Unit 2.

3 REVALUATION OF ASSETS

Revaluation of assets can be defined as the upwards or downwards review of the book value of

assets. The surplus or loss arising from revaluation of assets just like any other profit or loss of

the business will be shared among the partners in the ratio in which they had been sharing

profits/losses. It must be noted that the revaluation of assets referred to here is not necessarily on

fixed assets alone and it’s occasioned by an event such as admission of partners, retirement or

death of partners or change in profit sharing ratio. And once there is admission, retirement/death

or change in profit sharing ratio in partnership, it marks the end of one business and the

beginning of another one. Therefore, any profit or loss on the revaluation of assets occasioned by

any of these events is written off to the partners’ capital account in their profit sharing ratio

Unit 2.4 Admission of partners and Accounting entries for admission of partner(s) at the

beginning of accounting year

ADMISSON OF NEW PARTNER

This occurs when a new partner is admitted into the existing partnership. The admission of a

new partner is like selling the business by the old firm to the new therefore, the in-coming

partner will usually introduce an amount as his capital and may also be required to pay an

amount for the share of goodwill which he is coming in to enjoy.

In adjusting for goodwill, its value may or may not be retained in the books depending on the

agreement reached by the partners. Also, in addition to the adjustment for goodwill, some of the

assets of the partnership may be revalued. After the admission of the new partner, a decision may
be reached not to retain the revalued amounts of the assets and if this occurs, the pre-revaluation

values of the assets will be re-instated

The accounting entries are as follows:

a. To bring goodwill into the books :

Dr : Goodwill Account
Cr : Partners’ Capital Accounts

With the value of goodwill shared using their old profit-sharing ratio

b. Amount introduced by the new partner :

Dr : Bank / Cash Account
Cr : Capital Account of new partner
With the total amount introduced by the partner

c. To write off goodwill, if it is not to be retained in the books :

Dr : Partners Capital Accounts
Cr : Goodwill Account
With the value of goodwill shared in their new profit sharing ratio.

d. Revaluation of assets :
(i) Increase in value of assets
Dr : Assets Accounts
Cr : Revaluation Account
With the increase in the value of assets.

(ii) Decrease in value of assets :

Dr : Revaluation Account
Cr : Assets Accounts
With the decrease in the value of assets.

(iii) Profit/ loss on revaluation of assets :

 Dr : Revaluation Account
Cr : Partners’ Capital Accounts

With the profit on revaluation shared using their old profit-sharing ratio

OR
Dr : Partners’ Capital Accounts
Cr : Revaluation Account

With the loss on revaluation shared using their old profit-sharing ratio

(iv) To restore the revalued assets to their original values, if necessary ;

(a) Reverse entries d (i) and (ii)
(b) Reverse entry d (iii) in their new profit sharing ratio

ILLUSTRATION

Mariam, Jolly and Jape were in partnership sharing profits ½, 1/3 and 1/6 respectively. On 1 Jan

2019 they admitted Giggle into partnership on the following terms

Giggle to have 1/6 share purchased entirely from Mariam paying her ₦4,000 for that share of

goodwill of this amount Mariam retained ₦ 3,000 and put the balance into the firm as additional

capital. Giggle also brought ₦2,500 capitals into the firm

It was agreed that the investment should be reduced to their market value of ₦1,800 and that the

plant should be reduced to ₦2,900 as at 31st Dec 2019

The statement of financial position of the old firm as at 31st Dec 2019 was as follows:
₦ ₦

Fixed Assets

Plant 3,500

Furniture 1,000
Investment 3,000

7,500

Current Assets:

Stock 5,000

Debtors 6,000

Cash at bank 4,000

15,000

Current Liabilities:

Creditors 10,500 4,500

12,000

Capital A/c:

Mariam 6,000

Jolly 4,000

Jape 2,000

12,000

You are required to prepare :

a). The opening statement of financial position of the new firm as at 1st Jan 2019

b). The capital accounts of the partners for the year ended 31st Dec 2019

Solution:

STATEMENT OF FINANCIAL POSITION AS AT 1ST JAN 2019

₦ ₦

Non -current Assets

Plant 2,900

Furniture 1,000

Investment 1,800

5,700

Current Assets:

Stock 5,000

Debtors 6,000

Cash at bank 7,600

18,500

Current Liabilities:

Creditors 10,500 8,000

13,700

Capital A/c:

