Understanding FINANCIAL ACCOUNTING“Series Two” by daniel onoriode

Understanding

FINANCIAL ACCOUNTING “SeriesTwo”

OYELAMI WASIU OYETUNJI, HND, PGD(E), MBA, FCA, ACTI, AMNIM.

Understanding Financial Accounting –SeriesTwo

First Edition October 2005 Second Edition October 2009

Published and printed by: : Mularpak Corporate Services 20/22, Onadeko Street, Lawanson, Surulere, Lagos. Tel: 0802- 328- 5810

All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, and recording or otherwise without the prior written permission of the author .

Mularpak Corporate Services

Direct your suggestions, observation and complaint to the Author: W.O.A. OYELAMI, HND, MBA, ACA, ACTI, AMNIM . NOOKIA VENTURES ACADEMY LTD, AGBOJU. e-mail: believeoye@yahoo.co.uk telephone:

ISBN NUMBER:

believeoye@hotmail.com

08023136728; 08033725943, 4800636

978- 978- 903- 400- 0

PREFACE Understanding Financial Accounting –SeriesTwo

III

The text “UNDERSTANDING FINANCIAL ACCOUNTING – SERIES TWO” is designed for use by all students; particularly students offering Accounting Courses in the Universities, Polytechnic, Colleges of Education and Senior Secondary Schools. Candidates writing the Principles and Practice of Financial Accounting (PPFA), and Financial Accounting Papers of the Institute of Chartered Accountants of Nigeria (ICAN) and other professional bodies will find the book a tremendous companion. . This “Series Two” is in response to yearnings of over 2,000 users of “Series One”. My sincere believe is that they will find the book highly useful in their study.

OYELAMI W ASIU OYET UNJI

FORWARD I knew OYELAMI WASIU OYETUNJI as far back as 1990. Understanding Financial Accounting –SeriesTwo

He is a lecturer of Financial Accounting and has been involved in the training of students both for academic and professional examinations for over a decade. He has lectured at the Yaba College of Technology, Lagos; Mayo Associates, Alpha Tutors, Safe Associates Ltd, The Polytechnic, Ibadan (Lagos Centre), Nigerian Army School of Finance and Administration (NASFA), and Lagos State Polytechnic, Ikorodu. “The Ultimate” or “The Oluaye of Financial Accounting” as his numerous students often call him, is an authority in Financial Accounting. His experience and brilliant teaching techniques are brought into use in the writing of this book. “FINANCIAL ACCOUNTING – The Basics”; a question and answer text and “UNDERSTANDING FINANCIAL ACCOUNTING – SERIES ONE” are both written by him. I have no reservation in recommending “Understanding Financial Accounting – Series Two” for students and professionals.

A.A. ABIOYE, HND, MBA, FCA, ACTI Head of Department, Professional Accountancy Department Nigerian Army School of Finance & Administration (NASFA) Apapa, Lagos.

Understanding Financial Accounting –SeriesTwo

ACKNOW LEDGEMENTS I give glory to God Almighty for His mercy, grace, protection and compassion. I am grateful to graduates and undergraduates students of Nigerian Army School

Finance

Administration

(NASFA),

Apapa,

Lagos

State

Polytechnics Ikorodu, Yaba College of Technology Yaba, University of Lagos Akoka, Lagos State University, Ojo etc; whose unrelenting demand and requests more or less forced me to produce this “series two”. I express gratitude to Engr A.O. Gasper, Chief A.S. Edet, Brig-Gen D.A. Bako, Brig-Gen J.O. Lartey, Alhaji Y.A. Salimanu, and my parent-in-law, Mr and Mrs V.O. Ladipo. I cherished the contribution of my senior in the profession towards the realization of this work. I say thank you to Mr. J.B. Akeju (my teacher), Mr. A.A. Abioye, who not only write the forward to this book but also reviewed the book. I am very grateful sir. I appreciate the assistance and understanding I got from my family, Mrs Julian Oluwabunmi Oyelami, Master Peter Oluwadamilare, Master Enoch Ayomikun and Miss Esther Fiyinfoluwa. I am grateful to the Institute of Chartered Accountants of Nigeria (ICAN) for the permission granted me to reproduce past examination questions, some of which I have adapted for illustrations and as practice questions in this book. Once more, I give glory and adoration to the Almighty God.

OYELAMI W ASIU OYET UNJI

Understanding Financial Accounting –SeriesTwo

DEDICATION This revised edition is dedicated to God Almighty. Thank You Lord for “remembering me”.

Understanding Financial Accounting –SeriesTwo

VII

TABLE OF CONTENTS P age i. ii. iii. iv. v. vi. vii.

Title page . Publishers page Preface .. Forward .. Acknowledgement Dedication .. Table of Contents

.. .. .. .. .. .. ..

..i ..ii ..iv ..vi ..vii ..viii ..ix

CHAPTER

1. 2.

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Partnership Accounts - Introduction

Goodwill and change in constitution o Definition of goodwill o Methods of valuing goodwill o Change in profit sharing ratio o Admission of a partner o Retirement or death of a partner o Revaluation of assets and liabilities Amalgamation and absorption Dissolution of partnership Conversion of partnership to limited company Insurance Claims Accounting for containers and cases Investment accounts Contract accounts Accounting for hire purchase transactions Bills of exchange Multiple choice questions Fill in the gap questions

Understanding Financial Accounting –SeriesTwo

61 73 102 111 124 143 158 179 223 233 240 VIII

CHAPTER ONE PARTNERSHIP ACCOUNTS INTRODUCTION

DEFINITION The Partnership Act 1890 defined a partnership as “the relationship which subsists between persons carrying on a business in common with a view of profit.”

PARTNERSHIP AGREEMENT The basis of a partnership is agreement and trust. It is much better to have a written agreement to which reference may be made by all partners. An agreement may however be created: (a) By deed; (b) In writing; (c) By word of mouth; and (d) In the course of dealings. The agreement will cover rights and duties of partners and is likely to include a number of clauses of accounting importance, e.g. partners’ capital and current accounts, how much each partner can draw in anticipation of profits, profit and losses sharing formula, whether interest is allowable on capital and/or current accounts, whether interest is chargeable on drawings, whether salaries are to be paid to the partners etc. In the absence of agreement between the partners, Section 24 Partnership Act 1890 provides as follows: • The capital must be contributed equally by the partners; • No interest is allowed on capital and current accounts; • No interest is to be charged on drawings; • No partner is entitled to salary; • Loan from partners should attract interest at the rate of 5% per annum.; • Profits and losses must be shared equally; • Every partner may take part in the management of the partnership business; • Every partner is entitled to inspect and copy any of the accounting records which must be kept at the place of business; • No partner shall be admitted without the consent of all partners; Understanding Financial Accounting –SeriesTwo

• •

The firm must indemnify every partner in respect of payments made and personal liability incurred in the ordinary and proper conduct of the business or in the preservation of the property of the firm; Decisions are decided by majority vote.

CAPIT AL AND CURRENT ACCOUNT S To record a partner’s interest in the business we require: (1) Capital account , which shows his share of fixed capital of the firm; (2) Current account , recording his share of profits and losses and his drawings. There will be one account for each partner and these accounts should always be shown in columnar form. The partnerships have two choices open to them. They can maintain • Fixed capital accounts plus current accounts; • Fluctuating capital accounts. FIXED CAPITAL ACCOUNTS PLUS CURRENT ACCOUNTS The capital account for each partner remains year by year at the figure of capital put into the firm by the partners. The profits, interest on capital and the salaries to which the partner may be entitled are then credited to a separate current account for the partner, and the drawings and the interest on drawings are debited to it. The balance of the current account at the end of each financial year will then represent the amount of undrawn profits (if credit). A debit balance will be drawings in excess of the profits to which the partner is entitled. FLUCTUATING CAPITAL ACCOUNTS The distribution of profits and other interests on capital and or current accounts would be credited to the capital accounts, and the drawings and interest of drawings would be debited. Therefore the balance on the capital account will change each year. Note: • The fixed capital accounts plus current accounts is considered preferable to the fluctuating capital accounts. When partners are taking out greater amounts in drawings than their share of the profits that they are entitled to, this is shown up by a debit balance on the current account. This will serve as warning. • It is generally accepted that the Capital Account be used to record cash adjustments to the amount of fixed capital and the effect of any Understanding Financial Accounting –SeriesTwo

alteration in the value of goodwill. Do not use the Capital account for anything else unless given specific instructions in a question.

Understanding Financial Accounting –SeriesTwo

FINAL ACCOUNT S OF PART NERSHIP The Manufacturing, Trading and Profit and Loss Account of a partnership is the same as that of any other business entity; but once the net trading profit or loss has been determined, a further account is necessary to show the implementation of the Partnership Agreement. This account is called “Profit and Loss Appro pr iation Account”. The Profit and Loss Appropriation Account does not contain items that are charges against profit; it simply shows how the final profit or loss is shared. The Profit and Loss Appropriation account starts with the net profit/ (loss) available for appropriation and shows the division between them. It may reflect any or all of the following: interest on drawings; expenses attributable to partner(s); interest of Partner’s Debit balances; interest on Partners’ Capital and Current accounts; salaries of partners; commission to partners; division of profits. Profit and Loss Appro pr iation Accounts (for mat ) N N Net Trading Profit XX Add: Interest on Drawings: Ade X Bola X X XX Less: Interest on Capital/Current A/cs: Ade X Bola X Salaries: Ade X Bola X Commission Ade X X Div is ib le Profits for the year Shared as follows: Ade Bola

XX X X

XX 0

Though the above format is used throughout this book to present the profit and loss appropriation account; the traditional format is equally presented below:

Understanding Financial Accounting –SeriesTwo

XII

PROFIT AND LOSS APPROPRIATION ACCOUNT (T – FORMAT) N N Int. on Capital accounts: Net Trading Pro f it XXX Ade X Inte rest on drawings: Bola X Ade X Bola X Int . on Current a/cs (Cr): Ade X Bola X Sala ries: Ade X Bola X Inte rest on loans : Bola X Share of profits: Ade XX Bola XX XXX XXX For mat of Current Account CURRENT ACCOUNTS ADE BOLA N N 2000

2000 1/1 31/12

Balance b/d Drawings Int –Drawing

XX X

X XX X

Balance c/d

XXX

1/1 31/12

Balance b/d Int. Capital A/c Int. on Curr A/ c Salary Int. on Loan Share of Profits

XXX

ADE N

BOLA N

X X X

X X

X XX

X X XX

XXX

2001

1/1

Balance b/d

Notes: 1. If there is a net loss, the Profit and Loss Appropriation account Format above would be reversed. 2. If there exist partnership agreement; any rules not included in the agreement is/are assumed not applicable to the particular partnership. “If it is not panadol, it is not the same as panadol”. Understanding Financial Accounting –SeriesTwo XIII

