CHAPTER 7 96 • Accounts and books must be kept at the principal place of business and be made available to all partners. All partners are allowed to keep a copy of the accounts. 7.1.4 Type of Partnership Form the business point of view, the partners in the partnership business may be classified into various types. The following of three types of partnership: a. General Partner The partner participates fully in the operational managerial functions of the business and is also fully liable for the partnership debts. b. Sleeping partner A partner who does not participate in the operational and managerial functions of the business. However, he is also fully liable for the partnership debts. c. Limited liability partner A partner whose liability is limited to the amount of capital invested by him into the partnership business. In other words, his personal possessions cannot be taken to pay the partnership debts. A limited liability partner has the option to take part in the managerial functions of the business. 7.1.5 Advantages and Disadvantages of Partnership Advantages of Partnership a) Accumulation of skills, knowledge and experiences. If one partner has technical knowledge, other could be marketing or finance expert. Thus, the managerial resources of the firm are enhanced. b) Combines the financial strength of all partners, as the liability of partners is joint and several. Not only is the ability to contribute capital greater, it also enhances the borrowing capacity of the firm. c) The profits and losses are shared by all partners. If the firm is unable to meet any of its payment obligations, all partners are responsible. Thus, partnership offers risk reduction as the risk is spread across partners. d) Ease of formation compared to company, where any two persons capable of entering into contract can start partnership.
CHAPTER 7 97 Disadvantages of Partnership a) Partners become fully liable for all claims against the firm to an unlimited extent. b) Liable for actions conducted by other partners on behalf of firm. c) Dissolution when partner(s) withdraw, decease, bankrupt or with court order d) Restricted authority and decision making. All decisions need consent of partners eg; changes in nature of business and admission of new partner(s). e) Success of the partnership depends on quality of relationship amongst partners. 7.2 TYPE OF ACCOUNT FOR PARTNERSHIP There is no much different between the account of partnership firm and that the sole proprietorship (provided there is no change in the firm itself). The only difference to be noted is that instead of one Capital Account there will be as many Capital Accounts as there are partners. Following are the specific issues that require special attention in case of partnership accounts: a. Maintenance of capital accounts of partners b. Ascertainment and allocation of profit and losses c. Revaluation of partnership (new admission and death) d. Dissolution of partnership 7.2.1 Partners' Capital Accounts In case of partnership firm, the transactions relating to partners are recorded in their respective capital accounts. Normally, each partner's capital account is prepared. There are two methods by which the capital accounts of partners can be maintained. These are: a. Fluctuating Capital Method Under the fluctuating capital method, only the capital account for each partner is maintained. It records all items affecting partner's account like interest on capital, drawings, interest on drawings,
CHAPTER 7 98 salary, commission, and share of profit or loss in the capital account itself. As a result of these, the balance in the capital account keeps on fluctuating. Partners’ Capital Account RM RM Drawing xxx Balance b/d xxx Interest on drawing xxx Additional Capital xxx Share of loss xxx Interest on capital xxx Withdrawal of capital xxx Salary xxx Balance c/d xxx Commission xxx Share of profit xxx xxx xxx b. Fixed Capital Method Under the fixed capital method, the capitals of the partners shall remain fixed. For all transactions, a separate account called 'Partner's Current Account' is opened. Partners’ Capital Account RM RM Withdrawal of capital xxx Balance b/d xxx Balance c/d xxx Additional Capital xxx xxx xxx Partners’ Current Account RM RM Balance b/d xxx Balance b/d xxx Drawing xxx Interest on capital xxx Interest on drawing xxx Salary xxx Share of loss xxx Commission xxx Balance c/d xxx Share of profit xxx Balance c/d xxx xxx xxx