Mariam 6,100

Jolly 3,400

Jape 1,700

Giggle 2,500

13,700

PARTNERS’ CAPITAL ACCOUNT

Mariam Jolly Jape Giggle Mariam Jolly Jape Giggle

₦ ₦ ₦ ₦ ₦ ₦ ₦ ₦

Revaluation 900 600 300 - Bal b/f 6.000 4,000 2,000 -

Bal c/d 6,100 3,400 1,700 2,500 Cash 1,000 - - 2,500

7,000 4,000 2,000 2,500 7,000 4,000 2,000 2,500

Bal b/d 6,100 3,400 1,700 2,500

NOTE: There is no entry in the partners account for goodwill as the settlement between Mariam and
Giggle took place outside the partnership i.e Giggle gave Mariam a cheque for N4,000. If the transaction
had gone through the books it would have appeared as follows:

PARTNERS’ CAPITAL ACCOUNT

Revaluation 900 600 300 - Bal b/d 6,000 4,000 2,000 -

Goodwill 8,000 8,000 4,000 4,000 Goodwill 12,000 8,000 4,000 -

Cash 3,000 - - - Cash - - - 6,500

Bal c/d 6,100 3.400 1,700 2,500

18,000 12,000 6,000 6,500 18,000 12,000 6,000 6,500

Bal c/d 6,100 3,400 1,700 2.500

WORKINGS:

REVALUATION A/C

₦ ₦

Investment 1,200 Partners’ capital a/c

Plant 600 Mariam ½ 900

Jolly 1/3 600

Jape 1/6 300

1,800 1,800

Investment a/c

₦ ₦

Bal b/f 3,000 Revaluation 1,200

Bal c\d 1,800

 3,000

Plant a/c

₦ ₦

Bal b/f 3,500 revaluation 600

Bal c/d 2,900

3.500

Cash at bank a/c

₦ ₦

Bal b/f 4,000 Bal c/d 7,500

Mariam 1,000

Giggle 2,500

7,500 7,500

Value of goodwill= 1/6 =4,000

Total goodwill = 4000 *6 = 24,000

Calculation of new ratio

Mariam’s share = ½ - 1/6= 1/3

New ratio = 1/3, 1/3, 1/6, 1/6= 2:2:1:1

ILLUSTRATION.

Bako & Musa are partners in BUSA enterprise sharing profit & losses in ratio 3:2 respectively.
On 1st May 2008, the partnership balance sheet was given as follows:
NON-CURRENT ASSETS ₦ ₦ ₦

COST ACC.DEP CARRYING VALUE

Freehold premises 30,000 --- 30,000

Motor vehicle 18,000 8,000 10,000

Furniture 7,600 2,600 5,000

45,000

CURRENT ASSETS

Stock 8,000

Trade debtors (₦ 13,200 less prov of ₦1,200) 12,000

Cash& bank (4,000+ 1,000) 5,000

25,000

CURRENT LIABILTIES

Trade creditors 12,000

Other accruals 1,000 (13,000) 12,000

57,000

FINANCED BY:

Capital B: 30,000

M: 15,000 45,000

Current a/c :

B 6,000

M (1,500) 4,500

Reserves 7,500

57,000
 As a result of their agreement to increase the capital base, the partnership decided to admit Ojuju

on the following terms:

i. Admission of Ojuju to take effect from 1st May 2008.

ii. Ojuju to introduce cash of ₦ 20,000

iii. Freehold premises, motor vehicle and furniture & fittings to be revalued to ₦40,000, 15,000

and 3,000 respectively.

iv. An obsolete stock of ₦ 3,000 to be written off. The provision for doubtful debt is no longer

required, an amount of ₦ 600 included in trade creditors is also no longer required, while a

dispute debt of ₦700 included on accrual was finally agreed to ₦1,200

v. The new profit sharing ratio was agreed to Bako 4, Muas 3 and Ojuju 2 and the new firm is

to be known as BASAO ENTERPRISES

vi. To pass adjustments for goodwill and revaluation of Non current assets to capital account

while all other adjustments should be passed to current account.

vii. Goodwill is to be calculated using weighted average method. You are provided with the

following information

Year – 2003 - 7,000

2004 - 10,000
2005 - 12,000
2006 – 14,000
2007 - 7,000

You are required on the assumption that all transactions are completed on 1/5/2008 to :

i. Prepare necessary ledger a/c to record the above transactions

ii. Prepare the statement of financial position of the new firm immediately after the

admission
iii. Alternative to (i) above, prepare journal for the admission of Ojuju.

SOLUTION.

REVALUATION A/C (NON CURRENT ASSETS)

₦ ₦

Furniture & fittings 2,000 Freehold Premises 10,000

Share of profit Motor vehicle 5,000

Bako 7,800

Musa 5,200

15,000 15,000

REVALUATION A/C (CURRENT ASSETS)

₦ ₦

Stock 3,000 Provision for doubtful debt 1,200

Accrual 500 Discount received 600

SHARE OF LOSS

Bako (3) 1,020

Musa(2) 680

3,500 3,500

VALUATION OF GOODWILL.