Illustration 1.01: Saka, Obi and Job are partners. They share profits and losses in the ratio 2:2:1 respectively. For the year ended 31 st December 2005, the following information is obtained; a) The capital accounts remained fixed at Saka N6,000; Obi N4,000 and Job N2,000. b) The current accounts balances at 1st January 2005: Saka N1,200; Obi N750 and Job N480. c) They have agreed to give each other 10 per cent interest per annum on their capital accounts; 5 per cent on drawings and in addition to allowed salaries of N3,000 for Obi and N1,000 for Job. d) Drawings, both goods and cash by partners during the year: Saka N1,600; Obi N1,800 and Job N900. e) The net profit of the partnership before taking any of the above into account was N32,500. You are required to draw up the appropriation account of the partnership for the year ended 31st December 2005, and also the current accounts in columnar form. Solution to Illustration 1.01 SAKA, OBI AND JOB Profit and Loss Appropriation account for the year ended 31st Dec 2005 N N Net Profit 32,500 Add: Interest on Drawings: Saka 80 Obi 90 Job 45 215 32,715 Less: Interest on capital: Saka 600 Obi 400 Job 200 Salaries:Obi 3,000 Job 1,000 5,200 Divisible Profits 27,515 Shared as follows: Saka 11,006 Obi 11,006 Job 5,503 27,515 0 Understanding Financial Accounting –SeriesTwo

XIV

Drawings Int. on drawing Balance c/d

SAK A N 1,600

CURRENT ACCOUNTS OBI JOB 1,800

N 900

80 11,126

90 13,266

45 6,238

12,806

15,156

7,183

Balance b/d Int. Capital A/c Salaries Share of profits Balance b/d

SAK A N 1,200

OBI

JOB

N 750

N 480

600

400 3,000

200 1,000

11,006 12,806 11,126

11,006 15,156 13,266

5,503 7,183 6,238

MINIM UM SHARE OF PROFITS Partnership agreement may provide for minimum share of profits for a particular partner. The agreement will equally spelt out how such minimum share will be taken care of. It is essential for students to read the question carefully. INTEREST ON LOAN FROM PARTNER Interest on loans from partners, in excess of agreed capital is a charge against profit in the Profit and Loss account and does not appear in the Profit and Loss Appropriation account. This is so, even if it has not been paid and it appeared in the current account of the partner(s) concerned. Illustration 1.02: Ade, Bisi and Cole who share profits and losses in the ratio 2:2:1 respectively, with the clause that Cole share of profit in any year shall not be less than N20,000 (excluding interest on capital and salaries). Ade and Bisi shall meet any sum needed to make up this amount in their profit sharing ratio. The Partnership Deed further provided that: a). Bisi and Cole were to receive salaries of N2,000 and N1,000 respectively. b). Interest on capital is to be calculated at 5% per annum. c). Interest to be charged on drawings at 3% per annum. d). Interest shall not be allowed on credit balance on current account, but 2% interest should be charged on debit balance on Current account at the beginning of the year. f). Loan from partner shall attract interest at 5% per annum. During the year ended 31st December, 2004, the following balances appeared in the firm’s books: Understanding Financial Accounting –Series XV AdeTwo Bisi Cole

N Capital 1/1/2004 100,000 Current A/c 1/1/2004 6,000 Drawings for the year 26,600 Loan Account

N 60,000 4,000 Dr. 16,250 20,000

N 40,000 3,000 18,600

For the accounting year ended 31st December, 2004, the firm’s net trading profit (before interest on loans from Bisi which has not been paid) amounted to N96,024. You are required to prepare: (i). Profit and Loss Appropriation account for the year ended 31st December, 2004. (ii). The current accounts of the Partners in a columnar form; and the Balance Sheet (extract) as at 31st, December, 2004. Solution to Illustration 1.02 ADE, BISI AND COLE Profit and Loss Appropriation account for the year ended 31st December 2004 N N Net Profit after adjusting for interest on loans*1 95,024 Add: Interest on Drawings: Ade 798 Bisi 488 Cole 558 Interest on Current a/c Dr. bal – Bisi 80 1,924 96,948 Less: Interest on capital: Ade 5,000 Bisi 3,000 Cole 2,000 Salaries:Bisi 2,000 Cole 1,000 13,000 Divisible Profits 83,948 Shared as follows (See notes below) *2 : Ade 31,974 Bisi 31,974 Cole 20,000 83,948 0 Understanding Financial Accounting –SeriesTwo Note:

XVI

Net profit in the appropriation account is arrived at after deducting interest on loans from Bisi (i.e. N96,024 – N1,000) = N95,024.

Share of profits This is arrived at as follows:

Profit shared in profit ratio Adjustment for minimum share

ADE N Balance b/d Drawings Int. Drawings Int -Curr a/c Balance c/d

26,60 0 798 15,57 6 42,97 4

Total Ade Bisi Cole N N N N 83,948 33,579 33,579 16,790 - 1,605 1,605 3,210 83,948 31,974 31,974 20,000

CURRENT ACCOUNTS BISI COL E N N 4,000 16,25 0 488 80 17,15 6 37,97 4

18,600 558 6,842

Balance b/d Int. Capital A/c Salaries Share of profits

ADE

BISI

COL E N

6,000 5,000

3,000

3,000 2,000

31,79 4

2,000 31,79 4 1,000

1,000 20,000

42,97 4 15,57 6

37,97 4 17,15 6

26,000

Int. on Loan

26,000 Balance b/d

6,842

Alternativ ely, the adjustments to take care of minimum share of profit to Cole can be made in the current accounts as follows: Dr. Ade N1,605} The amount to make up the minimum is Dr. Bisi N1,605} debited to Ade and Bisi in the ratio 2:2 Cr. Cole N3,210} and credited to Cole. CURRENT ACCOUNTS ADE N

BISI

COL E N

N 4,000 Bal b/d 26,60 16,25 18,60 Int. Capital 0 0 0 Int -Drawg 798 488 558 Salaries Int -Curr a/c 80 Int. - Loan Cole Share Understanding1,605 Financial 1,605 Accounting –SeriesTwo Bal b/d Drawings

ADE

BISI

COLE

N 6,000 5,000

N 3,000

N 3,000 2,000

33,57

2,000 1,000 33,57

1,000 16,790 XVII

Bal c/d

15,57 6 42,97 4

17,15 6 37,97 4

6,842

profits Ade/Bisi

9 3,210

26,00 0

42,97 4 15,57 6

Balance b/d

37,97 4 17,15 6

26,000 6,842

Notes:• The agreement stipulates that Cole’s share in the profit excluding interest on capital and salaries must not be less than N20,000; hence the following adjustments: Share of profits This is arrived at as follows: Total Ade Bisi Cole N N N N Profit shared in profit ratio 83,948 33,579 33,579 16,790 Adjustment for minimum share 1,605 1,605 3,210 83,948 31,974 31,974 20,000 •

Assuming the clause reads “Cole’s share in the prof it including interes t on capital and salaries ” ; the picture will be different as shown below:

Share of profits This is arrived at as follows:

Total Ade N N Profit shared in profit ratio 83,948 33,579 Interest on capital 10,000 5,000 Salaries 3,000 Adjustment for minimum share -105 96,948 38,474 • • •

Bisi N 33,579 3,000 2,000 -105 38,474

Cole N 16,790 2,000 1,000 210 20,000

The profit and loss appropriation account is to show the implementation of the partnership agreement. Interest on loan is a charge against profit in the profit and loss account (it is not an appropriation of profit). This explains why it was adjusted outside the profit and loss appropriation account. It is important to read the questions carefully.

Balance Sheet (extract) as at 31 st Decem be r 2004 Understanding Financed by: Financial Ade Accounting –Series Bisi Two

Cole

Total

XVIII

Capital A/c Current A/c Loan from Bisi

N 100,000 15,576

N 60,000 17,156

N 40,000 6,842

N 200,000 39,574 239,574 20,000 259,574

INTEREST ON DRAW INGS It is obviously in the best interests of the firm if cash is withdrawn from the firm by the partners: (1) As little as possible, and (2) As late as possible. The more cash that is left in the firm the more expansion can be financed, the greater the economies of having ample cash to take advantage of bargains and of not missing cash discounts because cash is not available and so on. To deter the partners from taking out cash unnecessarily the concept can be used of charging the partners interest on each withdrawals, calculated from the date of withdrawal to the end of the financial year. Interest on drawings helps to swell the profits divisible between the partners. Illustration 1.03: Olu, Bunm i and Layo are partners sharing profits in the ratio 5:3:2 respectively, with the proviso, however, that Layo’s share in any year (exclusive of salary and interest on capital) shall not be less than N1,000, any deficiency to be borne by Olu. Partners are entitled to salary per annum: Olu N1,000; Bunmi N500 and Layo N500. Interest at the rate of 5% per annum is allowed on capital accounts balances at the commencement of the year. The trial balance of the firm at 31 December, 2005 was as follows: N N Capital AccountsOlu 8,000 Bunmi 5,000 Layo 3,000 Current AccountsOlu 1,600 Bunmi 1,200 Layo 800 Purchases and Sales 28,000 46,500 Debtors and Creditors 2,060 3,700 Shop fittings at cost 3,600 Shop fittings depreciation 1,400 Freehold premises at cost 6,000 Leasehold premises purchased 7,000 Stock on hand 1/1/2005 4,200 Understanding Financial Accounting –SeriesTwo XIX Salaries and wages 6,400

Office and trade expenses Rents, rates and insurance Professional charges Provision for bad debts Bank balance Drawings other than monthly payments: Olu Bunmi Layo

4,520 1,050 350

4,370

1,700 1,100 900 . 71,250 71,250 You are given the following additional information: i). Stock on 31 December, 2005 N3,600. ii) A debt of N60 is to be written off, and the provision against the remaining debtors should be 5%. iii) Salaries and wages include the following monthly drawings by the partners - Olu N50; Bunmi N30 and Layo N25. iv) Partners had during the year been supplied with goods from stock and it was agreed that these should be charged to them as follows: Olu N60; Bunmi N40. v) On 31 December, rates paid in advance and offices and trade expenses owing were N250 and N240 respectively. vi) Depreciation of shop fittings is to be provided at 5% per annum at cost. vii) Professional charges include N250 fees paid in respect of the acquisition of the leasehold premises which fees are to be capitalised. viii) Leasehold premises were to be written off over ten years commencing on January 1st in the year in which the premises were acquired. You are required to prepare the trading and profit and loss account for the year ended 31st December 2005, and Balance Sheet as on that date.