CHAPTER 7 99 EXAMPLE 7.1 Ahmeed and Sulaiman commenced business as partners on 1st April 2019. Ahmeed contributed RM40,000 and Sulaiman RM25,000 as their share of capital. The partners decided to share their profits in the ratio of 2:1. Ahmeed was entitled to a salary of RM6,000 a year. Interest on capital was to be provided at 6% per year. The drawings of Ahmeed and Sulaiman RM4,000 and RM8,000 respectively. The profits of the firm after providing Ahmeed salary and interest on capital were RM12,000. SOLUTION i. Capitals are fluctuating Partners’ Capital Account Ahmeed RM Sulaiman RM Ahmeed RM Sulaiman RM Drawing 4,000 8,000 Bank 40,000 25,000 Balance c/d 52,400 22,500 Interest on capital 2,400 1,500 Salary 6,000 - Share of profit 8,000 4,000 56,400 30,500 56,400 30,500 ii. Capitals are fixed Partners’ Capital Account Ahmeed RM Sulaiman RM Ahmeed RM Sulaiman RM Balance c/d 40,000 25,000 Bank 40,000 25,000 40,000 25,000 40,000 25,000
CHAPTER 7 100 Partners’ Current Account Ahmeed RM Sulaiman RM Ahmeed RM Sulaiman RM Drawing 4,000 8,000 Interest on capital 2,400 1,500 Balance c/d 12,400 - Salary 6,000 - Share of profit 8,000 4,000 Balance c/d - 2,500 16,400 8,000 16,400 8,000 7.2.2 Appropriation of Profit and Loss The net profit (after charging the interest on capital, partners' salary and commission and after taking into account the interest on drawings) is to be shared by all the partners in the agreed profit sharing ratio. For this purpose, Profit and Loss Appropriation Account may be prepared to show how net profit is to be distributed among the partners. Profit and Loss Appropriation Account RM RM Interest on capital: Net profit as per SOCI xxx Partner A xxx Interest on drawing: Partner B xxx xxx Partner A xxx Partners’ salaries xxx Partner B xxx xxx Partners’ commission xxx Share of loss Share of profit Partner A xxx Partner A xxx Partner B xxx xxx Partner B xxx xxx xxx xxx
CHAPTER 7 101 EXAMPLE 7.2 Ava and Budi have been in partnership for several years. The financial year of their business ends on 31 December. As at 31 December 2019 the partners had the following balances on their capital and current accounts: Partners’ Capital Account (RM) Current Account (RM) Loan Account (RM) Ava 60,000 1,500 10,000 Budi 130,000 1,200 - On the initial formation of the partnership an agreement drawn up on behalf of the partners included the following terms: • Partners would receive interest on their capital at the rate of 3% per year • Interest on drawing to be charged at 5% per year • Ava would receive a partnership salary of RM5,000 per year. • Remaining profits or losses would be shared equally. • Interest on loan 8% per year. Partnership generated a net profit of RM14,800. Drawings by partners: • Ava RM1,800 • Budi RM3,200 You are required to prepare: a) Profit and Loss Appropriation Account b) Partnership Current Account c) Extract of Financial Position as at 31 December 2019
CHAPTER 7 102 SOLUTION a) Profit and Loss Appropriation Account RM RM Interest on capital: Net profit as per SOCI 14,800 Ava 1,800 Interest on drawing: Budi 3,900 5,700 Ava 90 Partners’ salaries - Ava 5,000 Budi 160 250 Share of profit Ava 2,175 Budi 2,175 4,350 15,050 15,050 b) Partners’ Current Account Ava RM Budi RM Ava RM Budi RM Drawing 1,800 3,200 Balance b/d 1,500 1,200 Interest on drawing 90 160 Interest on capital 1,800 3,900 Balance c/d 9,385 3,915 Salary 5,000 - Share of profit 2,175 2,175 Interest on loan 800 - 11,275 7,275 11,275 7,275 c) Extract of Financial Position as at 31 December 2019 (RM) Finance by: Capital Account Ava 60,000 Budi 130,000 Current Account Ava 9,385 Budi 3,915 Current Liability: Loan - Ava 10,000