YEAR PROFIT WEIGHT

1 7,000 7,000

2 10,000 20,000

3 12,000 36,000
4 14,000 56,000

5 7,000 35,000

15 154,000

Goodwill = 154,000/15 =10,267

GOODWILL A/C

₦ ₦

Capital a/c Bal c/d 10,627

Bako 6,160.20

Musa 4,106.80

10,267 10,627

PARTNERS’ CAPITAL A/C

B M O B M O

Reserve(4:3:2) 3,333 2,500 1,667 Balc/d 30,000 15,000 -

Bal c/d 45,127 24,807 18,333 Reserve(3:2) 4,500 3,000 -

Cash - - 20,000

Profit on 7,800 5,200 -

revalued of
fixed asset

Goodwill 6,160 4,107 -

48,460 27,307 20,000 48,460 27,307 20,000

WORKINGS.

Debtors= 12,000 + 1200=

Creditors= 12,000 – 600 =

Accrual = 1,000 + 500 =

 PARTNERS CURRENT ACCOUNT

B M O B M O

1,500 - Bal. c/d 6000 - -

Bal. b/d

Sh 1020 680 -

are of loss

Bal. c/d 4,980 - - Bal. c/d 2180 -

6,000 2180 6000 2180 -

JOURNAL ENTRIES

(a). Cash A/c 20,000

20,000

Capital A/c – Ojuju

Being cash introduced as capital by Ojuju 10,000

(b). Freehold property 5,000

Motor vehicle 2,000
 Furniture 13,000
Revaluation

Being transfer of PXL on Rev. a/c

(c) Provision for doubtful debts 1,200

Creditors
Revalation 600

Stock 1,700
Accrual
3000
Being revaluation of current assets
500
(d) Revaluation – fixed assets
Capital A/c B (3)
13,000
M (2)
7,800
Being share of profit on revaluation of fixed assets
5,200
(e ) Goodwill
Capital; a/c B (3)
10,267
M (2)
6,160
Being creation & share of Goodwill to a respective cap. a/c
4,107
(f ) Current a/c B (3)
Revaluation M (2)

Being share of loss in revaluation on C/A and accruals

1,020

680 1700
 -

BASAO ENTERPRISES

STATEMENT OF FINANCIAL STATEMENT AS AT 1ST MAY 2008

Represented by:

Fixed assets # #

Freehold premises 40,000

Motor vehicle 15,000

Furniture & fittings 3,000

58,000

Goodwill 10,267

Current Assets
5,000
Stock (8000-3000)
13,2000
Trade debtor
25,000
 Bank and cash 43,200

Current Liabilities

Trade creditors (12,000-600) 11,400 12,900 30,300

Other accrual (1000 + 500) 1,500 98,567

Financed by: 45,127

Capital B 24807

M 18333 88,267

Current Account: 4980

(2180) 2,800
B
7,500
M
98,567
Reserve

Unit 2.5 Accounting entries for Admission of partner(s) during an Accounting year

Whenever, there is admission of partners during the year, technically it means there has been two

partnership during the year.

One is in existence up to the time of admission of the new partner and another one commenced

from the date of the admission of the new partner to the end of the year. It must be noted that if

nothing else changes, the profit – sharing ratio will definitely change. But the problem of how to

apportion profits of the year between the periods always arises. i. e periods before the date of

admission and period after the date of admission.

 The following rules are always applied

(a) Gross profit is apportioned in proportion to sales unless of told otherwise

(b) Expenses relating to sales e.g. discount allowed, bad debt, advertising etc. shall be

apportioned in proportion to sales unless you are otherwise told.

(c) Other income and expenses should be apportioned on a line basis unless otherwise stated.

ILLUSTRATION

Taiwo and Kehinde were in partnership sharing profits and losses equally and taking interest

on capital @ 8% per annum while Idowu acts as their general manager receiving a bonus of

6% of the gross profit. In addition to the bonus, Idowu receives a salary of ₦2,500 monthly.

On 1st October 2018, the partners admitted Idowu under the following conditions:

i. Idowu shall be entitled to 1/5th share of profit while the relative profit sharing ratio between

Taiwo and Kehinde remains unchanged.

ii. He is to introduce ₦50,000 as his capital.

iii. He is to pay for his share of goodwill which is not to be retained in the books. The goodwill

of the firm at that date was valued at ₦37,500.

iv. The salary and bonus to which Idowu had earlier been entitled as a general manager should

stop forthwith.