Understanding Financial Accounting –SeriesTwo

Solution to Illustration 1.02 OLU, BUNMI AND LAYO Trading and Profit and Loss and Approp riation account for the year ended 31 st Dec , 2005 N N N Sales 46,500 Less: Cost of Sales:Opening Stock 4,200 Purchases 27,900 32,100 Less: Closing Stock 3,600 28,500 Gross Profit 18,000 Less: Expenses Bad debts 60 Provision for bad debts 50 Salaries and wages 5,140 Rent, rates & insurance 800 Office and trade exp 4,760 Depreciation – Fittings 180 Depreciation – L. Premises 725 Professional expenses 100 11,815 Net trading prof it Less:

Int on capital accounts:Olu Bunmi Layo Salaries:Olu Bunmi Layo

Div is ib le pro fits Shared as follows *1 Olu Bunmi Layo

6,185 400 250 150 1,000 500 500 2,800 3,385 1,693 1,015 677

3,385

Note: *1 The adjustment for minimum share of profit is made in the current accounts. Understanding Financial Accounting –SeriesTwo Balance Sheet as at 31 st Decem be r 2005

XXI

Cost N 6,000 7,250 3,600 16,850

FIXED ASSETS Freehold Premises Leasehold Premises Shop fittings CURRENT ASSETS Stock Debtors N(2,000 – 100) Prepaid rates Bank

Capital a/c Current a/c

Olu N 8,000 2,010

OLU N Drawings Salaries Purchases Layo Balance c/d

1,700 600 60 323 2,010 4,693

NBV N 6,000 6,525 2,020 14,545

3,600 1,900 250 4,370 10,120

Less: CURRENT LIABILITIES Creditors 3,700 Accrued trade exp 240 Financed by:

Dep’n N 725 1,580 2,305

Bunmi N 5,000 1,465

3,940 Layo N 3,000 1,250

CURRENT ACCOUNTS LAY O N N

BUNMI

1,100 360 40

900 300

1,465 2,965

1,250 2,450

Balance b/d Int. Capital Salaries Share- profits Olu Balance b/d

W ork ings (1) Balance b/d

6,180 20,725 N 16,000 4,725 20,725 OLU

BUNMI

LAYO

1,600 400 1,000 1,693

1,200 250 500 1,015

4,693 2,010

2,965 1,465

800 150 500 677 323 2,450 1,250

DEBTORS N 2,060 Bad debts Balance c/d 2,060

BAD DEBTS ACCOUNT Understanding Financial Accounting –SeriesN Two

N 60 2,000

(2)

XXII

Debtors (3) Balance c/d

(4) Per accounts

(5)

(7)

P & L Account

PROVISION FOR BAD DEBTS A/C N N 100 Balance b/d 50 P & L account 50 100 100 SALARIES AND WAGES N 6,400 Current accounts:Olu Bunmi Layo P & L account 6,400

N 600 360 300 5,140 6,400

PURCHASES N 28,000 Current accounts:Olu Bunmi Trading account 28,000

60 40 27,900 28,000

RENT, RATES AND INSURANCES N Per accounts 1,050 P & L account Balance c/d 1,050

N 800 250 1,050

Per accounts

(6)

OFFICE AND TRADE EXPENSES N N Per accounts 4,520 P & L account 4,760 Understanding Financial –SeriesTwo XXIII BalanceAccounting c/d 240

4,760 (8)

4,760

PROVISION FOR DEPRECIATION OF SHOP FITTINGS N N Balance c/d 1,580 Balance b/d 1,400 P & L account 180 1,580 1,580

(9) Per accounts

(10) Balance b/d Professional charges

PROFESSIONAL CHARGES N 350 Leasehold Premise P & L accounts 350

LEASEHOLD PREMISES N 7,000 Balance c/d 250 7,250

Understanding Financial Accounting –SeriesTwo

N 250 100 350

N 7,250 7,250

XXIV

PARTNERSHIP INTRODUCTION - PRACTICE QUESTIONS 1. Rufus and Salman own a shop sharing profit and losses equally. Their first financial year ended on 31st December 2005. The following balances were taken from the books on that date. Capital accounts Rufus N6,000 Salman N4,800 Partnership salaries Rufus N900 Salman N600 Drawings Rufus N1,286 Salman N1,340 The firm’s net profit for the year was N3,284. Interest on capital is to be allowed at 5 per cent per year. From the above information, prepare the firm’s appropriation account and the partners’ current accounts. 2. W ale, Peter and Ha m m ed are partners sharing profits and losses in the ratio 5:3:2 respectively. W ale Peter Hammed Capital accounts bal b/f (N) 40,000 30,000 18,000 Current accounts bal b/f (N) 1,860 946 717 The following information were obtained from their books for the financial year ended 31st December 2004. (a) Net trading profits N30,350. (b) Interest to be charged on capital Wale N2,000; Peter N1,500 and Hammed N900. (c) Interest to be charged on drawings: Wale N240; Peter N180 and Hammed N130. (d) Salaries to be credited: Peter N2,000 and Hammed N3,500. (e) Drawings: Wale N9,200; Peter N7,100 and Hammed N6,900. Draw up a profit and loss appropriation account for the year ended 31st December 2004 and a balance sheet as at that date. 3. Ezenwa, W ale and Zacheus were in partnership sharing profits and losses in the ratio 2:2:1. Interest is credited no partners’ capital accounts and charged on partners’ drawings at 10% per annum. Zacheus is paid a salary of N10,000 per annum. During the year ended 31st December, 1997, the net profit of the firm was N166,400 after charging Zacheus’ salary which had been debited to the salaries and wages account. The partners’ monthly drawings all drawn on the last day of each month were: Ezenwa N4,000; Wale N3,500; and Zacheus N2,500. The balance on the partners’ accounts at 1st January, 2005 were : Capital A/cs Current A/cs Ezenwa (N) 100,000 26,600 Wale (N) 100,000 18,200 Zacheus (N) 50,000 9,400 Understanding Financial Accounting –SeriesTwo

XXV

You are required to prepare the Profit and Loss and Appropriation Account of the firm for the year ended 31st December 2005; Partners’ Current accounts in a columnar form, as on 31st Dec, 2005 and the balance sheet (extract) on 31st December, 2005. 4. The following list of balances as at 30th September 20*9 has been extracted from the books of Bola and Sola, trading in partnership, sharing profits and losses in the proportion 60%:40% respectively: N Fixtures and fittings at cost 260,000 Provision for depreciation of fixture and fittings 112,000 Motor vehicles at cost 460,000 Provision for depreciation of motor vehicles 250,000 Provision for doubtful debts 3,000 Drawings: Bola 240,000 Sola 110,000 Current accounts balances at 1st Oct 20*8: Bola 36,000 cr. Sola 24,000 cr. Capital accounts balances at 1st Oct 20*8: Bola 330,000 Sola 170,000 Debtors 93,000 Creditors 84,000 Balance at bank 77,000 Printing, stationery and postages 35,000 Sales 3,221,000 Stock in hand at 1st October 20*8 230,000 Purchases 2,082,000 Rent and rates 103,000 Lighting and cooling 87,000 Staff salaries 361,000 Telephone charges 29,000 Motor vehicles running expenses 56,200 Discount allowed 9,500 Discount received 3,700 Sales returns 21,000 Purchases returns 61,000 Carriage inwards 17,000 Carriage outwards 24,000 The following additional information was supplied: (a) N100,000 is to be transferred from Bola’s Capital account to a newly Understanding Financial Accounting –Series XXVI opened Bola Loan Account onTwo 1st July 20*9.

Sola is to be credited with a salary at the rate of N120,000 per annum from 1st April 20*9. (c) Stock in hand at 30th September 20*9 has been valued at N320,000. (d) Telephone charges accrued due at 30th September 20*9 amounted to N4,000 and rent of N6,000 prepaid at that date. (e) During the year ended 30th September 20*9 Sola has taken goods costing N10,000 for his own use. (f) Depreciation is to be provided at the following annual rates on the straight line basis: Fixtures and fittings 10% Motor Vehicles 20%. Required: Prepare the trading and profit and loss account for the year ended 30th September 20*9 and a balance sheet as at that date. Show the partners’ capital and current accounts for the year ended on that date. (b)

5. Big and Small are in partnership sharing profits and losses equally. The following is their trial balance as at 30th June 2005 N N Buildings (cost N75,000) 50,000 Fixtures at cost 11,000 Provision for depreciation of fixtures 3,300 Debtors 16,243 Creditors 11,150 Cash at bank 677 Stock at 30th June 2004 41,979 Sales 123,650 Purchases 85,416 Carriage outwards 1,288 Discount allowed 115 Loan interest from Iginla 4,000 Office expenses 2,416 Salaries and wages 18,917 Bad debts 503 Provision for doubtful debts 400 Loan from Iginla 40,000 Capitals: Big 35,000 Small 29,500 Current accounts: Big 1,306 Small 298 Drawings: Big 6,400 Small 5,650 . 244,604 244,604 Understanding Financial Accounting –Series Two supplied: The following additional information were XXVII

Stock, 30th June 2005, N56,340. Expenses owing: office expenses N96; and Wages N200. Depreciate fixtures at 10% on reducing balance basis, and building N1,000. (j) Adjust provision for doubtful debts to N320. (k) The partnership agreement provided for: (l) Interest on capital account balances 10 per cent. (m) Interest on drawings 2 per cent per annum. (n) Salaries Big N800. Prepare a trading and profit and loss appropriation account for the year ended 30th June 2005 and a balance sheet as at that date. (g) (h) (i)

6. Monica, Maltina and Mende share profits and losses in the ratios 5:3:2 respectively. Their trial balance as at 30 th September 20*9 was as follows; N N Office Equipment at cost .. .. 84,000 Motor Vans at cost .. .. .. 125,000 Provision for depreciation at 30=9=*9: Office Equipment .. .. 27,000 Motor Vans .. .. .. 42,000 Debtors and Creditors .. .. .. 371,780 243,560 Cash at bank .. .. .. .. 6,660 Drawings: Monica .. .. .. 126,100 Maltina .. .. .. 84,170 Mende .. .. .. 62,160 Current accounts at 30:09:20*8: Monica .. .. .. 13,900 Maltina .. .. .. .. 1,530 Mende .. .. .. .. 20,740 Capital accounts at 30:09:20*8: Monica .. .. .. 300,000 Maltina .. .. .. .. 160,000 Mende .. .. .. .. 120,000 Purchases and Sales .. .. .. 1,371,900 2,105,000 Returns inwards .. .. .. 68,000 Carriage inwards .. .. .. 15,000 Stock at 30th September, 20*8 .. .. 428,500 Discounts allowed .. .. .. 1,100 Salaries and wages .. .. .. 182,960 Bad debts .. .. .. .. 12,340 Provision for bad debts 30:09:20*8 .. 8,000 General expenses .. .. .. 9,450 Understanding Accounting Rent and ratesFinancial .. .. ..–SeriesTwo .. 25,650 XXVIII

Postages

39,400 . 3,040,200 3,040,200 The following additional information were supplied: (a) Stock, 30th September 20*9, N510,600. (b) Rates in advance N1,200; Stock of postage stamps N1,900. (c) Adjust provision for bad debts to N8,700. (d) Salaries: Maltina N12,000; Mende N7,000. Not yet recorded. (e) Interest on drawings: Monica N1,700; Maltina N1,100; and Mende N1,200. (f) Interest on capital account balances 10 per cent. (g) Depreciate Vans N25,000; Office Equipment N16,800. Draw up a set of final accounts for the year ended 30th September 20*9. 7. Ojez and Folex are in partnership. They share profits in the ratio 3:2 respectively. The following balance was extracted as at 31st March 2005: N Motor vehicles at cost 9,200 Office equipment at cost 6,500 Provision for depreciation at 31/3/04:Motor vehicles 3,680 Office equipment 1,950 Stock at 31st March 2004 24,970 Debtors 20,960 Creditors 16,275 Returns inwards 170 Bank 615 Cash 140 Sales 90,200 Purchases 71,630 Salaries 8,417 Discount received 340 Administrative expenses 1,370 Discount allowed 563 Current accounts 31st March 2004: Ojez 1,379 Folex 1,211 Capital accounts: Ojez 27,000 Folex 12,000 Drawings: Ojez 5,500 Folex 4,000 Required: Draw up a set of final accounts for the year ended 31 st March 2005 for the partnership. The following notes are applicable at 31st March 2005:Understanding Financial Accounting –SeriesTwo

XXIX

(a) (b)

Stock 31st March 2005 N27,340. Administrative expenses owing N110. Provide for depreciation: motor vehicles 20% on cost, office equipment 10% on cost. Charge interest on capital at 10%. Charge interest on drawings: Ojez N180; Folex N210.

