CHAPTER 9. Partnerships: Admission, retirement and dissolution CONTENTS

Transcription

1 CHAPTER 9 Partnerships: Admission, retirement and dissolution CONTENTS 9.1 Admission of a new partner 9.2 Retirement of a partner 9.3 Revaluation, determining goodwill, and admission of new partner 9.4 Partnership dissolution 9.5 Partnership dissolution ledger accounts

2 9.1 ADDITIONAL PROBLEMS Problem 9.1 Admission of a new partner Adam, Eve and Abel are partners in Suave Swimsuits. Profits and losses are shared in the ratio of 5:3:2. On 1 July 2002, when their capital balances stood at $50 000, $ and $ respectively, they agree to admit Cain to the partnership. Required: Prepare the journal entry to record Cain s admission to the partnership under each of the following assumptions 1. Cain pays Eve $ for 50% of her interest. 2. Cain pays Adam $ and Abel $7500 for 25% of each of their interests. 3. Cain invests $ cash in the partnership for a 10% interest. 4. Cain invests $ cash in the partnership for a 20% interest. 5. Cain invests $ cash in the partnership for a 30% interest. Solution SUAVE SWIMSUITS 1. Eve, Capital Cain, Capital Adam, Capital Abel, Capital Cain, Capital Total net assets of new partnership $ $ $ $ = $ Cain contributes $ for a 10% interest, therefore total capital = $ and total goodwill is $ Goodwill Adam, Capital 5/ Eve, Capital 3/ Abel, Capital 2/ Cash at Bank Cain, Capital Assets contributed by existing partners $ $ $ = $ Cain contributes $ for a 20% interest. $ = 80% interest, therefore 100% = $ /4 = $ Less $ $ = Goodwill = Cash at Bank Goodwill Cain, Capital Capital investment $ $ $ = $ $ = $ Cash at Bank Cain, Capital $ x 0.3 = $45 000)

3 9.2 Problem 9.2 Retirement of a partner The 1 July 2003 statement of financial position of W-X-L Catering is shown below: W-X-L CATERING Statement of Financial Position as at 1 July 2003 ASSETS Cash at bank Accounts receivable Inventory Property, plant and equipment LIABILITIES AND PARTNERS EQUITY Accounts payable Weston, Capital Ward, Capital Williams, Capital $ $ $ $ Weston, Ward and Williams share profits and losses in the ratio of 6:5:4. Williams decides to retire from the partnership on 1 July Required: Prepare the journal entries to record the retirement of Williams under each of the following independent assumptions: 1. Weston purchases Williams s interest for $ Williams sells one-third of his interest to Weston for $ and two-thirds to Ward for $ Appraisals reveal that accounts receivable are overstated by $6000, inventory understated by $7500 and equipment is understated by $ These assets are revalued, and Williams is given a promissory note equal to his revised capital account to cover his retirement. 4. The partnership gives Williams $ cash and plant valued at $ for his partnership interest. 5. The partnership gives Williams $ cash. 6. Williams receives $ cash and a $ promissory note from the partnership for his interest. (continued)

4 9.3 Solution W-X-L CATERINGS 1. Williams, Capital Weston, Capital Williams, Capital Weston, Capital Ward, Capital Inventory Equipment Allowance for doubtful debts Valuation Adjustment Summary Valuation Adjustment Summary Weston, Capital (6/15) Ward, Capital (5/15) Williams, Capital (4/15) Williams, Capital Bills Payable Fair value of assets paid to Williams = $ Williams s capital = $ Williams s share of goodwill = $ = 4/15 of value of business \ Total goodwill = $ Goodwill Weston, Capital (6/15) Ward, Capital (5/15) Williams, Capital (4/15) Williams, Capital Cash at Bank Plant Williams, Capital Weston, Capital 6/11 $ Ward, Capital 5/11 $ Cash at Bank Williams, Capital Cash at Bank Bills Payable

5 9.4 Problem 9.3 Revaluation, determining goodwill, and admission of new partner The post-closing trial balance of Manette and LaForce at 30 June 2003 is set out below. MANETTE AND LAFORCE Post-Closing Trial Balance as at 30 June 2003 Debit Credit Cash at bank Trade debtors Inventory Office equipment Motor vehicles Trade creditors Manette, Capital LaForce, Capital $ $ $ $ The partners shared profits and losses 60:40 respectively. They agreed to admit Defarge to the partnership as from 1 July She was to be entitled to one-sixth share of the profits while Manette and LaForce were to share the remainder in the same proportions as before. Defarge was to contribute the assets of her business at the following valuations: debtors $ (subject to an allowance of 5% for doubtful debts); inventory $20 800; and the goodwill of her business valued at $3000. Defarge s capital in the new firm was to be $ and she was to bring in cash for any further contribution required. The assets of Manette and LaForce were revalued as follows: 1. Inventory increased by $ Office equipment and motor vehicles reduced by $3000 and $3600 respectively. 3. Allowance for doubtful debts created at 5% on trade debtors. 4. Goodwill raised to the full agreed value of $ It was agreed among the three partners that capitals in the new firm should be fixed in proportion to the profit-sharing ratios using Defarge s capital as the base and with Manette and LaForce adjusting their capitals by cash payment or cash withdrawal. Required: A. Show necessary journal entries to record the above transactions. B. Prepare the statement of financial position of the new firm as at 1 July 2003, after all of the above arrangements have been completed. (continued)