CHAPTER 7 103 7.3 ADMISSION NEW PARTNERS AND RETIREMENT OR DEATH OF PARTNERS It is essential to know the true position of the capital of the old partners or the existing partners in case of admission, retirement or death of a partner. Hence, in order to ascertain the original or true value of the assets and or liability on a certain date for the said purpose, the assets and liability of the firm must be revalued. 7.3.1 Revaluation Whenever there is a change in the profit and loss sharing ratio or a change in the composition of a partnership (admission of a new partner, withdrawal or death of an old partner) all assets (including goodwill) and liabilities must be revalued and adjusting entries are required to be made immediately. A revaluation account will be opened to record the gain and losses on revaluation of assets and liabilities. Adjustment of assets and liabilities revaluation will affect partners. The overall profit or loss on revaluation of all assets and liabilities of the partnership should be shared immediately among the old partners in the old profit and loss sharing ratio by transferred to the partners’ capital account. The partners’ capital balances would be increased by profit on revaluation or decreased by the loss on revaluation. KEY POINT Gain on revaluation: Fair value (Market value) > Net book value Loss on revaluation: Fair value (Market value) < Net book value
CHAPTER 7 104 EXAMPLE 7.3 Tarmizi, Suzen dan Chuah were in partnership. The following shows their Balance Sheet as at 31 December 2019. Balance Sheet as at 31 December 2019 RM RM Buildings 80,000 Capital Tarmizi 95,600 Motor vehicles 35,500 Suzen 64,200 Office fittings 13,100 Chuah 48,400 Inventory 20,400 Debtors 45,300 Creditors 6,800 Bank 20,700 215,000 215,000 The partners had shared profits and losses in the ratio: Tarmizi 5: Suzen 3: Chuah 2. On 1 January 2019, the profit and loss sharing ratio was altered to: Tarmizi 2: Suzen 2: Chuah 4. The following assets were revalued to: buildings RM175,000, motor vehicles RM26,000, inventory RM18,900, office fittings RM10,900. Show the required entries in the revaluation account. SOLUTION Revaluation Account RM RM Motor vehicles (35,500–26,000) 9,500 Buildings (175,000–80,000) 95,000 Inventory (20,400–18,900) 1,500 Office fittings (13,100–10,900) 2,200 Capital Account Tarmizi (5/10 x 81,800) 40,900 Suzen (3/10 x 81,800) 24,540 Chuah (2/10 x 81,800) 16,360 81,800 95,000 95,000 The net profits on revaluation are transfer to the partners’ capital account, based on the old profit sharing ratio.
CHAPTER 7 105 7.3.2 Goodwill When partners carry on business with their firm for a long time, they earn a reputation for it. This reputation translates in monetary terms into expected future profits above normal profits. Goodwill usually exists because of factors such as managerial skills, good employee relations, strategic business standing and good product or service reputation. Goodwill is not a physical asset but its treat as an intangible asset. Since goodwill as an assets for company, it must be revaluated when changing in partnership occur. Partners have to compute their firm’s goodwill for the following purposes: • A new partner joins a firm • An existing partner retires or dies • Partners want to dissolve the firm • Partners change their profit sharing ratio There are two methods used to determine goodwill value: a. Business value method b. Average profit method Business Value Method This method refers to a value of business which exceeds the net assets of business (total asset- total liability). Value of business is an estimated value by comparing company or business profit with rate of return. EXAMPLE 7.4 Calculate the goodwill value based on the following information: Average annual profit RM50,000 Expected rate of return 10% per year Total net assets RM550,000 Total liability RM120,000
CHAPTER 7 106 SOLUTION Value of business = 50,000/10% = RM500,000 Goodwill value = RM500,000 – (550,000-120,000) = RM70,000 Average Profit Method The value of goodwill is equal to tha value of the average annual net profit for a spesified pas number of year. This is often reffered to as χ years purchase of the net profit. EXAMPLE 7.5 On 1 January 2019, goodwill was value as equal to 2 years purchase of the average annual profit of the last 5 years. 2014 40,000 2015 50,000 2016 70,500 2017 81,000 2018 93,400 Required: Calculate the amount of goodwill. SOLUTION Average = (40,000+50,000+70,500+81,000+93,400)/5 = RM66,980 Goodwill value = RM66,980 x 2 = RM133,960