In order to give a true reflection of the value of the assets of the firm at 1 st October 2018, the

partners agreed to revalue their land & buildings at ₦142,000 and motor vehicle and other

equipment at N120,000

The firm charges depreciation on the motor vehicle and other equipment at 20% per annum.
The trial balance of the firm at the end of 2018 before giving effect to the adjustments

necessitated by the admission of Idowu was as shown below:-

Trial balance as at 31st Dec 2018

DR CR

₦ ₦

Capital – Taiwo 150,000

Kehinde 75,000

Current Account – Taiwo 39,000

Kehinde 35,000

Land & building 90,000

Equipment & Vehicles 105,000

Suspense 57,500

Sales 600,000

Stock 30,000

General Managers salary 20,000

General Managers bonus 5,250

Debtors & creditors 54,250 19,500

Business expenses 75,000

Bank 30,000

Cash 12,500

Purchases 406,000

902,000 902,000

You are to assume that business, expenses were incurred evenly throughout the year and the

gross profit was earned as follows:

 January to September 65%

October to December 35%

100%

The amount introduced by Idowu had been credited to a suspense a/c pending d date when

proper adjustments will be made.

Closing stock at 31st December 2018 was valued at ₦46,000.

You are required to prepare:

i. Statement of income for the year ended 31st December 2018

ii. Statement of financial position as at that date

iii. Partners’ capital & current account for the year

SOLUTION

TAIWO , KEHINDE AND IDOWU

STATEMENT OF INCOME FOR THE YEAR ENDED 31ST DECEMBER 2018

Taiwo&Kehinde Taiwo,Kehinde&Idowu TOTAL

JAN- SEPT OCT- DEC

Sales 600,000

Opening stock 30,000

Add: purchases 406,000

Cost of goods available for sale 436,000

Less closing stock (46,000)

Cost of goods sold 390,000

Gross profit 136,500 73,500 210,000

Less: Expenses

General Manager Salary 20,000 20,000

General Manager Bonus 8,190 8,190

Business Expenses 56,250 18,750 75,000

Depreciation 15,750 6,000 21,750

(100,190) (24,750) (124,940)

36,310 48,750 85,060

Less: Int. on cap.

Taiwo 9,000 3,903 12,903

Kehinde 4,500 2,402 6,902

Idowu ---- (13,500) 1,000 (7,305) 1,000 (20,805)

Divisible profit 22,810 41,445 64,255

Share of profit :

Taiwo 11,405 16,578 27,983

Kehinde 11,405 16,578 27,983

Idowu ----- 8,289 8,289

22,810 41445 64,255

TAIWO, KEHINDE AND IDOWU

STATEMENT OF FINANCIAL POSITION AS AT 31ST December 2018.
FIXED ASSETS ₦ ₦ ₦

Land and building 142,000

Equipment and vehicle 114,000

256,000

Current Assets

Stock 46,000

Debtors 54,250

Bank 30,000

Cash 12,500

142,750

Current Liabilities

Creditors (19,500)

Working capital 123,250

379,250

Financed by:

Capital a/c:

Taiwo 195,125

Kehinde 120,125

Idowu 50,000

365,250

Current accounts:

Taiwo 1,886

Kehinde (115)

Idowu 12,229

14,000

379,250

CAPITAL A/C

Taiwo Kehinde Idowu Taiwo Kehinde Idowu

₦ ₦ ₦ ₦ ₦ ₦
 Bal c/d 195,125 120,125 50,000 Bal b,f 150,000 75,000 -

Suspense 3,750 3,750 50,000

Revaluation 41,375 41,375 -

195,125 120,125 50,000 195,125 120,125 50,000

Bal b/d 195,125 120,125 50,000

CURRENT A/C

Taiwo Kehinde Idowu Taiwo Kehinde Idowu

Bal f/d 39,000 35,000 - Int on cap 12,903 6,902 -

Bal c/d 1,886 - 12,229 Share of 27,983 27,983 8,289

profit

Bonus - - 2,940

Bal c/d - 115 -

40,886 35,000 12,229 40,886 35,000 12,229

Bal b/d - 115 - Bal b/d 1,886 - 12,229

REVALUATION A/C

₦ ₦

Capital:

Taiwo 41,375 Land and building 52,000

Kehinde 41,375 Motor vehicle 30,750

82,750 82,750

Accrued general manager bonus

Bonus due to Taiwo 6%*136,500 = 8,190

Less: bonus as per trial balance = (5,250)

