($85,000 – $80,000) / 5,000 / 0.5 0.5
Profit on revaluation — / Goodwill ($60,000 – $50,000) / 10,000 / 0.5
Capital: Margaret ( ) / 3,000 / 0.5
Capital: Nelson ( ) / 2,000 / 5,000 / 0.5
15,000 / 15,000

(b)

Capital
Margaret / Nelson / Olivia / Margaret / Nelson / Olivia
$ / $ / $ / $ / $ / $
Goodwill — / Balances b/f / 120,000 / 100,000 / — / 0.25 0.25
Write-off (W1) / 36,000 / 24,000 / — / Revaluation — / 0.5 0.5
Goodwill adjustment (W2) / — / — / 10,000 / Share of profit / 3,000 / 2,000 / — / 1, 0.5, 0.5
Balances c/d / 93,000 / 82,000 / 70,000 / Bank / — / — / 80,000 / 0.5 each
Goodwill adjustment (W2) / 6,000 / 4,000 / — / 1 1
129,000 / 106,000 / 80,000 / 129,000 / 106,000 / 80,000

Workings:

(W1) / Goodwill
$ / $
Balance b/f / 50,000 / Capital: / Margaret ( ) / 36,000
Revaluation / 10,000 / Nelson ( ) / 24,000
60,000 / 60,000
(W2) / Goodwill Adjustment
Partner / Goodwill shared
in old ratio / Goodwill shared
in new ratio / Gain (loss) from
change in ratio / Required adjustment
$ / $ / $ / $
Margaret / 36,000 / 30,000 / (6,000) / Cr Capital: Margaret / 6,000
Nelson / 24,000 / 20,000 / (4,000) / Cr Capital: Nelson / 4,000
Olivia / — / — / 10,000 / 10,000 / Dr Capital: Olivia / 10,000
60,000 / 60,000

QUESTION 4

George, Anthony and Margaret were partners, sharing profits and losses in the following ratio:

George 35%

Anthony 40%

Margaret 25%

On 31 December 2010, the balance sheet of the partnership was as follows:

George, Anthony and Margaret
Balance Sheet as at 31 December 2010
$ / $ / $
Non-current assets
Furniture and fittings, net book value / 239,350
Motor vehicles, net book value / 141,000
Office equipment, net book value / 145,990
526,340
Goodwill / 106,000
632,340
Current assets
Inventory / 253,000
Accounts receivable / 233,500
Prepaid insurance / 3,510
Cash / 64,210
554,220
Less / Current liabilities
Accounts payable / 187,000
Accrued rent / 23,100
Accrued utilities / 5,320
Bank overdraft / 23,360 / (238,780)
Net current assets / 315,440
947,780
Financed by:
Capital account: / George / 261,700
Anthony / 378,000
Margaret / 211,980 / 851,680
Current account: / George / 21,400
Anthony / 41,220
Margaret / 33,480 / 96,100
947,780

Additional information:

Owing to poor health, Anthony decided to retire on 31 December 2010 on the following terms:

(i) Revaluation of assets on 31 December 2010:

$

Goodwill 232,000

Furniture and fittings 353,000

Motor vehicles 53,200

Office equipment 264,200

Inventory 113,000

(ii) The allowance for doubtful accounts was maintained at 3% of accounts receivable.

(iii) A motor vehicle valued at $24,500 was to be taken over by Anthony.

(iv) Anthony was to be repaid 25% of the total balance due to him and the remaining portion would be treated as a loan to the partnership.

(v) George and Margaret agreed to each contribute additional capital of $95,000. The new profit and loss sharing ratio would be as follows:

George 60%

Margaret 40%

Required:

(a) Prepare the following accounts to reflect the above situation:

(i) Revaluation account (4.5 marks)

(ii) Partners’ capital accounts in columnar form (7 marks)

(b) Prepare the balance sheet of the new partnership of George and Margaret as at 1 January 2011.

(8.5 marks)

(Calculations to the nearest dollar)

Answer:

(a) (i)

Revaluation
2010 / $ / $ / 2010 / $
Dec 31 / Motor vehicles ($141,000 – $53,200) / 87,800 / Dec 31 / Goodwill ($232,000 – $106,000) / 126,000 / 0.5 0.5
" 31 / Inventory ($253,000 – $113,000) / 140,000 / " 31 / Furniture and fittings / 0.5
" 31 / Allowance for doubtful accounts / ($353,000 – $239,350) / 113,650 / 0.5
($233,500 × 3%) / 7,005 / " 31 / Office equipment / 0.5
" 31 / Profit on revaluation — / ($264,200 – $145,990) / 118,210 / 0.5
Capital: George (35%) / 43,069 / 0.5
Capital: Anthony (40%) / 49,222 / 0.5
Capital: Margaret (25%) / 30,764 / 123,055 / 0.5
357,860 / 357,860

(ii)

Capital
George / Anthony / Margaret / George / Anthony / Margaret
2010 / $ / $ / $ / 2010 / $ / $ / $
Dec 31 / Motor vehicle / — / 24,500 / — / Dec 31 / Balances b/f / 261,700 / 378,000 / 211,980 / 0.5 each
" 31 / Bank (W1) / — / 110,986 / — / " 31 / Bank / 95,000 / — / 95,000 / 0.5 each
" 31 / Loan (W2) / — / 332,956 / — / " 31 / Current / — / 41,220 / — / 0.5 each
" 31 / Balances c/f / 399,769 / — / 337,744 / " 31 / Revaluation — / 0.5 each
Share of profit / 43,069 / 49,222 / 30,764 / 0.5 each
399,769 / 468,442 / 337,744 / 399,769 / 468,442 / 337,744

Workings:

(W1) Payment to Anthony = ($468,442 – $24,500) × 25% = $110,986

(W2) Loan from Anthony = $468,442 – $24,500 – $110,986 = $332,956

(b)

George and Margaret
Balance Sheet as at 1 January 2011
$ / $ / $
Non-current assets
Furniture and fittings / 353,000 / 0.5
Motor vehicles ($53,200 – $24,500) / 28,700 / 0.5
Office equipment / 264,200 / 0.5
645,900
Goodwill / 232,000 / 0.5
877,900
Current assets
Inventory / 113,000 / 0.5
Accounts receivable / 233,500 / 0.5
Less / Allowance for doubtful accounts / (7,005) / 226,495 / 0.5
Prepayment / 3,510 / 0.5
Bank [($95,000 × 2) – $110,986 – $23,360] / 55,654 / 0.5
Cash / 64,210 / 0.5
462,869
Less / Current liabilities
Accounts payable / 187,000 / 0.5
Accruals ($23,100 + $5,320) / 28,420 / (215,420) / 0.5
Net current assets / 247,449
1,125,349
Financed by:
Capital account: / George / 399,769 / 0.5
Margaret / 337,744 / 737,513 / 0.5
Current account: / George / 21,400 / 0.5
Margaret / 33,480 / 54,880 / 0.5
792,393
Loan from Anthony / 332,956 / 0.5
1,125,349

QUESTION 5