CHAPTER 7 107 7.3.3 Accounting for Goodwill There are two ways in showing goodwill, a. A goodwill account is open. b. A goodwill account is not open; write-off goodwill. A goodwill account is open The treatment to retain goodwill in the business as an intangible asset is in line with the argument that when a change in partnership arises, the old partnership is dissolved and a new partnership will take over. If goodwill is retained, the entries are as follows: EXAMPLE 7.6 Henry and Jason had been partners for a number of years, sharing profits and losses equally. The partners agreed to change the profit and loss sharing ratio as follows: Henry 2 : Jason 1 with effect from the financial year starting on 1 June 2019. Suppose the partnership’s goodwill was valued for the first time at RM150,000. SOLUTION Goodwill Account RM RM Capital Henry 75,000 Balance c/d 150,000 Jason 75,000 150,000 150,000 150,000 KEY POINT Debit: Goodwill Account Credit: Partners’ Capital
CHAPTER 7 108 Partners’ Capital Account Henry RM Jason RM Henry RM Jason RM Balance c/d 175,000 225,000 Balance b/d 100,000 150,000 Goodwill 75,000 75,000 175,000 225,000 175,000 225,000 Extract of Financial Position as at 1 June 2019 RM Intangible Assets Goodwill 150,000 Finance by: Capital Account Henry 175,000 Jason 225,000 A goodwill account is not open The treatment to write-off goodwill is based on the argument that the value of goodwill is highly subjective because it is based on estimates. Hence, the amount may not be reliable and should not be recorded as an asset. I goodwill is written-off, the accounting entries required are as follows: KEY POINT Debit: Goodwill Account Credit: Partners’ Capital Account (old partners in the old profit sharing ratio) Debit: Partners’ Capital Account Credit: Goodwill Account (new partners in the new profit sharing ratio)
CHAPTER 7 109 EXAMPLE 7.7 Using the information in Example 7.6, treatments are shown below SOLUTION Goodwill Account RM RM Capital Henry 75,000 Capital Henry 100,000 Jason 75,000 150,000 Jason 50,000 150,000 150,000 150,000 Partners’ Capital Account Henry RM Jason RM Henry RM Jason RM Goodwill 100,000 50,000 Balance b/d 100,000 150,000 Balance c/d 75,000 175,000 Goodwill 75,000 75,000 175,000 225,000 175,000 225,000 Extract of Financial Position as at 1 June 2019 RM Finance by: Capital Account Henry 75,000 Jason 175,000 7.3.4 Admission of New Partner When a firm requires additional capital or managerial help it can admit a new partner in its business. Beside, when a new partner is admitted a new agreement is formed and thus the firm is reconstituted. The new partner acquires the right to share the assets of the firm for which he brings in the capital and the right to share the future profits of the firm for which he brings Goodwill. On admission of a new partner, the profit sharing ratio changes, the assets and liabilities are revalued and goodwill is calculated and distributed among the old partners in their sacrificing ratios.
CHAPTER 7 110 EXAMPLE 7.8 Rahim and Zaman are in partnership for several years, sharing profit and loss equally. The statement of financial position is as follows: Statement of Financial Position as at 31 July 2019 RM RM Non-Current Assets Premises 230,000 Furnitue 120,500 350,500 Current Assets Bank 21,600 Invenotry 24,200 Debtors 54,000 99,800 450,300 RM RM Capital Account Rahim 100,000 Zaman 200,000 300,000 Currrent Account Rahim 46,800 Zaman 56,600 103,400 Current Liability Creditors 46,900 450,300 Rahim and Zaman invited Devid to joint them in the partnership. David agreed to pay RM80,000 into the new partnership. Profit and losses are to be shared in the proportion of 1:2:1. Assets and liability are revalued: Goodwill RM50,000 Premises RM300,000 Furniture RM110,000 Inventory RM20,000
CHAPTER 7 111 Required to prepare: a) Revaluation Account b) Goodwill Account c) Partners’ Capital Account d) Statement of Financial Position as at 1 August 2019 SOLUTION a) Revaluation Account RM RM Furniture 10,500 Premises 70,000 Inventory 4,200 Capital Account Rahim 27,650 Zaman 27,650 55,300 70,000 70,000 b) Goodwill Account RM RM Capital Rahim 25,000 Capital Rahim 12,500 Zaman 25,000 50,000 Zaman 25,000 David 12,500 50,000 50,000 50,000 c) Partners’ Capital Account Rahim RM Zaman RM David RM Rahim RM Zaman RM David RM Goodwill 12,500 25,000 12,500 Balance b/d 100,000 200,000 Balance c/d 140,150 227,650 67,500 Bank 80,000 Revaluation 27,650 27,650 Goodwill 25,000 25,000 152,650 252,650 80,000 152,650 252,650 80,000