6 9.5 Solution MANETTE, LAFORCE AND DEFARGE A. Inventory Goodwill Office Equipment Motor Vehicles Allowance for Doubtful Debts Valuation Adjustment Summary Valuation Adjustment Summary Manette, Capital (6/10) LaForce, Capital (4/10) Debtors Inventory Goodwill Cash at Bank Defarge, Capital Allowance for Doubtful Debts 600 Manette LaForce Defarge New profit sharing ratio 3/6 2/6 1/6 New Capital balances $ Old Capital Required contribution $ Cash at Bank Manette, Capital LaForce, Capital B. MANETTE, LAFORCE AND DEFARGE Statement of Financial Position as at 1 July 2003 Partners' equity Manette, Capital $ LaForce, Capital Defarge, Capital Liabilities Creditors $ Current assets Cash at Bank $ Debtors $ Allowance for Doubtful Debts Inventory Non-current assets Office Equipment Motor Vehicles Goodwill $

7 9.6 Problem 9.4 Partnership dissolution Brown, Blue and Black decide to dissolve their partnership on 15 April The statement of financial position on that date is presented below. Profits and losses are shared 2:1:2. BROWN, BLUE AND BLACK Statement of Financial Position as at 15 April 2003 ASSETS Cash at bank Accounts receivable Allowance for doubtful debts Inventory Equipment Accumulated depreciation equipment Building Accumulated depreciation building $ (9 000) (54 000) $ Land $ LIABILITIES AND PARTNERS EQUITY Accounts payable Mortgage on building Brown, Capital Blue, Capital Black, Capital $ $ Required: A. Prepare the Realisation account to record sale of the assets as follows: 1. Sold the inventory for $ Collected $ on accounts receivable and wrote off the remaining accounts. 3. Sold the equipment for $ Sold the building and the land for $ , the buyer taking over the mortgage on the building. B. Prepare the journal entry to record the payment of accounts payable (in full). C. Prepare the journal entry to allocate the gain or loss on realisation to the partners Capital accounts. D. Prepare a statement of financial position after the entries for requirements A, B and C are posted. E. Prepare journal entries to record the distribution of the remaining cash to the partners.

8 9.7 Solution A. BROWN, BLUE AND BLACK Realisation Gross amount of non-cash Contra-asset accounts: assets: Accounts receivable All. for doubtful debts Inventory Acc. depr. - equipment Equipment Acc. depr. - building Building Mortgage on building Land Assets realised: Accounts receivable Inventory Equipment Building and land ( ) - Loss on realisation: Brown : (40%) Blue: (20%) Black: (40%) B. C. D. Accounts Payable Cash at Bank Brown, Capital Blue, Capital Black, Capital Realisation BROWN, BLUE AND BLACK Statement of Financial Position (after realisation of assets) Assets Liabilities and partners equity Cash at Bank $ Brown, Capital Black, Capital Blue, Capital $ $ E. Brown, Capital Blue, Capital Black, Capital Cash at Bank

9 9.8 Problem 9.5 Partnership dissolution ledger accounts Hale and Shine decided to dissolve their partnership on 30 October 2003, at which date their statement of financial position was as set out below. Profits and losses are shared 5:3. HALE AND SHINE Statement of Financial Position as at 30 October 2003 ASSETS Accounts receivable Inventory Prepaid insurance Telstra shares Furniture and equipment Motor vehicles $ LIABILITIES AND PARTNERS EQUITY Accounts payable $ Bank overdraft Hale, Retained profits Shine, Retained profits 5100 Hale, Capital Shine, Capital Hale, Advance $ Plus: Accrued interest $ $ On 15 November the proceeds from the sale of assets were: Accounts receivable Furniture and equipment Motor vehicle Inventory Telstra shares Refund of prepaid insurance $ On the same date, accounts payable (including $800 omitted for sundry expenses) were discharged for $ The bank had charged interest on overdraft to date at final settlement of $305. Realisation expenses of $3400 were paid and the bank account was closed. Required: Prepare the Realisation account, the Cash at Bank and partners Capital accounts after completion of the dissolution.

10 9.9 Solution HALE AND SHINE Realisation Carrying amount of assets: Proceeds of realisation: Furniture and equipment Accounts receivable Motor vehicles Furniture and equipment Inventory Motor vehicles Telstra shares Inventory Accounts receivable Telstra shares Prepaid insurance Insurance rebate 450 Extra sundry expenses 800 Discount on acc. payable 890 Realisation expenses Share of loss: Hale (5/ ) Interest expense 305 Share of loss: Shine (3/8 1665) $ $ Cash at Bank Proceeds of sale Realisation expenses Bank overdraft (+ interest of $305) Accounts payable Hale, Advance (+ interest) Payment to Hale Payment to Shine $ $ Hale, Capital Share of loss Balance Cash Transfer from retained profits $ $ Shine, Capital Share of loss Balance Cash Transfer from retained profits $ $50 100