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
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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
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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:
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Sh ‘000’
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Sh ‘000’
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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
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KAMARO LTD.
Trading, Profit and Loss account
For the year ended 31 May 2002
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|
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1st month
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2nd month
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|
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Sh. ‘000’
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Sh. ‘000
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Sh. ‘000’
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Sh. ‘000’
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Sales
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24,000
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|
36,000
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Cost of sales
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(14,400)
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(21,600)
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Gross profit
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9,600
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|
14,400
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|
|
|
|
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Expenses
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|
|
|
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Depreciation on furniture
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300
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120
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Depreciation on motor vehicles
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1,200
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|
600
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|
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Administrative expenses
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3,000
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3,000
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|
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Selling expenses
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1,200
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1,800
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|
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Audit expenses
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600
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|
600
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Incorporation expenses
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-
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|
600
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Directors salaries – Kamau
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-
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|
750
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Maneno
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-
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|
450
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Rotino
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-
|
|
450
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Loan interest
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450
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|
-
|
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Goodwill written off
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(6,750)
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3,500
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(11,870)
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Profit to be shared in PSR
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2,850
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2,530
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Less: Salaries: Kamau
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750
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Maneno
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450
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Rotino
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450
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(1,650)
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|
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Profit share:
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1,200
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Kamau
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400
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Maneno
|
400
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Rotino
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400
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(1,200)
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|
|
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|
-
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Capital account
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|
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Kamau
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Maneno
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Rotino
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Kamau
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Maneno
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Rotino
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Balance c/d ordinary share
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23,000
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23,450
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11,000
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Bal b/d
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18,000
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9,000
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6,000
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|
|
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Goodwill
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4,500
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4,500
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4,500
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Ordinary share capital
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9,000
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|
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Current a/c
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400
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850
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400
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Revaluation gain
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100
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100
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100
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Current account
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|
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Kamau
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Maneno
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Rotino
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Kamau
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Maneno
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Rotino
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Drawings
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750
|
450
|
450
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Salaries
|
750
|
450
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450
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Capital a/c
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400
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850
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400
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Profit share
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40
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400
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400
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Interest on capital
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____
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450
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___
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1,150
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1,350
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850
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1,150
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1,300
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850
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Revaluation account
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Motor vehicle
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1,200
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Property
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1,200
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Capital gain
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Furniture
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300
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K
|
100
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M
|
100
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R
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100
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____
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1,500
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1,500
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KAMARU
Balance Sheet as at 31 May 2002
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Sh. ‘000
|
Sh. ‘000
|
Sh. ‘000
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NON- CURRENT ASSETS
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COST
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DEPRECIATION
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NET BOOK VALUE
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Freehold property
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27,000
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-
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27,000
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Furniture and fittings
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2,400
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(120)
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2,280
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Motor vehicles
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6,000
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(600)
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5,400
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34,680
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Goodwill
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10,000
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44,680
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Inventory
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14,400
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Receivables
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9,000
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Prepayments
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600
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24,000
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68,680
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Ordinary share capital
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57,450
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Retained earnings
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2,530
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59,980
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Bank overdraft
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1,200
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Payables
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7,200
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Accruals
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|
300
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8,700
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68,680
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23,000
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23,450
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11,000
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23,000
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23,450
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11,000
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