CHAPTER 7 112 d) Statement of Financial Position as at 1 August 2019 RM RM Non-Current Assets Premises 300,000 Furnitue 110,000 410,000 Current Assets Bank 101,600 Invenotry 20,000 Debtors 54,000 175,600 585,600 Capital Account Rahim 140,150 Zaman 227,650 David 67,500 435,300 Currrent Account Rahim 46,800 Zaman 56,600 103,400 Current Liability Creditors 46,900 585,600 7.3.5 Death or Retirement of a Partnership One major changes in the constitution of a partnership firm may occur if a partner retirement from the firm or in the event of his death. In both cases, the partner’s account will have to be settled, and new ratios will have to be calculated. There is also the issue of treatment of goodwill. Goodwill needs to be distributed to the partners in terms of profit and loss ratio as the goodwill earned by the firm is the result of the efforts of all partners in the past. EXAMPLE 7.9 Azlan, Yusof and Tarmizi were in partnership sharing ratio profit and losses in the ratio 3:2:1 respectively. The following is the statement of financial position for the current year:
CHAPTER 7 113 Statement of Financial Position as at 30 September 2019 RM RM Non-Current Assets Machine 80,000 Motor Vehicle 120,000 Furniture & fitting 35,500 235,500 Current Assets Bank 15,100 Invenotry 8,200 Debtors 6,000 29,300 264,800 RM RM Capital Account Azlan 90,000 Yusof 70,000 Tarmizi 78,000 238,000 Currrent Account Azlan 6,450 Yusof 6,300 Tarmizi 5,200 17,950 Current Liability Creditors 8,850 264,800 On 1 October Yusof decided to retire from the partnership. Azlan and Tarmizi agreed to revalue all assets and liability for this situation. The following assets and liability were revalued: Machine RM75,000 Motor Vehicle RM100,000 Furniture & fittings RM30,000 Goodwill RM20,000 Azlan and Tarmizi agreed to share the new ratio of profit and losses by 3:2 respectively. The balance of Yusof’s current account was to be transferred to his capital account on retirement date. Yusof agreed to give RM60,000 as a loan to the partnership with as interest rate of 7% per year. The partnership would be paid the balance to Yusof’s capital account with the cheque.
CHAPTER 7 114 Required to prepare: a) Revaluation Account b) Goodwill Account c) Partners’ Capital Account d) Statement of Financial Position as at 1 October 2019 SOLUTION a) Revaluation Account RM RM Machine 5,000 Capital Account Motor vehivle 20,000 Azlan 15,250 Furniture & fitting 5,500 Yusof 10,167 Tarmizi 5,083 30,500 30,500 30,500 b) Goodwill Account RM RM Capital Azlan 10,000 Capital Azlan 12,000 Yusof 6,667 Tarmizi 8,000 20,000 Tarmizi 3,333 20,000 20,000 20,000 c) Partners’ Capital Account Azlan RM Yusof RM Tarmizi RM Azlan RM Yusof RM Tarmizi RM Goodwill 12,000 - 8,000 Balance b/d 90,000 70,000 78,000 Revaluation 15,250 10,167 5,083 Goodwill 10,000 6,667 3,333 Loan 60,000 Current Ac. - 6,300 - Bank 12,800 Balance c/d 72,750 - 68,250 100,000 82,967 81,333 100,000 82,967 81,333
CHAPTER 7 115 d) Statement of Financial Position as at 1 October 2019 RM RM Non-Current Assets Machine 75,000 Motor vehivle 100,000 Furniture & fitting 30,000 205,000 Current Assets Bank 2,300 Invenotry 8,200 Debtors 6,000 17,600 221,500 Capital Account Azlan 72,750 Tarmizi 68,250 141,000 Currrent Account Azlan 6,450 Tarmizi 5,200 11,650 Current Liability Creditors 8,850 Loan - Yusof 60,000 221,500 7.4 DISSOLUTION OF PARTNERSHIP When all the partners resolve to dissolve the partnership, the dissolution of business occurs. The partnership will be dissolved for the following reasons: a. death, unethical or bankruptcy of one of the partners b. agreement between fellow partners c. when the business is unable to settle its debt and is forced to close d. by order of law (court) e. when it is not profitable to continue business f. when the purpose of establishing a partnership is reached g. when the partnership firm is changed to a limited company
