Reference no: EM133840876

FINANCIAL ACCOUNTING

QUESTION 1

The following pre-adjustment trial balance of Anderson Partnership is presented to you:

Additional information, year-end adjustments:

An outstanding debt of N$ 300 is irrecoverable and must be written off.
The allowance for credit losses must be adjusted to N$ 708.
Depreciation must be provided as follows:
Equipment: 10 % per annum according to the straight line method.
Vehicles: 20% per annum according to the diminishing balance method.

The terms of the mortgage provide for interest on loan to be calculated at a rate of 15 % per annum on the outstanding amount of the loan at the end of the financial year. Interest is payable in the first week of January of the following year. During the 2024 financial year, the partnership will start repaying the loan at an amount of N$ 20 000 per annum payable on 2 January of every year until the loan is fully paid. The loan is secured by a mortgage over land and buildings and was originally granted to the partnership by InvestCapex Bank Limited on 2 January 2024.

A van Diesel granted an unsecured loan to the partnership on 1 September 2023. According to the terms of the loan agreement, interest at 9% per annum will be charged and is payable in January of every year. The total amount of the loan will be repaid in full on 30 June 2027.
Advertising expenses included an amount of N$ 400 which was prepaid for January 2024.

The amount paid for water and electricity excludes an amount of N$ 2 300 still payable for December 2023.
During the year, the following cash salaries were withdrawn by the partners: A van Diesel: N$ 47 140.
E Neo: N$ 62 860.
Interest calculated on the partners' drawings accounts, as per the partnership agreement, amounted to N$ 230 for A van Diesel and N$ 145 for Neo for the current financial year. The interest was not yet recorded in the books of the partnership at the end of the financial year.

Provisions to comply with the terms of the partnership agreement must still be made.

Provisions of the partnership agreement:

Interest on capital will be calculated at a rate of 10 % per annum on the opening balances of the capital accounts and at a rate of 8 % per annum on the opening balances of the current accounts. The interest on capital and current accounts must be capitalised to the current accounts of the partners.

Interest will be charged at a rate of 5 % per annum on the balance of the drawings accounts at the end of each month. The interest must be capitalised against the current accounts of the partners.

A van Diesel is entitled to an annual salary of N$ 60 000 and E Neo is entitled to an annual salary of N$ 80 000.

The partners will share profits and losses in the following ratio: A Van Diesel 1/3 and E Neo, 2/3 .

QUESTION 2
Premium Designs is a partnership of architects who specialise in modern building architecture. The two partners, who shares profits and losses equally, are the husband-and-wife team Max and Mara Builders. The information below pertains to the business activities of the partnership for the year ended 31 December 2023.

Additional information:
The following is an extract from the partner agreement and except where it is stated differently, has not yet been taken into account:

Interest on capital is calculated at 9% per annum.
Interest on current accounts (opening balances) at 7% per annum.
Interest on drawings must be calculated at 5% per annum on the average monthly amount outstanding on the partners' drawings accounts. (These amounts have already been calculated correctly as N$640 for Max and N$500 for Mara. No entry has been made yet)
A managerial salary of N$6 000 per year must be paid to Mara. This amount has already been paid to Mara and recorded under Salaries and wages.
Max is entitled to a bonus calculated at 5% on the comprehensive income for the year after taking into account the salary of Mara and any adjustments for interest on capital, current account and drawings.

An outstanding debt of N$600 is irrecoverable and must be written off.

The allowance for credit losses must be adjusted to RN$ 300 at year-end.

It was agreed that interest on the long-term loan from Mara would amount to N$4 800 per annum.

Depreciation must be provided for at 15% per annum on furniture and equipment according to the diminishing-balance method.

The provisional tax for Max for the year is N$3 000. The accounting officer recorded this payment as administrative expenses.

Admission of new partner
Max and Mara's eldest daughter, Mina, recently graduated as an architect and Max and Mara decided to admit Mina as a third partner of Premium Designs on 01 January 2024.
A revaluation of all assets and liabilities were done. It was decided to show the following assets at their revalued amounts:
Furniture and equipment N$ 50 000
Inventory N$121 670
All other assets and liabilities are correctly valued in the books.
Goodwill will not be shown in the new partnership's books.