8. Gani, Lati and Sheu set up in partnership together some years ago with capitals of N50,000; N30,000 and N15,000 respectively. The following are summaries of the partners’ Current Accounts for the year ended 31 December, 2004. Study these carefully and then answer the questions, which follow: GANI

LATI

CURRENT ACCOUNT GANI

Bal b/d Drawing Loss

13031 200

10640 120

SHE U N 133 7598 80

Bal c/d

135 13366

10760

7811

Bal b/d Salary Int on Cap Bal c/d

LATI

SHEU

366 7000 6000

264 6500 3600

5500 1800

13366

396 10760

511 7811

Required: a). Reconstruct the Partnership Agreement. b). Calculate the net profit of the partnership for the year ended 31/12/2004. c). How would the partners have shared this profit had they made no formal agreement.

9. Sanya and Buba were in partnership sharing profits and losses in the ratio of 2:1. The Deed of the partnership contained the following provisions: a). Interest on capital is credited at 5% per annum. b). 6% interest is charged on drawings per annum. c). Buba is entitled to a salary of N4,000 per annum. The trial balance extracted from the books of the partnership for the year ended 31st, December, 2004 was as follows: N N Premises (including land N20,000) 56,000 Understanding Financial Accounting –SeriesTwo

XXX

Fixtures (cost N60,000) Office equipment (cost N45,000) Debtors and Creditors Bank balance Cash in hand Purchases and Sales Returns Carriage outward Salaries and wages Lighting and cooling Rent and rates Capital accounts: Sanya Buba Current accounts: Sanya Buba Stocks at 1/1/04 Drawings: Sanya Buba

40,000 20,000 89,000 2,370 200,000 6,000 3,500 45,000 7,000 13,000 420 40,000 60,000 80,000 662,290

32,000 5,590 419,500 4,000

120,000 80,000 1,200 . 662,290

The following additional information may be relevant: (1). Unsold stocks as on 31st, December, 2004 was valued at N53,400. (2). Depreciation is charged as follows: Premises 5% on cost, Fixtures 10% on straight line basis, and Office equipment 12% on reducing balance method. (3). Capital accounts are contributed as follows: Sanya Buba N N Balance at 1st Jan., 2004 40,000 30,000 Additions: 1st May, 2004 50,000 50,000 2nd Oct., 2004 30,000 (4). The following drawings were all made up of cash withdrawn at various dates as follows: Sanya Buba N N 1st March, 2004 20,000 30,000 31st August, 2004 20,000 30,000 1st December, 2004 20,000 20,000 (5). Carriage outwards (N3,500) include N1,800 which was incurred in bringing purchased goods into the business premises. (6). Salaries and wages (N45,000) include N2,000 paid to Buba as salary. On 1st August 2004, Buba’s salary was increased to N6,000 per annum. (7). Rent N650 and electricity N1,200 were owing; while rates were prepaid to the tune of N1,300. Understanding Financial Accounting –SeriesTwo

XXXI

You are required to prepare a set of final accounts for the firm of Sanya and Buba for the year ended 31st December, 2004. 10. The financial arrangements between the members of a partnership are usually contained in an agreement. Required: State: a) The position where a partnership agreement contains financial clauses which conflict with the requirements of the Partnership Act 1890, and b) The requirements of the Partnership Act 1890 regarding: I. Interest on Capital. II. Interest on loans made by partners. III. Remuneration of partners. IV. Sharing of profits and losses.

Understanding Financial Accounting –SeriesTwo XXXII

CHAPTER TWO GOODWILL AND CHANGE IN CONSTITUTION Goodwill is that part of the value of a business, which arises from all of its advantageous circumstances which, generates earnings above an assumed norm (‘super profit’). “Super profits” are what an accountant would call what is left of the net profits after allowances have been made for: (a) services of the proprietor and (b) the use of the capital.

(W arr ington J, in Hill v Fearis (1905) “The goodwill of a business is the advantage, whatever it may be, which a person gets by continuing to carry on, and being entitled to represent to the outside world that he is carrying on a business, which has been carried on for some time previously.” (Lord Macnaughten in IRC v Muller (1901) “[Goodwill] is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force, which brings in customers. It is the one .thing that distinguishes an old established business from a new one at its start. Nothing more than the probability that the old customers will resort to the old place....... From the Accountant’s viewpoint, goodwill is the value attributable to a company’s above average strength in areas such as technical skill, knowledge, management and marketing research and promotion that cannot be separately identified. CLASSIFICATION OF GOODW ILL Goodwill can be classified into: a). Inherent or internally generated goodwill. b). Purchased goodwill which may result from a definite market transaction. FACTORS AFFECTING GOOD W ILL An existing business which has been established for some time may have quite few possible advantages, some of which are: (a) A large number of regular customers who will continue to deal with the new owner. (b) Good reputation of the firm’s service or products. (c) Experienced, efficient, reliable and contented employees. (d)Understanding The business is situated in a–Series goodTwo location. Financial Accounting XXXIII

(e) Quality of the firm’s product(s). (f) Advantageous patents or trade marks. (g) Growth element. (h) Strong liquid resources. (i) Good labour relations. (j) Management efficiency etc. (k) Ability to guarantee supplies. (l) Favourable association with other firms. (m) The continuance of advertising campaigns. (n) Personal reputation of the partners. CHARACTERISTICS OF GOODW ILL 1) It cannot be sold as a separate asset. 2) The value of goodwill may fluctuate from time to time. 3) The value and existence of goodwill are subjective. 4) The value of goodwill has no reliable relationship to costs, which may have been incurred in its creation. GOODW ILL IN A SOLE TRADER’S BOOKS Goodwill is only entered in a sole trader’s accounts when it has been purchased. The existence of goodwill in the financial statements of a sole trader means that the business was purchased as a going concern by the owner; that is, the owner did not start the business from scratch. GOODW ILL IN A PARTNERSHIP BOOKS Although goodwill is not normally entered in the financial statements unless it has been purchased, sometimes in the case of partnerships goodwill may have to be ascertained in certain situations. Unless it has been agreed to the contrary, partners own a share in the goodwill in the same ratio in which they share profits. For instance, if Ameachi takes one-third of the profits, Ameachi will be the owner of onethird of the goodwill. This is true even if there is no goodwill account. When certain thing happens, then the ownership of goodwill by partners changes in some way. The ownership of goodwill will change in the following circumstances: • Existing partners decide to change profit and loss sharing ratios, • A new partner is introduced. • A partner retires or dies. • Two firms decide to amalgamate (combine) to become one. Understanding Financial Accounting –SeriesTwo XXXIV

METHODS OF VALUING GOODW ILL Various methods are advocated for the valuation of goodwill. In many cases the method adopted is a purely arbitrary one and is often governed by the custom of the particular trade in which the business is engaged. The more usual bases of valuation are as follows: 1.

Average Profit Method: This method is based on a specific number of preceding years’ profits. It is usually expressed as a number of years’ purchase of the average profits of a specified number of preceding years. Example : Three years purchase of the average profits of the last five years.

W eighted Average Profits Method: This method is a bit more sophisticated. Weight is applied to each year; the highest factor is applied to the most recent year. It is usually expressed as a number of years’ purchase of the weighted average profits of a specified number of preceding years. E.g. Three years’ purchase of the weighted average profits of the last five years.

Illustration 2.01: Uche and Okafor are in partnership sharing profits and losses equally. Their profits for the last five years have been as follows: 2001 N28,000; 2002 N30,000; 2003 N50,000; 2004 N70,000; and 2005 N100,000. The firm agreed to admit Eric with effect from January 1st , 2006. You are required to calculate the value of goodwill on the following basis: a). 2½ years’ purchase of the average profits of the last four years. b). 3 years’ purchase of the weighted average profit of the last four years. Solution to Illustration 2.01: UCHE, OKAFOR AND ERIC a). Av erage Profits Method: N 2002 30,000 2003 50,000 2004 70,000 2005 100,000 250,000 divided by 4

= N62,500.

2½ Years’ purchase :- N62,500 x 2½ = N156,250 Financial –SeriesTwo b).Understanding W eighted AvAccounting erage Profits Method:

XXXV

Years 2002 2003 2004 2005

Weight x 1 2 3 4 10

Profits N 30,000 50,000 70,000 100,000 N740,000/10

N 30,000 100,000 210,000 400,000 740,000 = N74,000

N74,000 x 3 = N222,000 3. Super Profits Method: This method is based on the expected return on the net value of tangible assets acquired. For instance, if the net tangible assets of a business is acquired for N300,000 and the agreed rate of return is 10%, that is N30,000. Profits (usually average or weighted average) in excess of N30,000 would be regarded as super profits. If the average profits for an agreed number of years is N35,500, then an excess or super profit of N5,500 has been achieved. The figure for goodwill is then computed on a number of years’ purchase of this super profit. If the number of years was agreed at five, then goodwill would be valued at N5,500 x 5 = N27,500. 4. Present Value Method: This is expressed as the present value of an annuity equivalent to average profits for an agreed number of years at an agreed rate of interest. Example: Average profits N20,000; agreed number of years 5; agreed rate of interest 10%. Thus the present value of annuity of N20,000 over 5 years at 10% is N75,816. -n That is : P x 1 - (1+r) r

5. Gross Annual Fees x Agreed Number of Years: sometimes adopted by professional firms.

This is

CHANGE IN PROFIT SHARING RATIO Sometimes the profit and loss sharing ratios have to be changed for instance: • A partner may now not work as much as in the past, possibly because of old age or ill health. • A partner’s skills and ability may have changed, perhaps after Understanding Financial Accounting –SeriesTwo attending a course or following an illness. XXXVI

•

A partner may now be doing much more for the business than in the past. If the partners decide to change their profit sharing ratios, an adjustment will have to be made to reflect the new ratios. The accounting entries depend on the intention of the partners: a).

Where the partners intends that the goodwil l account should re main in the books . Dr. Goodwill A/c Full value of goodwill. Cr. Capital A/cFull value of goodwill shared in their old profit sharing ratio.

b). Where the partners decide not to have good wi ll account re main in the books, there exist two options: Option 1. Using the goodwill account to make the adjustments to the partners’ capital accounts. In addition to the entries make in (a) above: Dr. Capital Account - Full value of goodwill shared in their new profit sharing ratio. Cr. Goodwill A/cFull value of goodwill. The effect of these entries is that the goodwill account is closed off and the Capital Accounts of Partners are adjusted upward or downward.

Option 2.

