Illustration for company conversion-partnership, Financial Accounting

Illustration for company conversion

Kamau Maneno and Rotino have carried on partnership for several years, sharing profits and losses equally after allowing for annual salaries as follows:

 

Kamau

Sh.

1,500,000

Maneno

Rotino

900,000

900,000



They decided to convert the partnership into limited company; Kamaro Ltd.as at 30 November 2001, the following terms:
1. Goodwill to be valued at Sh.13,500,000
2. Other assets to be valued as follows:
 
 

 

Sh.

Freehold property

Furniture and fittings

Motor Vehicles

27,000,000

2,400,000

6,000,000



3. Each partner is becoming director of the company at the same salary as that previously allowed in the partnership.
4. Maneno’s loan is to be converted into share capital at par.
5. Shares are to be issued to each partner at parin respect of the amounts of their equity holdings at 30 November 2001.
6. The financial year of partnership ends on 30 May .No action has been taken to carryout the terms of conversionof partnership into the limited company in the books of accounts. On 31 May 2002, the trial balance showed the following position:

 

Sh ‘000’

Sh ‘000’

Capital accounts at 1 June 2001

           Kamau

           Maneno

           Rotino

Stock -31 May 2002

Cost of sales

Sales

 

Administrative expenses

Selling expenses

Accounting &Audit expense

Incorporation expenses

Drawings:

            Kamau

            Maneno

            Rotino

Freehold property at cost

Furniture and fittings at cost

Accumulated depreciation

Debtors and Creditors

Prepayments and Accruals

Loan from Maneno(10% interest per annum)

Motor Vehicles at cost

Accumulated depreciation

Bank balance

 

 

 

 

 

14,400

36,000

 

 

6,000

3,000

1,200

  600

 

1,500

900

900

25,800

6,000

 

9,000

600

 

12,000

 

______

117,900

 

18,000

9,000

6,000

 

 

60,000

 

 

 

 

 

 

 

 

 

 

 

3,600

7,200

300

9,000

 

3,600

1,200

117,900



Additional information:

i. The sales during the second half of the year were 60% of the total sales though the gross profit percentage remained the same throughout the year.
ii. The selling expenses were proportional to the sales for each period. All the expenses were incurred evenly throughout the year.
iii. Salary drawings were made evenly. Drawing made after incorporation were to be treated as director’s salaries.
iv. There were no purchases or sales of fixed assets during the year .Depreciation  is to be provided on cost as follows;
Furniture and fittings    10% per annum
Motor vehicles    20% per annum
v.    No dividends are paid or proposed but it is decided to write off the incorporation expenses and also Sh.3,500,000 of the goodwill.

Required
(a)    Trading and profit and loss account for Kamaro Ltd. for the six months ended 31 May 2002
        (8 marks)
(b)    Calculation showing the value of shares to be issued to each partner.    (4 marks)
(c)    Balance sheet as at 31 May 2002.    (8 marks)

Solution

KAMARO LTD.

Trading, Profit and Loss account

For the year ended 31 May 2002

 

1st month

2nd month

 

Sh. ‘000’

Sh. ‘000

Sh. ‘000’

Sh. ‘000’

Sales

 

24,000

 

36,000

Cost of sales

 

(14,400)

 

(21,600)

Gross profit

 

9,600

 

14,400

 

 

 

 

 

Expenses

 

 

 

 

Depreciation on furniture

300

 

120

 

Depreciation on motor vehicles

1,200

 

600

 

Administrative expenses

3,000

 

3,000

 

Selling expenses

1,200

 

1,800

 

Audit expenses

600

 

600

 

Incorporation expenses

-

 

600

 

Directors salaries –     Kamau

-

 

750

 

                                   Maneno

-

 

450

 

                                   Rotino

-

 

450

 

Loan interest

450

 

-

 

Goodwill written off

 

(6,750)

3,500

(11,870)

Profit to be shared in PSR

 

2,850

 

  2,530

Less:  Salaries:  Kamau

750

 

 

 

                        Maneno

450

 

 

 

                        Rotino

450

(1,650)

 

 

Profit share:

 

1,200

 

 

                        Kamau

400

 

 

 

Maneno

400

 

 

 

Rotino

400

(1,200)

 

 

 

 

         -

 

 

 

 

 

 

 

                                                        Capital account

 

Kamau

Maneno

Rotino

 

Kamau

Maneno

Rotino

Balance c/d ordinary share

 

23,000

 

23,450

 

11,000

Bal b/d

 

18,000

 

9,000

 

6,000

 

 

 

 

Goodwill

4,500

4,500

4,500

 

 

 

 

Ordinary share capital

 

 

9,000

 

 

 

 

 

Current  a/c

400

850

400

 

 

 

 

Revaluation gain

     100

     100

     100

 


 

                                                             Current account

 

Kamau

Maneno

Rotino

 

Kamau

Maneno

Rotino

Drawings

750

450

450

Salaries

750

450

450

Capital a/c

400

850

400

Profit share

40

400

400

 

 

 

 

Interest on capital

____

  450

___

 

1,150

1,350

850

 

1,150

1,300

850

 

                                                     Revaluation account

Motor vehicle

1,200

Property

1,200

Capital gain

 

Furniture

300

K

100

 

 

M

100

 

 

R

  100

 

____

 

1,500

 

1,500

 

 

 

 

 


KAMARU

Balance Sheet as at 31 May 2002

 

 

 

Sh. ‘000

Sh. ‘000

Sh. ‘000

NON- CURRENT ASSETS

COST

DEPRECIATION

NET BOOK VALUE

Freehold property

27,000

-

27,000

Furniture and fittings

2,400

(120)

2,280

Motor vehicles

6,000

(600)

5,400

 

 

 

34,680

Goodwill

 

 

10,000

 

 

 

44,680

CURRENT ASSETS

 

 

 

Inventory

 

14,400

 

Receivables

 

9,000

 

Prepayments

 

    600

24,000

 

 

 

68,680

 

 

 

 

Ordinary share capital

 

 

57,450

Retained earnings

 

 

  2,530

 

 

 

59,980

CURRENT LIABILTIES

 

 

 

Bank overdraft

 

1,200

 

Payables

 

7,200

 

Accruals

 

  300

8,700

 

 

 

68,680

 


23,000

23,450

11,000

 

23,000

23,450

11,000

Posted Date: 12/11/2012 7:34:36 AM | Location : United States







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