CHAPTER 7 116 Following are the actions to be taken when businesses are dissolved: a. Sold all the assets (except cash or bank) for cash and recognize a gain or loss on realization. b. Allocate the gain or loss from realization to the partners based on their income ratios. c. Pay partnership liabilities in cash. d. Any remaining balances in the current account are transferred to the capital account. e. Distribute any remaining cash to the partners on the basis of their capital balances. EXAMPLE 7.10 Elly, Ella and Bella who are in partnership, operate furniture business and they share their profits and losses in the ratio 2: 1: 3 respectively. Assets, liabilities and equity positions are as shown below: Statement of Financial Position as at 30 November 2019 RM RM Non-Current Assets Machine 250,000 Office Equipment 150,000 Motor Vehicle 200,000 600,000 Current Assets Bank 50,000 Invenotry 56,800 Debtors 20,000 126,800 726,800 RM RM Capital Account Ella 290,000 Elly 70,000 Bella 240,000 600,000 Currrent Account Ella 27,000 Elly 23,500 Bella 40,500 91,000 Loan - Ella 20,000 Current Liability Creditors 15,800 726,800
CHAPTER 7 117 Upon dissolution, the following matters were agreed: i. Machine, office equipment and inventory was sold for RM220,000, RM100,000 and RM22,000 respectively. ii. Ella took over the motor vehicle for RM150,000. iii. All debtors settled their debt except for RM2,600 which the partners considered as bad debts. iv. Dissolution expenses of RM7,200 were paid. v. Creditors aggred to settle full payment for RM12,000. vi. Loan from Ella was paid in full amount. Required to prepare: a) Realization Account c) Partners’ Capital Account d) Bank Account SOLUTION a) Realization Account RM RM Machine 250,000 Bank: Office Equipment 150,000 Machine 220,000 Motor Vehicle 200,000 Office Equipment 100,000 Invenotry 56,800 Inventory 22,000 Debtors 20,000 Debtors 17,400 Bank - Dissolution expenses 7,200 Capital A/c. Ella Capital A/c loan Motor Vehicle 150,000 Ella 20,000 Creditors (Discount) 3,800 Loan - Ella 20,000 Capital A/c-Loss Ella 56,933 Elly 28,467 Bella 85,400 170,800 704,000 704,000
CHAPTER 7 118 b) Bank Account RM RM Balance b/d 50,000 Creditors 12,000 Realisation: Realization expenses 7,200 Machine 220,000 Capital A/c Office Equipment 100,000 Ella 130,067 Inventory 22,000 Elly 65,033 Debtors 17,400 Bella 195,100 390,200 409,400 409,400 c) Partners’ Capital Account Ella RM Elly RM Bella RM Ella RM Elly RM Bella RM Realization 56,933 28,467 85,400 Balance b/d 290,000 70,000 240,000 Motor Vehicle 150,000 - - Current Ac. 27,000 23,500 40,500 Bank 130,067 65,033 195,100 Realisation 20,000 - - Loan 337,000 93,500 280,500 337,000 93,500 280,500 7.4.1 Rules of Garner vs. Murray If a partner with a debit balance in his capital account is unable to bring in additional cash to cover his capital account, then the rules of Garner vs. Murray are imposed. In this case, if the partner not able to pay full or part due to certain circumstance, his balance will be borne by the partners. The amount contributes by these partners will be based on their opening capital ratio.
CHAPTER 7 119 EXAMPLE 7.11 Lee, Tee and Chan are sharing partners doing business selling watches. They share a profit loss ratio of 2: 2: 1. On 31 July 2019, the statement of financial position was as follows: Statement of Financial Position as at 31 July 2019 RM RM Non-Current Assets Store Equipment 16,800 Office Supplies 15,660 Current Assets Bank 1,200 Inventory 3,800 Debtors 5,000 42,460 RM RM Capital Account Lee 11,000 Tee 9,000 Chin 5,000 25,000 Currrent Account Lee 4,258 Tee 6,000 Chin 2,402 12,660 Current Liability Creditors 4,800 42,460 The three partners wanted to retire and sell their business on 31 July 2019. The following details are about the dissolution. i. The store equipment was sold at RM14,000 while the inventory was sold at RM3,000. ii. Office equipment taken over by Tee at RM12,000 iii. The dissolution fee of RM360 was paid. iv. A sum of RM3,500 is collected from the debtor after deducting bad debts and discounts. v. The creditors agree to accept RM3,000 as full payment for amount due to them.
