Illustration of admissions and retirements, Financial Accounting

Illustration of Admissions and Retirements

Jim and Ken have been trading in partnership for several, sharing profits or losses equally after allowing for interest on their capitals at 8% p.a. At 1 September 19-7 their manager, Len, was admitted as a partner and was to have a one-fifth share of the profits after interest on capital. Jim and Ken shared the balance equally but guaranteed that Len’s share would not fall below £6,000p.a.  Len was not required to introduce any capital at the date of admission but agreed to retain £1,500 of his profit share at the end of each year to be credited to his capital account until the balance reached £7,500, until that time no interest was to be allowed on his capital. Goodwill, calculated as a percentage of the profits of the last five years was agree at £15,000 at September 19-7, and Len paid into the business sufficient cash for his share. No goodwill accounts were to be left in the books. Land and building were professionally valued at the same date £28,400 and this figure was to be brought into the books, whilst the book value of the equipment and vehicles was, by mutual agreement, to be reduced to £15,000 at the date. Len had previously been entitled to a bonus of 5% of the gross profit payable half-yearly, the bonus together with his manager’s salary were cease when he became a partner. It was agreed to take out a survivorship policy and the first premium of £1,000 was paid on 1 September 19-7.

The trial balance at the end of the 19-7 financial year is given below. No adjustments had yet been made in respect of lens admission, and the amount he introduced for goodwill had been put into his current account. The drawings of all the partners have been changed to their current account. It can be assumed that the gross profit and trading expenses accrued evenly throughout the year. Depreciation on the equipment and vehicles is to be charges at 20% p.a. on the book value.

 

 

            £

             £

Capital accounts  Jim  

 

30,000

                             Ken

 

15,000

Current accounts  Jim

7,800

 

                             Ken

7,100

 

                             Len

 

1,800

Land and buildings

18,000

 

Equipment and vehicles

21,000

 

Inventory         

9,200

 

Gross profit

 

42,000

Trading expenses         

15,000

 

Managers salary

4,000

 

Managers bonus

1,050

 

Accounts receivables & Payables

4,850

3,100

Premium on survivorship policy

1,000

 

Bank balance

2,900

 

 

91,900

91,900

                                                                                                                                       

Required:

(a) Prepare the profit and loss account and the partner’s capital and current accounts for the year ended 31 December 19-7 and a balance sheet as at that date.

 

Solution


 

Capital account

 

JIM

KEN

LEN

 

JIM

KEN

LEN

Goodwill written off

6,000

6,000

3,000

Bal b/d

30,000

15,000

-

 

 

 

 

 

 

 

 

 

 

 

 

Current a/c – capital

 

-

 

-

 

15,000

 

 

 

 

Goodwill

7,500

7,500

-

 

 

 

 

Current a/c – goodwill

 

-

 

-

 

3,000

Bal c/d

35,100

20,100

1,500

Revaluation gain

  3,600

  3,600

       -

 

41,100

26,100

4,500

 

41,100

26,100

4,500

 

Current account

 

JIM

KEN

LEN

 

JIM

KEN

LEN

Balance b/d

7,800

7,100

-

Balance b/d

30,000

15,000

-

Capital a/c –capital

-

-

1,500

Accrued bonus

-

-

1,500

Capital a/c-goodwill

-

-

3,000

Interest on capital

7,500

7,500

-

Balance c/d

200

 

 

Profit share

-

-

3,000

 

 

 

 

Balance c/d

3,600

3,600

-

 

8,000

7,100

4,500

 

8,000

7,100

4,500

 

 

Revaluation account

Equipment and vehicles

3,200

Land and building

10,400

Capital account – JIM

3,600

 

 

 

                           KEN

3,600

 7,200

 

 

 

 

10,400

 

10,400

 

 

Jim, Ken and Len

Partnership, Profit and Loss and Appropriation account

For the year ended 31 December 19-7

 

1st 8 months

2nd 4 months

TOTAL

 

£

£

£

£

£

£

Gross profit

 

28,000

 

14,000

 

42,000

Expenses

 

 

 

 

 

 

Depreciation on equipment & vehicles

 

2,800

 

 

1,000

 

 

3,800

 

Trading expenses

10,000

 

5,000

 

15,000

 

Managers’ salary

4,000

 

-

 

4,000

 

Manager bonus

1,400

 

-

 

1,400

 

Premium on survivorship policy

         -

(18,200)

1,000

(7,000)

1,000

(25,200)

NET PROFIT

 

9,800

 

7,000

 

16,800

Less:  Interest on capital  J

1,600

 

936

 

2,536

 

                                       K

800

 

536

 

1,336

 

                                       L

-

(2,400)

-

(1,472)

         -

(3,872)

Balance of profits share in PSR

 

7,400

 

5,528

 

12,928

                                               J

3,700

 

1,764

 

5,464

 

                                              K

3,700

 

1,764

 

5,464

 

                                              L

       -

(7,400)

2,000

(5,528)

2,000

(12,928)

 

 

Jim, Ken and Len Partnership

Balance Sheet as at 31 December 19-7

 

Cost revaluation

Depreciation to date

Net book value

NON-CURRENT ASSETS

 

 

 

Land and buildings

28,400

-

28,400

Equipment and vehicles

15,000

(1,000)

14,000

 

43,400

(1,000)

42,400

Life policy asset account

 

 

  1,000

 

 

 

43,400

CURRENT ASSETS

 

 

 

Inventory

 

9,200

 

Account receivables

 

4,850

 

Bank

 

  2,900

 

 

 

16,950

 

CURRENT LIABILITIES

 

 

 

Trade payables

 

(3,100)

 

Net current assets

 

 

13,850

 

 

 

57,250

FINANCED BY:

 

 

 

Capital:  J

 

 

35,100

            K

 

 

20,100

            L

 

 

  1,500

 

 

 

56,700

Current account  J

 

200

 

                          K

 

(300)

 

                          L

 

(350)

(450)

Life policy fund account

 

 

  1,000

 

 

 

57,250

 

Posted Date: 12/11/2012 6:35:56 AM | Location : United States







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