Partnerships AFE 3691 Class Exercises

Questions

Q1.1 Theory

a) Name and briefly discuss five factors which should be outlined in a partnership agreement.
b) Discuss the circumstances under which it would be equitable to introduce interest on capital in a partnership agreement.
c) Explain the purpose of a current account for each partner.
d) Explain the purpose of a statement of changes in equity.

Q1.2 Distribution of partnership profits

Loo, Moo and Soo are in partnership trading as LMS Traders. The balances in their capital accounts are as follows:

 Loo N$ 60 000
 Moo N$ 80 000
 Soo N$ 100 000

The profit for the past year was N$ 48 000

You are required to divide the profit among the partners in each of the following unrelated cases:

a) There is no agreement regarding the ratio in which profit is to be divided.

b) Loo gets a salary of N$ 30 000 per annum. The rest of the profit is divided equally among the three partners
c) Loo gets a salary of N$ 30 000 per annum. The rest of the profit is divided in relation to the capital contributed by each partner.
d) Loo gets a salary of N$ 10 000 per annum. Each partner is entitled to 8% interest per annum on their capital. The balance is divided
among Loo, Moo and Soo in the ratio 2:3:5.

Q1.3 Distribution of partnership profits

Andy and Brad have been in partnership since 01 January 2012. Andy made an initial capital investment of N$ 80 000 on 01 January 2012. He
invests a further N$ 20 000 on 01 April 2012. On 01 January 2012 Brad invested N$ 160 000, N$ 10 000 of which he withdrew on 01 October
2012. The partnership agreement stipulates that each partner may draw N$ 1 000 as an advance on expected profits at the end of each month.
(NB: such drawings have no influence on the profit for the period distribution- it is simply debited against the partners’ current or withdrawal
accounts). The profit earned by the firm for the year ended 31 December 2012 amounts to N$ 60 000.

You are required to divide the profit in each of the following situations:

a) Profit is shared in the ratio Andy 60% and Brad 40%

b) Profits are shared based on the initial capital ratio.
c) Profits are shared based on closing balances of capital accounts
d) Profits are shared equally between the partners

Q1.4 Financial Statements of partnerships

Mutt and Jeff are equal partners in a sport shop called Born Losers. The following balances appeared in the pre-adjustment trial balance at 28
February 2011:

Account details Amount/N$

Capital : Mutt 71 500
Capital: Jeff 71 500
Current account: Mutt (Cr) 500
Current account: Jeff (Dr) 2 000
Drawings: Mutt 7 100
Drawings: Jeff 7 100
Office equipment at cost 126 000
Land and building at cost 150 000
Accumulated depreciation: Land and buildings 40 000
Accumulated depreciation: office equipment 19 200
Fixed deposit 14 900
Loan from City Bank 45 000
Debtors 28 500
Provision for bad debts 1 150
Creditors 22 100
Bank overdraft 25 250
Inventory (01/03/2010) 8 400
Sales 83 400
Sales returns 4 600
Purchases 33 600
Purchases returns 2 300
Rent paid 7 200
Rent income 58 800
Interest on loan 2 700
Bad debts 2 800
Railage inwards 2 500
Salaries and wages 38 750
Insurance 2 400
Stationery 990
Custom duties 1 160

Adjustments:

1) Depreciation on land and building must be provided for at 8% p.a. on the straight-line-basis.
2) Depreciation on office equipment must be provided for on the reducing-balance method at 10% p.a.
3) The loan from City Bank was negotiated on 01/03/2010 and interest is payable six-monthly at 12% p.a.
4) An additional amount of N$ 1 500 must be written off from debtors as irrecoverable and the provision for debtors must be adjusted to
equal to 5% of good debtors.
5) The balance on the insurance account represent two premiums paid as follows:
 N$ 900 on a one-year fire policy effective from 01 May 2010.
 N$ 1 500 on a one-year theft policy effective from 01 August 2010.
6) Stationery costing N$ 180 was still on hand at 28/02/2011.
7) An account of N$ 240 dated 01/02/2011 for customs duties was only received on 03/03/2011.
8) Inventory costing N$ 6 000 was still on hand at 28/02/2011
9) According to Mutt, advertisements costing N$ 4 100 were placed before 28/02/2011.
10) Interest on current accounts must be calculated at 6% p.a.
11) Interest on drawings came to N$ 125 for Mutt and N$ 100 for Jeff.

You are required to prepare for Born Losers for the year ending 28 February 2011 the following statements:

1) A statement of profit or loss and other comprehensive income.

2) A statement of profit distribution for the partners.
3) A statement of financial position.
4) A statement of changes in equity.

Q1.5 Financial Statement of Partnerships

Jack and Jill are in business as partners with a formal Agreement. Their Trial Balance at the year- end appears as shown below. During the year
Jack’s drawings amounted to N$ 35 000 and Jill’s drawings amounted to N$ 16 000. Interest on capital is calculated at 5% of the opening
balance of capital. Interest on drawings to be calculated at 6% p.a. profits are shared in relation to capital contributed.
JACK AND JILL

TRIAL BALANCE AS AT 30 JUNE 2011

Account details Dr/N$ Cr/N$

Non-current assets 840 000
Accumulated depreciation 30/06/2011 380 000
Inventory 30/06/2011 648 000
Receivable 584 000
Payables 596 000
Profit for the year 260 000
Partners drawings 51 000
Capital accounts: Jack 600 000
Capital account: Jill 30 000
Cash at bank 13 000
2 136 000 2 136 000
Required:

1) Prepare the partners’ capital and current ledger accounts

2) Prepare the Statement of Financial Position (equity section only) and Statement of Changes in Equity of the partnership as at 30 June
2011.