By making the adjustment direct to the partners’ capital accounts. This is better explained than described. e.g. A, B and C are in partnership sharing profit in the ratio 3:2:1. On 31 December 1997, they agreed to change their profit sharing ratio to 2:2:1. Goodwill was agreed at #60,000. The partners did not wish the Goodwill Account to remain in the books. Goodwi ll shared in the: Old Ratio New Ratio Cr .N Dr. N A 30,000 24,000 B 20,000 24,000 C 10,000 12,000

The Journal entries would be : Dr. Understanding Financial Accounting –SeriesTwoN XXXVII

Net N 6,000 Cr. 4,000 Dr. 2,000 Dr.

Cr. N

Capital Account - B 4,000 Capital Account - C 2,000 Capital Account - A Being adjustments to capital accounts as a result of change in profit sharing ratio.

6,000

Illustration: 2.02: Ade and Buky were in partnership sharing profits and losses equally. Their balance sheet at 31st December 2004 was as under: Balance Sheet As At 31 Dece mb er, 2004 N Capital Fixed Assets Accounts :Ade 80,000 Buky 70,000 Current Assets Current Accounts :Ade Buky Current Liabilities

N 210,000 120,000

75,000 25,000 80,000 330,000

330,000

The partners agreed that from 1st January, 2005, they would share profits and losses: Ade 60%, Buky 40%. The goodwill was valued at N50,000 and all the other assets at their balance sheet value. Prepare a revised balance sheet as at 1st January 2005 after necessary adjustment to reflect the change in profit sharing ratio on the following basis: (a) That Goodwill will remain in the books; and (b) That no Goodwill is to remain in the books.

Understanding Financial Accounting –SeriesTwo XXXVIII

Solution to Illustration 2.02 ADE AND BUKY (a)

That good wi ll wil l re main in the book s.

Balance c/d

CAPITAL ACCOUNTS ADE BUKY N N 105,000 95,000 Balance b/d Goodwill 105,000 95,000 Balance b/d

Ade Buky

ADE N 80,000 25,000 105,000 105,000

GOODWILL ACCOUNT N 25,000 Balance c/d 25,000 50,000

Balance Sheet as at 1st January 2005 Fixed Assets Goodwill Current Assets Less: Current liabilities

BUKY N 70,000 25,000 95,000 95,000

N 50,000 50,000

N 210,000 50,000

120,000 80,000 40,000 300,000

Financed by: Capital accounts Current accounts

Ade N 105,000 75,000

Understanding Financial Accounting –SeriesTwo XXXIX

Buky N 95,000 25,000

200,000 100,000 300,000

(b)

That good wi ll wil l NOT re main in the book s.

Goodwill Balance c/d

ADE N 30,000 75,000 105,000

CAPITAL ACCOUNTS BUKY N 20,000 Balance b/d 75,000 Goodwill 95,000 Balance b/d

ADE N 80,000 25,000 105,000 75,000

Goodwill account N 25,000 Ade 25,000 Buky 50,000

Ade Buky

Balance Sheet as at 1st January 2005

Fixed Assets Current Assets Less: Current liabilities Financed by: Capital accounts Current accounts

120,000 80,000 Ade N 75,000 75,000

Buky N 75,000 25,000

BUKY N 70,000 25,000 95,000 75,000

N 30,000 20,000 50,000 N 210,000 40,000 250,000

150,000 100,000 250,000 Alternatively, the adjustment can be made directly to the capital accounts (i.e. without opening goodwill account. Adjustment for goodwill as a result of change in profit ratio: Old ratio New ratio 50:50 60:40 Net Cr. N Dr. N N Ade 25,000 30,000 5,000 Dr. Buky 25,000 20,000 5,000 Cr. Therefore:

Dr. Cr.

Ade Buky

N5,000 N5,000

Understanding Financial Accounting –SeriesTwo

Goodwill Balance c/d

ADE N 5,000 75,000 80,000

CAPITAL ACCOUNTS BUKY ADE N N Balance b/d 80,000 75,000 Goodwill 75,000 80,000 Balance b/d 75,000

BUKY N 70,000 5,000 75,000 75,000

ADMISSION OF A PARTNER New partners may be admitted, probably: (a) As an extra partner, either because the firm has grown or because someone is needed with different skills. (b) To replace partners who are leaving the firm. This might be because of retirement or death of a partner. There are many ways of dealing with goodwill on admission of a new partner. In practice, the partnership agreement would be followed; in examination, the criteria set out in the question must be followed. a).

The new partner pays the old partners for his share of the goodwill and no goodwill account is kept. There are three acceptable ways: 1. The new partner makes a payment for share of goodwill to the old partners in their old profit sharing ratio; through the partnership books as a matter of record only. The old partners would withdraw it immediately. 2. The payment for share of goodwill may by agreement retained in the partnership to increase the cash resources. 3. The new partner makes a payment for share of goodwill to the old partners in the old profit sharing ratio; as a separate transaction outside the accounts of the partnership. In this case, the only entry in the books would be to record the capital introduced by the new partner.

The new partner pays the firm for share of goodwill. Goodwill account is to be opened and no extra cash is paid in by the new partner for goodwill.

Understanding Financial Accounting –SeriesTwo

XLI

Understanding Financial Accounting –SeriesTwo

XLII

Th e new partner makes payment for share of goodwill to the old partners in the old profit sharing ratio through the partnership books as a matter of record only. The old partners would withdraw it immediately Illustration 2.03: On 31st March 2005, the balance sheet of Beauty and Joy, who shared profits and losses in the ratio 2:1 was as follows: Balance Sheet as at 31 st March, 2005. N Fixed Assets Current Assets (excluding Cash) 54,000 Cash 6,000 60,000 Less: Current Liabilities 48,000 Financed By:

Beauty N 20,000 4,500

Joy N 10,000 1,500

N 24,000

12,000 36,000

N 30,000 6,000 36,000 On 1st April 2005, the partnership agreed to admit Gladys as a partner who brought in N18,000 (half of which was for her share of goodwill and the balance as her capital). It was agreed that Beauty and Joy would immediately withdraw the cash credited to their respective capital accounts for the goodwill purchased by Gladys. The new partnership is to share profits and losses in the ratio Beauty 50%, Joy 30% and Gladys 20%. REQUIRED: Show the necessary entries in the partner’s capital accounts and prepare the balance sheet after adjustment for the new firm. Capital Accounts Current Accounts

Solution to Illustration 2.03 BEAUTY, JOY AND GLADYS (a) CAPITAL ACCOUNTS

Understanding Financial Accounting –SeriesTwo

XLIII

Cash Bal d

BEAUTY

JOY

GLADYS

BEAUTY

JOY

GLADYS

N 6,000

N 3,000

N 20,000

20,000

10,00 0 13,00 0

9,000

N 10,00 0 3,000

26,000

Bal b/ d Cash

9,000

26,000 Bal b/ d

Balance b/d Beauty Joy Gladys

6,000

20,000

CASH ACCOUNT N 6,000 Beauty 6,000 Joy 3,000 Balance c/d 9,000 24,000

Balance Sheet as at AFTER ADMISSION OF GLADYS N Fixed Assets Current assets (excluding cash) 54,000 Cash 15,000 69,000 Less: Current liabilities 48,000 Financed by: Beauty N Capital a/cs 20,000 Current a/cs 4,500

Joy N 10,000 1,500

Gladys N 9,000 -

13,00 0 10,00 0

9,000 9,000 9,000

N 6,000 3,000 15,000 24,000

N 24,000

21,000 45,000 39,000 6,000 45,000

The payment for share of goodwill may by agreement retained in the partnership to increase the cash resources. In this case there will be no immediate withdrawal of the cash credited to Beauty and Joy. The cash will be allowed to remain while the capital accounts of the partners concerned will be increased accordingly. The balance sheet and the capital accounts will appear as under: Understanding Financial Accounting –SeriesTwo

XLIV

CAPITAL ACCOUNTS

Bal c/ d

BEAUT Y N 26,000

JOY

26,000

13,00 0

N 13,00 0

GLADY S N 9,000

Bal b/ d Cash

9,000 Bal b/ d

BEAUT Y N 20,000 6,000 26,000 26,000

CASH ACCOUNT N Balance b/d 6,000 Balance c/d Beauty 6,000 Joy 3,000 Gladys 9,000 24,000

JOY N 10,00 0 3,000 13,00 0 13,00 0

GLADY S N 9,000 9,000 9,000

N 24,000

24,000

Balance Sheet as at AFTER ADMISSION OF GLADYS N N Fixed Assets 24,000 Current assets (excluding cash) Cash Less: Current liabilities Financed by: Beauty N Capital A/cs 26,000 Current A/cs 4,500

Joy N 13,000 1,500

54,000 24,000 78,000 48,000 Gladys N 9,000 -

30,000 54,000 48,000 6,000 54,000

The new partner makes a payment for share of goodwill to the old partners in the old profit sharing ratio; as a separate transaction outside the accounts of the partnership. In this case, the only entry in the books would be to record the capital introduced by the new partner. Understanding Financial Accounting –SeriesTwo

XLV

In this case there will be no entry in respect of the N9,000 paid to Beauty and Joy in respect of goodwill. The solution will have been presented as follows: CAPITAL ACCOUNTS

Bal c/ d

BEAUTY

JOY

N 20,000

N 10,00 0

20,000

10,00 0

GLADY S N 9,000

Bal b/ d Cash

9,000 Bal b/ d

BEAUTY

JOY

GLADYS

N 20,000

N 10,00 0

20,000

10,00 0 10,00 0

20,000

CASH ACCOUNT N Balance b/d 6,000 Balance c/d Gladys 9,000 15,000

9,000 9,000 9,000

N 15,000 15,000

Balance Sheet as at AFTER ADMISSION OF GLADYS N N Fixed Assets 24,000 Current assets (excluding cash) Cash Less: Current liabilities Financed by: Beauty N Capital A/cs 20,000 Current A/cs 4,500

Joy N 10,000 1,500

54,000 15,000 69,000 48,000 Gladys N 9,000 -

21,000 45,000 39,000 6,000 45,000

W here goodwill account is to be opened and no extra cash is paid in by the new partner for goodwill A Goodwill Account is raised at the current value of goodwill. i) .

Dr. Goodwill A/c-

Goodwill .

Understanding Financial Accounting –SeriesTwo

XLVI

ii).

Cr. Capital A/c-

Goodwill shared in the old profit sharing ratio.

Dr. Cr.

] Total payment made ] by the new partner.

Cash/Bank Capital A/c

Where the goodwill account is not adjustments are made for goodwill at its current value, either: through the Goodwill Account itself, or as a separate calculation, which entails posting only the net, increase or decrease. Illustration 2.04: Rita and Linda are in partnership, sharing profits and losses equally. They decide to admit Anita. By agreement, goodwill valued at N6,000 is to be introduced into the business books. Anita is required to provide capital N7,000. The new profit sharing ratio is to be 2:1:1 respectively for Rita, Linda and Anita. The balance sheet before admission of Anita showed: N Fixed and current assets 15,000 Bank 2,000 17,000 Less: Current liabilities 5,000 12,000 Financed by: Capital account: Rita 8,000 Linda 4,000 12,000 (a) Show the necessary ledger entries to record the above and show the revised balance sheet after the admission of Anita (assuming goodwill is to remain in the books). (b) Show the necessary ledger entries to record the above and show the revised balance sheet after the admission of Anita (assuming goodwill is not to remain in the books).

