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
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, $25 000 and $30 000 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 $15 000 for 50% of her interest. 2. Cain pays Adam $10 000 and Abel $7500 for 25% of each of their interests. 3. Cain invests $20 000 cash in the partnership for a 10% interest. 4. Cain invests $20 000 cash in the partnership for a 20% interest. 5. Cain invests $45 000 cash in the partnership for a 30% interest. Solution SUAVE SWIMSUITS 1. Eve, Capital 12 500 Cain, Capital 12 500 2. Adam, Capital 12 500 Abel, Capital 7 500 Cain, Capital 20 000 3. Total net assets of new partnership $50 000 + $25 000 + $30 000 + $20 000 = $125 000. Cain contributes $20 000 for a 10% interest, therefore total capital = $200 000 and total goodwill is $75 000 Goodwill 75 000 Adam, Capital 5/10 37 500 Eve, Capital 3/10 22 500 Abel, Capital 2/10 15 000 Cash at Bank 20 000 Cain, Capital 20 000 4. Assets contributed by existing partners $50 000 + $25 000 + $30 000 = $105 000 Cain contributes $20 000 for a 20% interest. $105 000 = 80% interest, therefore 100% = $105 000 5/4 = $131 250 Less $105 000 + $20 000 = 125 000 Goodwill = 6 250 Cash at Bank 20 000 Goodwill 6 250 Cain, Capital 26 250 5. Capital investment $50 000 + $25 000 + $30 000 = $105 000 + $45 000 = $150 000 Cash at Bank 45 000 Cain, Capital 45 000 $150 000 x 0.3 = $45 000)
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 $ 67 500 37 500 84 000 313 500 $502 500 $ 52 500 225 000 135 000 90 000 $502 500 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 2003. 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 $111 000. 2. Williams sells one-third of his interest to Weston for $37 500 and two-thirds to Ward for $57 000. 3. Appraisals reveal that accounts receivable are overstated by $6000, inventory understated by $7500 and equipment is understated by $15 000. 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 $37 500 cash and plant valued at $67 500 for his partnership interest. 5. The partnership gives Williams $60 000 cash. 6. Williams receives $60 000 cash and a $30 000 promissory note from the partnership for his interest. (continued)
9.3 Solution W-X-L CATERINGS 1. Williams, Capital 90 000 Weston, Capital 90 000 2. Williams, Capital 90 000 Weston, Capital 30 000 Ward, Capital 60 000 3. Inventory 7 500 Equipment 15 000 Allowance for doubtful debts 6 000 Valuation Adjustment Summary 16 500 Valuation Adjustment Summary 16 500 Weston, Capital (6/15) 6 600 Ward, Capital (5/15) 5 500 Williams, Capital (4/15) 4 400 Williams, Capital 94 400 Bills Payable 94 400 4. Fair value of assets paid to Williams = $105 000 Williams s capital = $90 000 Williams s share of goodwill = $15 000 = 4/15 of value of business \ Total goodwill = $56 250 Goodwill 56 250 Weston, Capital (6/15) 22 500 Ward, Capital (5/15) 18 750 Williams, Capital (4/15) 15 000 Williams, Capital 105 000 Cash at Bank 37 500 Plant 67 500 5. Williams, Capital 90 000 Weston, Capital 6/11 $30 000 16 364 Ward, Capital 5/11 $30 000 13 636 Cash at Bank 60 000 6. Williams, Capital 90 000 Cash at Bank 60 000 Bills Payable 30 000
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 $ 24 000 29 000 30 000 33 000 27 600 $ 43 600 60 000 40 000 $143 600 $143 600 The partners shared profits and losses 60:40 respectively. They agreed to admit Defarge to the partnership as from 1 July 2001. 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 $12 000 (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 $40 000 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 $5000. 2. 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 $50 000. 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)