Partners will share profits in the ratio 1:1:1.

Mina will acquire 25% of the net assets of the partnership, for which she will pay N$150 000. Mina recently inherited money from her grandfather, so she is able to pay for her part of the assets in cash.

(a) Prepare the Profit Appropriation account as at 31 December 2023 before Mina was admitted as a partner.

(b) Provide all the journal entries for Mina's admission as a partner on 01 January 2024. Journal narrations are not required.

QUESTION 3

Bester, Gunter and Angula are in partnership, trading as the Windhoek Garden Centre Partnership ("Windhoek Garden Centre") and sharing in the profits/losses of the partnership in the ratio of 3:2:1 respectively. When they entered into the partnership, they each made a capital contribution of N$ 10 000 000. At the financial year-end 31 December 2023, the balances of the ledger accounts of the partnership were as follows:

The partners decided to liquidate the partnership piecemeal as from 1 January 2024 and to repay the creditors in full with a once-off payment as soon as sufficient cash is received from the sale of the assets. They further decided that interim repayments will be made to them as cash becomes available in such a way that it would not be necessary to repay any of these amounts to the partnership at a later stage, and that in the case of a final capital deficit of an insolvent partner, it would be borne according to the profit-sharing ratio of the remaining solvent partners.

No settlement discount was received on the payment of the creditors' accounts, and at 3 March 2024 Bester was declared insolvent. No dividend is receivable from his insolvent estate.
The partners have agreed that the liquidation transactions should be prepared in the following columnar format and outlay:

(a) Prepare the liquidation transactions of the Windhoek Garden Centre in the columnar format and outlay agreed upon by the partners. Disclose all credit balances and credit entries in brackets.

Use the surplus-capital method to calculate the interim repayments to the partners, please show your calculations clearly

QUESTION 4

Your friend, Goliath, from high school decided not to go study at university, but rather to start his own business. He always showed a keen interest in computers, and therefore it did not come as a surprise when you heard he is planning on opening a computer store in the nearby mall. One evening, while you were studying for the next day's financial accounting test, you received the following email from Goliath:

My dearest friend
I cannot begin to describe to you how excited I am about opening up my computer shop! I have been dreaming about this since I was a little boy, and now my dream is about to become a reality! I already secured a small space in the mall that we liked so much when we were in high school.
The only problem is just sorting out the admin behind opening up my own business. For instance, I must decide whether I am going to trade as a sole trader, or have someone else join me in a partnership, or perhaps start up a company or a close corporation. I want to do it right from the start, you know?
You are probably wondering where I am going to get the capital to start up my business. To tell you the truth, I haven't figured out that part just yet! I don't think the bank is going to lend me some money because I am so young, and I guess I must still proof to the world that I am able to run a business. I might be able to borrow a few Rands from my cousin - you know, that rich cousin I used to tell you about? Problem is, he told me he is afraid of losing his money if he lends it to me and the business does not work out. He is also in IT and he mentioned something that he rather wants to invest in my business or join me as a partner. This brings me back to the decision that I need to take on the type of business - sole trader, company, close corporation or partnership.

I was wondering if you cannot perhaps guide me in the right direction on this decision. Can you perhaps tell me what are the advantages and disadvantages of each type of business? Also, can you maybe make some kind of recommendation about which one you think would suit me best? You know I have always valued your opinion, and since you are studying towards becoming a Chartered Accountant, I am sure you have at least some knowledge of the types of businesses already.
Thanks in advance, I know I can always count on you. Your dear friend
Goliath

Write an email to Goliath answering his questions about the main advantages and disadvantages of the types of businesses, as well as making a recommendation based on the facts he mentioned. Give reasons for your recommendation.
Do not give more than two advantages or disadvantages per type of business.

Attachment:- FINANCIAL ACCOUNTING.rar