Solution to illus tration 2.04 RITA, LINDA AND ANITA (a)

Assum ing good wi ll wi ll re main in the books CAPITAL ACCOUNTS

Understanding Financial Accounting –SeriesTwo XLVII

Bal c/d

RITA

LINDA

N 11,00 0

N 7,000

ANIT A N 7,000

RITA N 8,000

LIND A N 4,000

3,000

11,000

7,000

7,000 7,000

11,000

7,000

Bal b/d Goodwill Bank

11,00 0

7,000

7,000 Bal b/d

GOODWILL ACCOUNT N Rita 3,000 Balance c/d Linda 3,000 6,000 BANK ACCOUNT N Balance b/d 2,000 Balance c/d Anita 7,000 9,000 Balance Sheet as at AFTER ADMISSION OF ANITA N Fixed Assets Goodwill Bank Less: Current liabilities Financed by: Rita N Capital A/cs 11,000

(b)

9,000 5,000 Linda N 7,000

Anita N 7,000

Understanding Financial Accounting –SeriesTwo XLVII I

N 6,000 6,000 N 9,000 9,000

N 15,000 6,000 4,000 25,000 25,000

Assum ing good wi ll wi ll not re main in the books CAPITAL ACCOUNTS

ANITA

Goodwill Balance c/d

RITA

LINDA

N 3,000 8,000

N 1,500 5,500

ANIT A N 1,500 5,500

11,00 0

7,000

RITA Balance b/d Goodwill Bank Balance b/d

Rita Linda

N 8,000 3,000 11,00 0 8,000

GOODWILL ACCOUNT N 3,000 Rita 3,000 Linda Anita 6,000

BANK ACCOUNT N Balance b/d 2,000 Balance c/d Anita 7,000 9,000 Balance Sheet as at AFTER ADMISSION OF ANITA N Fixed Assets Bank Less: Current liabilities

LIND A N 4,000 3,000

ANITA N

7,000

7,000 7,000

5,500

N 3,000 1,500 1,500 6,000

N 9,000 9,000

N 15,000

9,000 5,000 4,000 19,000

Financed by: Capital A/cs

Rita N 8,000

Linda N 5,500

Anita N 5,500

19,000

Illustration 2.05: Alberts and Bebeto are in partnership sharing profits and losses equally. At 30TH June,2005, they have balances on their capital accounts of N12,000 and N15,000 respectively. On that day they agreed to bringFinancial in theirAccounting friend Romar io as a third partner. All three partners Understanding –SeriesTwo XLIX

are to share profits and losses equally from now on. Romario is to introduce N20,000 as capital into the business. Goodwill on 30th June, 2005 was agreed at N18,000. REQUIRED: a). Show the Partners’ capital accounts for 30th June and 1st July on the assumption that the goodwill, previously unrecorded is to be included in the accounts b). Show the additional entries necessary to eliminate goodwill again from the accounts.

Understanding Financial Accounting –SeriesTwo

Solution to Illustration 2.05 ALBERTS, BEBETO AND ROMARIO CAPITAL ACCOUNTS Bal c/d

Goodwil l Bal c/d

ALBERT

BEBETO

ROMAR

21,000

N 24,000

N 20,000

21,000

24,000

20,000

6,000

15,000 21,000

18,000 24,000

14,000 20,000

Alberts Bebeto Balance b/d

Bal b/d Goodwil l Bank Bal b/d

ALBERT

BEBETO

ROMAR

12,000 9,000

N 15,000 9,000

21,000

24,000

20,000 20,000

21,000

24,000

20,000

21,000

24,000

20,000

Goodwill account N 9,000 Balance c/d 9,000 18,000 18,000 Alberts Bebeto Romario 18,000

N 18,000 18,000 6,000 6,000 6,000 18,000

A PARTNER RETIRES OR DIES When a partner retires, he would expect the balance on his capital and current accounts plus a share of goodwill to be returned. Similarly, when a partner dies, his executors would expect same. The goodwill of the firm would be valued in the agreed manner and shared amongst the old partners in the existing profit sharing formula. The normal situation is for the retiring or deceased partner’s entitlement to be settled in cash through the Cash Book. However, where the amount due is not paid immediately, the usual accounting custom is to transfer it to a loan account in the name of the retiring or deceased partner. Interest may have to be paid on such loans. Where it is desired by the surviving partners that no goodwill account is to remain in the books, the goodwill account raised would be Understanding Financial Accounting –SeriesTwo

written off against the surviving partners’ capital accounts in their newly agreed profit sharing ratio. Illustration 2.06: Dare, Bunm i and Mena were in partnership sharing profits and losses in the ratio 2:2:1 respectively. The balance sheet as at 31st December, 2004 was as follows: N N Fixed Assets 20,800 Current Assets (excluding bank) 31,300 Bank 29,600 60,900 Less: Current Liabilities 26,800 34,100 54,900 Financed By: Dare Bunmi Mena N N N N Capital A/cs 20,000 20,000 10,000 50,000 Current A/cs 1,850 1,600 1,450 4,900 54,900 Dare retired on 31 December, 2004 and Bunmi and Mena continued in partnership sharing profits and losses in the ratio 2:1. The value of the firm’s goodwill as on 31 December, 2004 was agreed to be N15,000. The entire amount due to Dare was paid as soon as they are computed. No account for goodwill was to be maintained in the partnership books, adjusting entries for transactions between the partners being made in their capital accounts. Prepare the partners capital accounts and balance sheet of Bunmi and Mena as on 1st January 2005. Solution to illus tration 2.06 BUNMI AND MENA CAPITAL ACCOUNTS

Dare a/c Goodwill

DARE

BUNMI

MENA

N 26,00 0

DARE Bal b/d

10,000

5,000

Goodwil l

16,000 8,000 26,00 26,000 13,00 0 0 Bal b/d Understanding Financial Accounting –SeriesTwo

MENA

N 20,000

BUNM I N 20,000

6,000

3,000

26,000

13,000

16,000

8,000 LII

N 10,000

Bal c/d

Balance b/d

Dare Bunmi Mena

BANK ACCOUNT N 29,600 Dare Balance c/d 9,600 GOODWILL N 6,000 Bunmi 6,000 Mena 3,000 15,000

N 27,850 1,750 9,600

N 10,000 5,000 15,000

DARE (RETIRING PARTNER) ACCOUNT N N Balance c/d 27,860 Current a/c 1,850 Capital 26,000 27,850 27,850

Balance Sheet as at AFTER ADMISSION OF GLADYS N N Fixed Assets 20,800 Current assets (excluding cash) 31,300 Cash 1,750 33,050 Less: Current liabilities 26,800 6,250 27,050 Financed by: Bunmi Mena N N Capital a/cs 16,000 8,000 24,000 Current a/cs 1,600 1,450 3,050 27,050

Understanding Financial Accounting –SeriesTwo

LIII

REVALUATION OF ASSETS AND LIABILITIES When a partner leaves the firm or a new partner is admitted, there must be a re-appraisal of the asset values. A realistic value must be placed on the tangible assets and a figure agreed or calculated for goodwill. To adjust the accounts, a Revaluation Account is used. The accounting entries are as follows: a). Dr. Assets A/c ] Increase in assets’ Cr. Revaluation A/c ] values b).

Dr. Cr.

Revaluation A/c Assets’ A/c

] Decrease in assets’ ] values.

Note : Where liabilities are revalued the above entries (a) and (b) would be reversed. c).

Balance the Revaluation Account; If credit balance, it represents a prof it or gain; Dr. Revaluation account. Cr. Partner’s Capital accounts in old profit sharing ratio.

If debit balance, it repres ents los s. Dr. Partners’ Capital accounts in old profit sharing ratio. Cr. Revaluation account. *1 Note: Where the partners maintained fixed capital accounts the profit or loss on revaluation will be recorded in the current accounts . Illustration 2.07: Alfa and Bade have been in partnership for many years sharing profits and losses in the ratio 3:2 respectively. The following was their balance sheet as at 31st December 2004: N N Capital Goodwill 2,000 Accounts:Alfa 4,000 Plant and Machinery 1,800 Bade 3,000 Stock in trade 1,960 Debtors 2,130 Liabilities:Cash at bank 90 Creditors 980 7,980 7,980 On 1st January 2005, they decided to admit Adam as a partner on the condition that he contributed N2,000 as his capital, but that new values should be placed on certain assets as follows: Plant and machinery N2,000, Understanding Financial Accounting –SeriesTwo

LIV

Stock N1,900, the other assets excepting goodwill remaining at their present book values,. The goodwill was agreed to be valueless. Required: Draw up the Partners’ capital accounts, Goodwill account and the Revaluation accounts to record the above transactions. Show the revised balance sheet after the admission of Adam. Solution to illus tration 2.07 ALFA, BADE AND ADAM CAPITAL ACCOUNTS Goodwill Bal c/d

ALFA N 1,200 2,884 4,084

BADE N 800 2,256 3,056

ADAM N 2,000

Balance b/d Bank Revaluation

2,000 Balance b/d

Balance b/d Adam

Balance b/d

ALFA N 4,000

BADE N 3,000

84 4,084 2,884

56 3,056 2,256

ADAM N 2,000

BANK ACCOUNT N 90 Balance c/d 2,000 2,090 GOODWILL N 2,000 Alfa Bade 2,000

2,000 2,000

N 2,090 2,090 N 1,200 800 2,000

REVALUATION ACCOUNT N Stock 60 Plant & Machinery Revaluation profits: Alfa 84 Bade 56 200 Balance Sheet as at AFTER ADMISSION OF ADAM N Fixed Assets Plant and machinery Understanding Financial Accounting –SeriesTwo

N 200

200 N 2,000 LV

Current assets Stock Debtors Bank (excluding cash)

1,900 2,130 2,090 6,120 980

Less: Current liabilities Financed by: Alfa N Capital A/cs 2,884

Bade N 2,256

Adam N 2,000

5,140 7,140 7,140

Illustration 2.08: The balance sheet of Kem i, Amend and Doris on 31st December 2003 was as follows: Cost Dep’n NBV Fixed Assets N N N Plant and Equipment 3,000 1,000 2,000 Motor Vehicles 5,000 1,000 4,000 Furniture 1,000 300 700 9,000 2,300 6,700 Current Assets Stock 1,500 Debtors 1,200 Bank 150 2,850 Less: Current Liabil ities : Creditors 2,050 Accrued rent expenses 200 2,250 60 7,300 Financed By: Kemi Amanda Doris N N N N Capital A/cs 3,000 2,000 1,000 6,000 Current A/cs 150 200 (50) 300 6,300 Reserves 500 10% Loan from Chief Benjamin 500 7,300 The partners used to share profit and loss in the ratio 2:2:1 respectively. As from 1st January 2004 it was agreed that the new profit and loss sharing ratio should be 5:3:2. For this purpose the following decision were made: a). Assets were to be revalued as follows: Plant and Equipment N1,800, Motor Vehicles N5,000, Furniture N600. Goodwill was Understanding Accounting –SeriesTwo LVI agreedFinancial at N2,000.

b).

