Change a partnership

When does a partnership change?

Partnerships may or may not have to change in the following circumstances:

 When a new partner joins - the partnership continues. The new partner's basis period for self
assessment for income tax begins on the day they start. The existing partners' self assessment
periods do not change.
 When a partner retires - the partnership continues and the remaining partners' self assessment
periods do not change.

 When a partner dies - the partnership continues and the remaining partners' self assessment
periods do not change.

 When a partner becomes bankrupt - the partnership continues and the remaining partners' self
assessment periods do not change.

 When a partnership goes into receivership - the partnership ends automatically.

 When a partnership is dissolved a court - the partnership ends automatically.

 When a general partnership changes to a limited partnership or a limited liability partnership

(LLP) - in doing so the partnership becomes subject to different rules.

For general partnerships, there is no legal requirement to tell anyone of the changes. It is
advisable to tell your solicitor and your accountant, and the partnership's bank should be
informed if there are any guarantees provided by the partners.

Remember that a fixed-term partnership does not necessarily terminate at the end of the term if
you continue to trade.

Practice Question 1

JKM is a partnership owned by Jean, Kathryn and Meryl. It has been successfully trading for several years. Jean retired
from the partnership at 31 May 2010.
You have been provided with the following information:
(i) JKM’s profi t for the year ended 31 May 2010 was $345,490.
(ii) Jean, Kathryn and Meryl shared profi ts in the ratio 2:3:1.
(iii) The partnership agreement allows for the following salaries per annum: Jean $40,000; Kathryn $35,000 and
Meryl $30,000.
(iv) During the year cash drawings were as follows: Jean $25,000, Kathryn $22,000 and Meryl $20,000. No
interest is charged on drawings.
(v) At 1 June 2009 Jean and Kathryn had credit balances on their current accounts of $2,400 and $1,600
respectively, Meryl had a debit balance of $1,800.
(vi) Interest on capital is to be paid at a rate of 8% on the balance at 1 June 2009 on capital accounts. At 1 June
2009, the partners had credit capital account balances as follows: Jean: $35,000, Kathryn $50,000 and Meryl
$40,000.
(vii) Jean has agreed that if there was a credit balance on her capital account at 31 May 2010, it can be transferred
into a loan to the partnership.
(viii) The assets of the partnership were revalued at 31 May 2010.
The book value and the revaluations are as follows:
Book Value Revaluation
1
 $ $
Property 130,000 156,000
Equipment and machinery 50,000 40,000
Inventory 25,000 22,000
Receivables 20,000 19,000
The revaluations are to be recorded in the books of the new partnership.
(ix) On the retirement of Jean, Kathryn agreed to invest a further $20,000 and Meryl a further $25,000 into the partnership and the
following new profi t-sharing ratio was agreed:
Kathryn 3/5
Meryl 2/5
(x) Goodwill is not carried in the statement of financial position. However, at 31 May 2010 the goodwill in the partnership was valued at
$90,000. Any adjustments for goodwill are to be made through the partners’ capital
accounts.
Required:
(a) Prepare the appropriation account for the partnership for the year ended 31 May 2010. (4 marks)
(b) Prepare the following partnership accounts incorporating the adjustments that need to be made on the
retirement of Jean from the partnership:
(i) current accounts for the year ended 31 May 2010; [8 marks]
(ii) capital accounts as at 31 May 2010. [10 marks]
The following mark allocation is provided as guidance for this requirement:
Identify three advantages of operating as a limited liability company rather than a partnership. (3 marks)
(25 marks)

Solutions

(a)(i) Revaluation account

JM PC JM PC
Inventory 500 Property 5 000
Plant and Machinery 1 500 Goodwill 12 000 9 000
Capital account 16 500 7 500
17 000 9 000 17 000 9 000

(ii) Capital Account

JM PC
Motor vehicle 7 000 Balance b/d 35 000 23 300
Revaluation 16 500 7 500
Goodwill 14 000 7000
Balance c/d 42 000 16 800 Loan 4 500
56 000 30 800 56 000 30 800

(b) MRC Statement of financial position as at 31 December 2010

Non-current assets $
Property 30 000
Plant and Machinery 28 500
Total non-current assets 58 500
Current assets
Inventory 8 500
Trade receivables 2 800
Cash and cash equivalents 4 000
Total current assets 15 300
Total assets 73 800

Equity and liabilities

Capital JM 42 000
PC 16 800
Current liabilities
Trade payables 15 000
2
Total equity and liabilities 73 800

(c) Good will may be calculated using any of the following methods:

- Average profits over a given period.

- Revenue multiplied by a certain factor.
- Super profits of the entity
- On the basis of rule of thumb.
- On the excess of estimated purchase price over the fair values of net assets. Maximum 2 marks

Goodwill is calculated for the following reasons

-the entity may have increased value because of the following factors:
-customer loyalty
-quality service by experienced staff
-location of the business
-brand loyalty
Maximum 3 marks