Illustration for company conversion-partnership, Financial Accounting

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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

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’

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

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
	1^st month		2^nd 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

Ordinary share capital

9,000

Current a/c

400

850

400

Revaluation gain

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

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