9.5 Solution MANETTE, LAFORCE AND DEFARGE A. Inventory 5 000 Goodwill 50 000 Office Equipment 3 000 Motor Vehicles 3 600 Allowance for Doubtful Debts 1 450 Valuation Adjustment Summary 46 950 Valuation Adjustment Summary 46 950 Manette, Capital (6/10) 28 170 LaForce, Capital (4/10) 18 780 Debtors 2 000 Inventory 20 800 Goodwill 3 000 Cash at Bank 4 800 Defarge, Capital 40 000 Allowance for Doubtful Debts 600 Manette LaForce Defarge New profit sharing ratio 3/6 2/6 1/6 New Capital balances $120 000 80 000 40 000 Old Capital 88 170 58 780 Required contribution $31 830 21 220 - Cash at Bank 53 050 Manette, Capital 31 830 LaForce, Capital 21 220 B. MANETTE, LAFORCE AND DEFARGE Statement of Financial Position as at 1 July 2003 Partners' equity Manette, Capital $120 000 LaForce, Capital 80 000 Defarge, Capital 40 000 240 000 Liabilities Creditors 43 600 $283 600 Current assets Cash at Bank $81 850 Debtors $41 000 Allowance for Doubtful Debts 2 050 38 950 Inventory 55 800 176 600 Non-current assets Office Equipment 30 000 Motor Vehicles 24 000 Goodwill 53 000 107 000 $283 600
9.6 Problem 9.4 Partnership dissolution Brown, Blue and Black decide to dissolve their partnership on 15 April 2003. 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 $ 54 000 (9 000) 288 000 (54 000) $ 36 000 45 000 108 000 234 000 1 440 000 180 000 1 260 000 Land 360 000 $2 043 000 LIABILITIES AND PARTNERS EQUITY Accounts payable Mortgage on building Brown, Capital Blue, Capital Black, Capital $ 90 000 1 080 000 315 000 108 000 450 000 $2 043 000 Required: A. Prepare the Realisation account to record sale of the assets as follows: 1. Sold the inventory for $72 000. 2. Collected $48 000 on accounts receivable and wrote off the remaining accounts. 3. Sold the equipment for $192 000. 4. Sold the building and the land for $1 200 000, 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.
9.7 Solution A. BROWN, BLUE AND BLACK Realisation Gross amount of non-cash Contra-asset accounts: assets: Accounts receivable 54 000 All. for doubtful debts 9 000 Inventory 108 000 Acc. depr. - equipment 54 000 Equipment 288 000 Acc. depr. - building 180 000 Building 1 440 000 Mortgage on building 1 080 000 Land 360 000 Assets realised: Accounts receivable 48 000 Inventory 72 000 Equipment 192 000 Building and land 120 000 (1 200 000-1 080 000) - Loss on realisation: Brown : (40%) 198 000 Blue: (20%) 99 000 Black: (40%) 198 000 495 000 2 250 000 2 250 000 B. C. D. Accounts Payable 90 000 Cash at Bank 90 000 Brown, Capital 198 000 Blue, Capital 99 000 Black, Capital 198 000 Realisation 495 000 BROWN, BLUE AND BLACK Statement of Financial Position (after realisation of assets) Assets Liabilities and partners equity Cash at Bank $378 000 Brown, Capital 117 000 Black, Capital 252 000 Blue, Capital 9 000 $378 000 $378 000 E. Brown, Capital 117 000 Blue, Capital 9 000 Black, Capital 252 000 Cash at Bank 378 000
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 $ 81 750 134 250 1 500 11 250 18 975 11 250 LIABILITIES AND PARTNERS EQUITY Accounts payable $ 42 690 Bank overdraft 53 865 Hale, Retained profits 18 720 Shine, Retained profits 5100 Hale, Capital 75 000 Shine, Capital 45 000 Hale, Advance $18 000 Plus: Accrued interest 600 18 600 $258 975 $258 975 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 $ 86 400 21 000 10 050 127 500 12 750 450 On the same date, accounts payable (including $800 omitted for sundry expenses) were discharged for $42 600. 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.
9.9 Solution HALE AND SHINE Realisation Carrying amount of assets: Proceeds of realisation: Furniture and equipment 18 975 Accounts receivable 86 400 Motor vehicles 11 250 Furniture and equipment 21 000 Inventory 134 250 Motor vehicles 10 050 Telstra shares 11 250 Inventory 127 500 Accounts receivable 81 750 Telstra shares 12 750 Prepaid insurance 1 500 Insurance rebate 450 Extra sundry expenses 800 Discount on acc. payable 890 Realisation expenses 3 400 Share of loss: Hale (5/8 2 775) Interest expense 305 Share of loss: Shine (3/8 1665) 4 440 $263 480 $263 480 Cash at Bank Proceeds of sale 258 150 Realisation expenses 3 400 Bank overdraft (+ interest of 54 170 $305) Accounts payable 42 600 Hale, Advance (+ interest) 18 600 Payment to Hale 90 945 Payment to Shine 48 435 $258 150 $258 150 Hale, Capital Share of loss 2 775 Balance 75 000 Cash 90 945 Transfer from retained profits 18 720 $93 720 $93 720 Shine, Capital Share of loss 1 665 Balance 45 000 Cash 48 435 Transfer from retained profits 5 100 $50 100 $50 100