An amount of N300 obsolete stock is to be written off while a provision of N100 is to be created for bad debts. c). A provision of N120 for a contingent liability included in the trade creditors is no longer required. REQUIRED: Prepare the necessary ledgers to record the above transactions and show the balance sheet after the above adjustments have been made.

Solution to illus tration 2.08 KEMI, AMEND, AND DORIS CAPITAL ACCOUNTS

Bal c/ d

KEMI

AMEND

N 3,80 0

N 2,800

DORI S N 1,400

Bal b/d Goodwil l

3,80 0

2,800

1,400 Bal b/d

KEMI

AMEND

DORIS

N 3,00 0 800

N 2,000

N 1,000

800

400

3,80 0 3,80 0

2,800

1,400

2,800

1,400

CURRENT ACCOUNTS Bal b/d Reserve Bal c/d

KEMI

AMEND

DORIS

KEMI

AMEND

DORIS

N 150 168

N 200 168

200 518 268

200 568 418

100 184 34

250

150

N 50 100

268 518

418 568

34 184

Bal b/d Revaluatio n Reserve Bal b/d

Understanding Financial Accounting –SeriesTwo

LVII

Understanding Financial Accounting –SeriesTwo

LVIII

Kemi Amend Doris Balance c/d

RESERVES ACCOUNT N 200 Balance b/d 200 Creditors 100 Kemi 500 Amend Doris 1,000

REVALUATION ACCOUNT N Plant 200 Motor Vehicles Furniture 100 Creditors Stock 300 Debtors 100 Revaluation profits:Kemi 168 Amend 168 Doris 84 1,120 Balance Sheet as at 1 ST January 2004 N N Fixed Assets Plant and equipment Furniture Motor vehicles Goodwi ll Current assets Stock Debtors Bank Less: Current liabil ities Creditors Accrued expenses

N 500 120 250 150 100 1,000

N 1,000 120

1,120

N 1,800 600 5,000 7,400 2,000

1,200 1,100 150 2,450 1,930 200

2,130

Less: 10% Loan from Chief Benja min Financed by: Kemi Amend Understanding Financial Two N Accounting –Series N

Doris N

320 9,720 500 9,220 LIX

Capital A/cs Current A/cs

3,800 268

2,800 418

1,400 34

Reserv es

8,000 720 500 9,220

Illustration 2.09: Alex, Bode and Charles are in partnership sharing profits and losses in the ratio 3:2:1. The balance sheet of the firm as at 30 June, 2004 is as follows: N Capital Accounts:Alex Bode Charles Current Accounts:Alex Bode Charles Loan from Charles Current Liabil ities:Creditors Bank

8,500 6,500 3,500 372 (250) 468

N Fixed Assets :Premises Plant Motor Cars Current Assets :Stock Debtors Cash

9,000 3,700 1,700 14,400 6,238 3,498 76

2,800

1,902 420 24,212 24,212 Charles decided to retire from the business on 30th June 2004 and Dare is admitted as a partner on that date. The following matters are agreed: a). Certain assets were revalued - Premises N12,000, Plant N3,500, and Stock N5,418. b). Provision is to be made for doubtful debts N300. c). Goodwill is to be recorded in the books on the date Charles retires in the sum of N420. The partners in the new firm do not wish to maintain a goodwill account; so that amount is to be written back against the new partners’ capital account. d). Alex and Bode are to share profits in the same ratio as before, and Dare is to have the same share of profits as Bode. e). Charles is to take his car at its book value of N390 in part payment, and the balance of all he is owed by the firm in cash except N2,000 which he is willing to leave as a 10% Loan to the firm. f). The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned. Dare is to contribute cash to bring his capital and current accounts to the same amounts as the original partner from the old firmTwo who has the lower investment in LX the Understanding Financial Accounting –Series

business. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners. REQUIRED: Account for the above transactions, (including goodwill and retiring partner’s accounts) and draft a balance sheet for the partnership of Alex, Bode and Dare as at 1st July 2004. Solution to illus tration 2.09 ALEX, BODE, CHARLES AND DARE CAPITAL ACCOUNTS Goodwil l Charles Bank Bal c/d

A N 180

B N 120

C N

D N 120

3,57 0 2,01 0 6,52 0 8,71 0

6,52 0 6,64 0

3,57 0

Bal b/d Goodwil l Bank

6,52 0 6,64 0 Bal c/d

A N Bal b/d Charles Bank Bal c/d

902 310 1,212

A N 8,50 0 210

Goodwill N Alex 210 Alex Bode 140 Bode Charles 70 Dare Understanding Financial Accounting –Series 420 Two

C N 3,50 0 70

D N

6,640

8,71 0 6,52 0

CURRENT ACCOUNTS C D A N N N Bal b/d 372 748 Revaluat 840 n Bank 310 310 560 748 310 1,212 Bal c/d 310 B N 250

B N 6,50 0 140

6,64 0 6,52 0

3,57 0

B N

C N 468 280

560

6,640 6,520

D N

310 560 310

748

N 180 120 120 420

310 310

LXI

Plant Stock Debtors Revaluation profits:Alex Bode Charles

REVALUATION ACCOUNT N 200 Premises 820 300

Dare Dare Balance c/d

N 3,000

840 560 280 3,000

3,000

BANK ACCOUNT N 6,640 Balance b/d 310 Alex – Capital 1,110 Alex – Current Charles 8,060 Balance b/d

N 420 2,010 902 4,728 8,060 1,110

CHARLES (RETIRING PARTNER) ACCOUNT N N Motor Car 390 Loan 2,800 Bank 4,728 Capital 3,570 Balance c/d 2,000 Current a/c 748 7,118 7,118 Balance b/d 2,000 MOTOR CAR ACCOUNT N 1,700 Charles Balance c/d 1,700 1,310

Balance b/d Balance b/d

N 390 1,310 1,700

Profit sharing ratio: Old New

A 3 3

B 2 2

C 1 -

D 2

The note says that Dare is to have the same share of profit as Bode. Alex, Bode and Dare Balance Sheet as at 1 ST July 2004 Understanding Financial Accounting –Series Two

LXII

Fixed Assets Premises Plant Motor vehicles

5,418 3,198 76 8,692 1,902 1,110

3,012 5,680 22,490 2,000 20,490

Less: 10% Loan from Charles Financed by: Capital A/cs Current A/cs

Alex N 6,520 310

N 12,000 3,500 1,310 16,810

Current assets Stock Debtors Cash Less: Current liabilities Creditors Bank

Bode N 6,520 310

Dare N 6,520 310

19,560 930 24,490

RETROACTIVE CHANGE IN CONSTITUTION In the change of interests already considered, it has been assumed that such changes take effect on the date of the decision. In some cases, however, the partners may decide that the change of interests have a retroactive effect, that is, take effect from a date prior to the date of the decision. In that case, a journal entry will be required to adjust the existing partners’ capital and/or current account balances to the intended balances reflecting the effect of the change of interests. In order to ascertain the amounts by which the existing balances would be adjusted, it is necessary to prepare FROM THE DATE OF THE CHANGES to the DATE OF THE DECISION a revised appropriation account and partners’ capital/current accounts to reflect the new arrangements. The revised balances so obtained are then compared with the existing balances to ascertain the adjustments required.

Understanding Financial Accounting –SeriesTwo

LXIII

GOO DW I L L AND QUES TI O NS

CHANGE

CONS TI T UT I O N

PRACTI CE

1. The balance sheet of Nora, Tina, W innie and Mona as at 31st December 20*8 is presented below. The partners agree that from 1st January 20*9 they will share profits and losses in the ratio of 3:3:2:2, instead of equally. The goodwill of the firm at 31st December 20*8 is to be valued at N20,000: N N Fixed Assets 50,000 Current Assets 46,000 Less: Current liabilities 28,000 Net current assets 18,000 68,000 Financed by: Capitals Nora 20,000 Tina 20,000 Winnie 14,000 Mona 14,000 68,000 You are required to prepare a balance sheet as at 1st January 20*9, to record the change in profit sharing ratios. No goodwill account is to remain in the books. 2. Badmus and Otonko are partners sharing profit in the ratio 4:3 respectively. The balance sheet at 30th June 20*9 was as follows: N N Fixed Assets 38,200 Current Assets (excluding cash) 49,200 Cash 4,200 53,400 Less: Current liabilities 30,000 Net current assets 23,400 61,600 Capitals: Capital Current Badmus (N) 32,000 3,200 35,200 Otonko (N) 24,000 2,400 26,400 61,600 It was agreed to admit Mimi into partnership on 1st July 20*9 on payment of N8,400 to the existing partners for a share of goodwill; the cash is to remain in the partnership. Mimi also introduced N16,000 capital. One-half of the balance on the current accounts of Badmus and Otonko was to be withdrawn in cash and the balances to be transferred to their capital accounts. Understanding Financial Accounting –SeriesTwo LXIV

You are required to show: (a) the Capital accounts of the three partners as at 1st July 20*9, after making the entries for the above adjustments, and (b) a balance sheet of the new firm as at that date. 3. The balance sheet of Hap, Alen and Eva as at 31st December 2004 is presented below: N N Buildings at cost 8,000 Motor vehicles at net book value 3,550 Office fittings at net book value 1,310 12,860 Stock 2,040 Debtors 4,530 Bank 1,390 7,960 20,820 Capitals Hap 9,560 Alen 6,420 Eva 4,840 20,820 The above partners have always shared profits and losses in the ratio 5:3:2. From 1st January 2005, the assets were to be revalued as the profit sharing ratios are to be altered soon. The following assets are to be revalued to the figures shown: Buildings N17,500; Motor vehicles N2,600; Stock N1,890 and Office fittings N1,090. You are required to show all the ledger accounts necessary to record the revaluation and draw up a balance sheet as at 1st January 2005. 4. Lola, Moni and Seun are in partnership. They shared profits in the ratio 2:5:3. It is decided to admit Remi. It is agreed that goodwill was worth N10,000, but that this is not to be brought into the business records. Remi will bring N4,000 cash into the business for capital. The new profit sharing ratio is to be Lola 3: Moni 4: Seun 2: Remi 1. The balance sheet before Remi was admitted was as follow: N Assets (excluding cash) 11,000 Cash 2,500 13,500 Creditors 1,500 12,000 Understanding Financial Accounting –SeriesTwo

LXV

Capitals: Lola Moni Seun

3,000 5,000 4,000 12,000 Show the entries in the capital accounts of Lola, Moni, Seun and Remi, the accounts to be in columnar form. In addition, draw the balance sheet after Remi has been introduced. 5. Lola, Si mi and Bola were in partnership sharing profits and losses in the ratio 5:3:2. The draft balance sheet of the partnership as on 30th June, 2005 was as follows: N N Capital Accounts:Fixed Assets :Lola 120,000 Premises 80,000 Simi 60,000 Plant & Eqpt 42,000 Bola 40,000 Motor Vehicle 21,000 220,000 Current Assets :Loan fro m Lola 30,000 Stock 36,000 Debtors 48,000 Current Liabilities :Bank 83,000 Creditors 46,000 Provision for repainting of premises 14,000 310,000 310,00 0 Lola retired on 30th June, 2005, and Simi and Bola continued in partnership sharing profits and losses in the ratio 3:2 respectively. Lola’s loan was repaid on 1st July, 2005 and it was agreed that 10% of the outstanding balance due to her should be paid as soon as the amount was computed, the remaining balance on loan to the partnership. It was agreed that the following adjustments should be made to the balance sheet as on 30th June, 2005. a). The Freehold Premises to be revalued at #150,000 and the Plant and Equipment at N35,000. b). Lola to be charged N4,000 for one of the Motor Vehicles taken over by her, the vehicle having a book value of N4,500. c). The provision for doubtful debts to be increased by N2,000. d). The provision for repainting of the premises to be increased to N20,000. Understanding Financial Accounting –SeriesTwo LXVI

e).