CHAPTER 7 120 vi. After all assets are realized and the liabilities are explained, Tee is declared bankrupt and unable to settle his debt. Required to prepare: a) Realization Account c) Partners’ Capital Account d) Bank Account SOLUTION a) Realization Account RM RM Store Equipment 16,800 Bank: Office Supplies 15,660 Store Equipment 14,000 Invenotry 3,800 Inventory 3,000 Debtors 5,000 Capital A/c. Tee Bank - Dissolution fee 360 Office Supplies 12,000 Bank : Debtors 3,500 Creditors 1,800 Capital A/c-Loss Lee 2,928 Tee 2,928 Chin 1,464 7,320 41,620 41,620 b) Bank Account RM RM Balance b/d 1,200 Creditors 3,000 Realization: Realisation expenses 360 Store Equipment 14,000 Capital A/c Inventory 3,000 Lee 7,336 Debtors 3,500 Tee 7,336 Chin 3,668 18,340 21,700 21,700
CHAPTER 7 121 c) Partners’ Capital Account Lee RM Tee RM Chin RM Lee RM Tee RM Chin RM Realisation 2,928 2,928 1,464 Balance b/d 11,000 9,000 5,000 Off. Supplies - 12,000 - Current A/c 4,258 6,000 2,402 Capital A/c 4,994 - 2,270 Capital A/c Bank 7,336 7,336 3,668 Lee 4,994 * Chin 2,270 * 15,258 22,264 7,402 15,258 22,264 7,402 * Tee could not be paid the remaining balance RM7,264 and this balance was paid by Lee and Chan. It calculates by their opening capital ratio. Lee = 11,000/ (11,000 + 5,000) x 7,264 = RM4,994 Chin = 5,000/ (11,000 + 5,000) x 7,264 = RM2,270
CHAPTER 7 122 EXERCISE 1. Hamid and Nazri established a partnership on 1 January 2019. They agreed to share profits and losses in the ratio of 2:1. Other information for the year ended 31 December 2010 is as follows: • Cash contributed on 1 January 2019: Hamid RM80,000, Nazri 60,000 • Rate of interest on capital: 5% per annum. • Rate of interest on drawings: 10% per annum. • Nazri was entitled to an annual salary of RM10,000. • Drawings made on 1 July 2010: Hamid RM9,000, Nazri RM6,200. • Net profit for the year amounted to RM82,000. Prepare: a) Profit and Loss Appropriation b) Capital accounts of the partners c) Current Account of the partners 2. Kamal and Tan are partners sharing profit and losses in the ratio of 2:3. Their statement of financial position was as follows: Statement of Financial Position as at 31 December 2018 RM RM Non-Current Assets Builing 20,000 Machine 13,000 Office Equipment 15,000 48,000 Current Assets Bank 7,000 Debtors 26,000 Inventory 6,000 39,000 87,000 Capital Account Kamal 40,000 Tan 30,000 70,000 Current Liability Creditors 17,000 87,000
CHAPTER 7 123 Mikahil is admitted as a partner and assets and liability are revalued as follows: i. Create a Provision for doubtful debt on debtors at RM800. ii. Building RM50,000, machine RM 20,000, office equipment RM13,000, iii. Creditors were RM15,000. Prepare revaluation account before the admission of Mikahil. 3. Aishah, Beeha and Chantik are partners sharing profit and losses in the ratio of 3:2:1 respectively. The following is a list of balance extracted from the account of the partnership as at 31 March 2019. Item RM Plant & Machinery 70,000 Building 90,000 Motor Vehicle 16,000 Debtors 21,000 Stock 50,000 Bank 5,000 Creditors 38,000 Capital Account: Aishah 80,000 Beeha 60,000 Chantik 50,000 Current Account: Aishah 5,000 Beeha 9,000 Chantik 10,000 Beeha retires on that date, subject to the following adjustments: i. The Goodwill of the firm to be valued at RM36,000. ii. Plants and machinery RM63,000, building RM100,000 and motor vehicle RM13,600. iii. Stock RM45,000.
CHAPTER 7 124 Prepare: a) Revaluation Account b) Capital Account for partners c) Statement of Financial Position (after Beeha retired) 4. Amirul, Akmal and Asyraf are partners sharing profits in the ratio of 5:3:2. Their Balance Sheet as on 31 July 2019 was as follows: Balance Sheet as at 31 July 2019 Assets RM Liabilities RM Buildings 200,000 Creditors 30,000 Machine 40,000 Bank loan 120,000 Furniture 80,000 Capitals: Cash at bank 60,000 Amirul 70,000 Stock 16,000 Akmal 90,000 Debtors 24,000 Asyraf 110,000 420,000 420,000 The firm was dissolved on that date. Close the books of the firm with following information: i. Buildings realized for RM190,000. ii. Stock were took over by Asyraf RM15,000. iii. Debtors were recovered 5% less. iv. Machinery sold for RM48,000 and furniture for RM75,000. v. Bank loan was settled for RM110,000. vi. Creditors were settled at 10% discount. vii. Realization expenses RM12,000 for completing the dissolution process. Prepare: a) Realization Account c) Partners’ Capital Account d) Bank Account
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