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
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
Inventory
|
|
9,200
|
|
|
Account receivables
|
|
4,850
|
|
|
Bank
|
|
2,900
|
|
|
|
|
16,950
|
|
|
|
|
|
|
|
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
|