N4,000 to be written off the stock in respect of damaged and obsolete items included therein. f). A provision of N2,500 included in creditors to be written off. The Partnership Agreement provided that on the retirement of a partner, goodwill was to be valued at an amount equal to the lower of the average annual profits of either the three or five years expiring on the date of retirement. The relevant profits were: N Year ended 30 June, 2002 64,200 2002 53,600 2003 81,800 2004 78,400 2005 81,500 (per draft accounts). It was agreed that for the purpose of valuing goodwill, only the adjustments in respect of the provision for repainting and doubtful debts, creditors and stock should be regarded as affecting the profits. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their capital accounts. You are REQUIRED to prepare: (a) The Revaluation Account, (b) The Partners’ Capital Accounts, (c) Lola’s Account showing the outstanding balance due to her and (d) The Balance Sheet of Simi and Bola as on 1st July, 2005. 6. The balances in the Capital Accounts of Niyi, Ezenwa and Shehu are as follows, and they share profits and losses in the ratio 2:2:1. Niyi N40,000; Ezenwa N28,000; and Shehu N20,000. There is no goodwill account in their records. It is decided that they shall from 1st January 20*8 share profits in the proportion of 4:3:1. For this purpose the assets are to be written down by N2,000, and goodwill is valued at N18,000. The capital accounts are to be adjusted (by cash payments) in the same proportion as their profit sharing ratios and no alterations are to be made to book values of assets, neither is the goodwill accounts to remain in the books. REQUIRED: Show the relevant ledger entries.

Understanding Financial Accounting –SeriesTwo LXVII

7. Graham and Kingibe have been partners sharing profits equally. The partnership balance sheet at 30th June, 2005 was: N N Capital Accounts:Fixed Assets 35,000 Graham 30,000 Kingibe 18,500 Current Assets 28,000 Current Liabilities

14,500 63,000

63,000

On 1 July, 2005, the partners agreed that as Graham wished to take a smaller part in the partnership business, the profit sharing ratio should be changed to 2:3 with a salary of N5,000 a year to Kingibe. For the purpose of the change only, goodwill was agreed at a value of N30,000 and fixed assets at a value of N47,000. These changes in value were not to be incorporated in the books. You are required to show the necessary entries in the partnership books. 8. Taju and Bukar were in partnership sharing profits and losses in the ratio 2:1.The partnership agreement provided: a). Interest at the rate of 8% p.a. to be allowed on fixed capital accounts. No interest is to be allowed on current accounts but 10% per annum is to be charged on any debit balance at the commencement of the year. b). Goodwill is to be valued at 1½ times the average annual profits of the previous four or five years whichever is lower. The Partners agreed to take W ale into partnership as on 1st January, 2004, and he introduced N50,000 into the business. It was agreed that the fixed capital of the business should be N200,000 contributed by the partners in their profit sharing ratio; any deficiency or surplus being transferred to their current accounts. Taju was to be entitled to a prior share of the profits of N5,000 and the balance was to be shared: Taju two-fifths, Bukar two-fifths, and Wale one-fifth. In addition it was agreed that Wale’s share of the profits should be not less than N35,000 per annum. Agreed profits for goodwill purposes of the past five years are as follows: N 1998 104,200 1999 117,600 2000 94,000 2002 138,200 2003 146,000 No account for goodwill is maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. Partners’ accounts as on 31 December, 2003 were as follows: Understanding Financial Accounting –SeriesTwo LXVII I

Fixed Capital Current N N Taju 100,000 34,000 Cr. Bukar 60,000 12,000 Cr. The draft accounts for the year ended 31 December, 2004 before taking into account interest on partners’ accounts show a net profit of N164,000. Partners’ drawings during the year are: Taju N50,000; Bukar N25,000 and Wale N15,000. You are required to prepare a statement showing the division of profits for the year ended 31 Dec, 2004 and the partners’ current accounts for the year ended 31 December, 2004 recording therein the entries necessary upon Wale’s admission as a partner. 9. Ariyo and Odunayo are in partnership with capitals of N12,000 and N6,000 respectively; profits and losses shared in proportion of their capitals after charging interest on capital at 5% per annum and a partnership salary of N4,200 to Odunayo. Ariyo desires to retire to from full active work in the partnership as from 1 January, 2004. It was accordingly agreed on 1 January, 2003 that: (a) Odunayo shall in future be entitled to a partnership salary of N5,400 per annum; (b) Interest is to be allowed on capital at 5% per annum, (c) Arije , a departmental manager, shall be introduced as a partner without capital as from 1 January, 2003 with a salary of N5,250 per annum, the excess over N4,200 (his former salary as a manager) being chargeable against Ariyo and not against the firm’s profit before division. (d) Arije shall also be entitled to 5% of the profit after charging interest on capital and partnership salaries. (e) The balance of profit is to be divided as to three-fifths to Ariyo, and two-fifths to Odunayo. The profit for the year ended 31 December, 2003 was N39,600 before charging interest on capital or partnership salaries. You are to show the division between the partners through the use of a profit and loss appropriation account, and summary of total appropriation to the individual partner. 10. Love, Luck and Lee were in partnership, sharing profits and losses in the ratio 6:3:1 respectively. The partnership deed provided: (1) Interest at the rate of 6% per annum shall be allowed on fixed capital accounts. No interest shall be allowed on current accounts but 8% per annum is to be charged on any debit balance at the commencement of the year. (2) Goodwill shall be valued at 80% of the average annual profits of the Understanding Financial –Serieswhichever Two LXIX previous threeAccounting or four years, is the lower.

The following are particulars of partners’ accounts as at 31st December 20*8: Capital Current N N Love 180,000 50,000 Cr. Luck 90,000 10,000 Cr. Lee 30,000 12,000 Cr. The partners agreed to take Wick into partnership as on 1st January 20*9, and on that day he introduced N35,000 in cash which included his fixed capital of N30,000. He is to receive a salary of N15,000 per annum in addition to his share of the profits. Love personally guaranteed that the aggregate of Wick’s salary and share of profit shall be not less than N30,000 per annum. Profit sharing ratios are to be: Love three-tenths; Luck three-tenths; Lee three-tenths, and Wick one-tenth. Agreed profits for goodwill purposes for the past four years are as follows: 20*8 N163,370. 20*7 N102,550. 20*6 N107,580, 20*5 N141,640. No account for goodwill is to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. The draft accounts for the year ended 31st December 20*9, before taking into account Wick’s salary or interest on partners’ account, show a profit of N176,400. Partners’ drawings during the year are: Love N63,200; Luck N49,000; Lee N49,000 and Wick (including salary) N21,930. Required: (a) A statement showing the division of profit for the year ended 31st December, 20*9. (b) The partners’ current accounts for the year ended 31st December 20*9, recording therein the entries necessary upon Wick’s admission as a partner. 11. Caleb and David had been trading in partnership for three years sharing profits and losses in proportion to their capitals which has not changed since 2001 and were N50,000 and N25,000 respectively.. The partners maintained fixed capital accounts during the period. On 31st December 2003, they agreed to admit their manager, Mr. Eddy with effect from the beginning of the partnership. Eddy had received a salary of N10,000 per annum during the period and had loaned N15,000 to the firm since its inception upon which he had received interest at the rate of 6% per annum. Understanding Financial Accounting –SeriesTwo

LXX

The result of operation for the past three years ended 31st December 2001; 2002 and 2003 was N128,200; N20,900 (loss) and N88,130 respectively. All the above results are after charging Interest on Partners’ Capital 5% per annum; Caleb’s salary N15,000 per annum; David’s salary N12,500 per annum, Eddy’s salary and interest on his loan and crediting interest on the following drawings at the rate of 8% per annum. 2001 2002 2003 Caleb (N) 20,000 15,000 10,000 David (N) 22,500 20,000 25,000 The terms upon which Eddy was to be admitted as a partner were that he should have a salary of N12,500 per annum and that his loan should be treated as his capital upon which he should received, from the inception of the firm, the same rate of interest as Caled and David instead of 6% per annum already paid to him as interest. The profit sharing ratio shall be 2:2:1 between Caleb, David and Eddy respectively. You are required to adjust the results of each of the three years to show: (a) The revised net profits or (losses). (b) The revised divisible profits or (losses). (c) The revised share of profits or (losses). (d) The adjusted partners’ current account. 12. Buky, Ronke and Lola were in partnership sharing profits and losses in the ratio 3:2:1 respectively. The draft balance sheet as at 31st March 20*7, was as follows: N N N Capital accounts: Assets: Buky 120,000 Premises 60,000 Ronke 60,000 Plant 94,000 Lola 30,000 Stock 46,000 210,000 Debtors N(62,000-6,000) 56,000 Current accounts: Balance at bank 80,600 Buky 9,600 Ronke 8,400 Lola 5,600 23,600 Loan from Buky 25,000 Provn Staff Pension 30,000 Creditors 48,000 . 336,600 336,600 Buky retired on 31st March 20*7 and Rose and Lola continued in partnership, sharing profits and losses in the ratio 2:1 respectively. Buky’s st Understanding Financial –Seriesand Two it was agreed that the remaining LXXI loan was repaid on 1Accounting April 20*7

balance due to him, other than that on her current account, should remain on loan to the partnership. It was agreed that the following adjustments were to be made to the balance sheet as on 31st March 20*7: (a) The Premises were to be revalued at N120,000; and the plant N79,000. (b) The provision for bad debts was to be increased by N2,000. (c) A provision of N2,500 included in creditors was no longer required. (d) The provision for staff pensions was to be increased by N2,000. (e) N6,000 was to be written off the stock in respect of damaged and obsolete items included therein. (f) Provision of N1,200 was to be made for professional charges in connection with the revaluations. The partnership agreement provided that on the retirement of a partner, goodwill was to be valued at an amount equal to the average annual profits of the three years expiring on the date of the retirement. The relevant profits were: Year ended 31st March 20*5 N65,200 Year ended 31st March 20*6 N84,200. Year ended 31st March 20*7 N72,100 (per the draft accounts). It was agreed that, for the purpose of valuing goodwill, the revaluation of the fixed assets, the adjustment to the provision for staff pensions and the professional charges should not be regarded as affecting the profits. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the parties being made in their capital accounts. You are required to prepare: (a) The Revaluation account. (b) Buky;s account, showing the balance due to her, and (c) The balance sheet of Ronke and Lola as on 1st April 20*7.

Understanding Financial Accounting –SeriesTwo LXXII

Understanding Financial Accounting –SeriesTwo LXXIII