Outstanding bonus 2,940

Equipment & motor vehicle ₦

Carrying value at 1/1/18 105,000

Less: depreciation for Jan- Sept (20%*105,000*9/12) (15,750)

NBV @30/9/X2 89,250

Add revaluation surplus @ 1/10/18 30,750

120,000

Less: depreciation for Oct- Dec (20%* 120,000*3/12) (6,000)

Carrying value at 31/12/18 114,000

NOTE : The amount credited to suspense account N 57,500 is made up of Idowu’s capital of N

50,000 and N 7500 being 1/5 of goodwill (i.e 1/5 x N 37,500 = N 7, 500 )
 Unit 2,6 Accounting entries for retirement or death of partner(s) at the beginning of

accounting year

Whenever a partner dies or retires, the outgoing partner in the case of retirement or the

representative of the dead in the case of death of a partner is entitled to have the assets including

the goodwill of the firm revalued.

The sum due to the outgoing partner or the estate of the dead partner may be paid immediately

by the firm. But if the firm is unable to do so, one of the following may be agreed upon.

(i) Amount due may be credited to loan account: Whereby the loan may be paid by

instalments with interest accruing on the outstanding balance or the loan may be paid

at a specified date together with all the accumulated interest up to the date of

repayment

(ii) Amount due may be settle by way of an annuity: whereby agreement may be made

to pay the outgoing partner or the representative of the dead partner an annuity either

for a certain number of years or for the life time of the retired partner or the

representative of the dead partner. In this case, the amount due is transferred to the

credit side of an annuity suspense account and this account is debited annually with

the annuity paid while it is credited with interest at a fixed rate per annum on the

diminishing balance.
ACCOUNTNG ENTRIES

a. To bring goodwill into the books :

Dr : Goodwill Account
Cr : Partners’ Capital Accounts

With the value of goodwill shared using their profit-sharing ratio

b. Revaluation of assets :

(i). Increase in value of assets

Dr : Assets Accounts
Cr : Revaluation Account
With the increase in the value of assets.

(ii) Decrease in value of assets :

Dr : Revaluation Account
Cr : Assets Accounts
With the decrease in the value of assets.

(iii) Profit/ loss on revaluation of assets :

Dr : Revaluation Account
Cr : Partners’ Capital Accounts

With the profit on revaluation shared in the pre-retirement profit-sharing ratio

OR
Dr : Partners’ Capital Accounts
Cr : Revaluation Account

With the loss on revaluation shared in the pre-retirement profit-sharing ratio

c. Payment of the amount due to the out-going partner

 DR : Capital account of the out-going partner
CR : Bank/ Cash account
With the amount of the credit balance on the capital account of the out-going partner.

d. Transfer of amount due to the out-going partner to the loan account

DR ; Capital account of out-going partner
CR : Loan account
With the amount due to the out-going partner.

e. Transfer of amount due to the out-going partner to annuity suspense account

DR : Capital account of out-going partner
CR : Annuity suspense A/c
With the amount due to the out-going partner.

f. Reversal of Goodwill, if necessary, after retirement of partner.

DR : Capital account of continuing partners
CR : Goodwill A/c
With the value of goodwill shared in the post retirement profit – sharing ratio.

g. Reversal of revaluation of assets, if necessary :

(i). Reverse entries b (i) and (ii)

(ii). Reverse entry b (iii) in the post-retirement profit sharing ratio

ILLUSTRATION:

RETIREMENT- AMOUNT DUE TO EX- PARTNER CREDITED TO LOAN ACCOUNT

Tunde, Yinka and Titi were partners in a business. They had been sharing profits in ration 3:2:1
respectively. Titi retired from the partnership on 31st march 2019. Goodwill of the firm which
had not been previously recorded was valued at N6,000. The assets of the firm were revalued at
the following amounts:

Land and building 18,000

Furniture 3,000

Motors vehicles 4,500

Debtors 4,100

At 31st march 2019, the Statement of financial Position of the firm was as follows:

Statement of financial Position as at 31st march 2019

Capital Accounts: N N Fixed Assets N N

Tunde 10,000 land and building 10,000

Yinka 8,000 furniture 4,000

Titi 7,000 Motor vehicle 6,000

25,000 20,000

Current liabilities current Assets

Creditors 3,500 stock 3,500

Accruals 1,500 debtors 4,800

5,000 bank/cash 1,700 10,000

30,000 30,000

Due to the lean financial resources of the firm, Titi agreed that the amount due to her be
transferred to a loan account to be paid over six equal yearly installments, each installment to
include principal and interest on the outstanding balance at 5% per annum. The first installment
was paid on the 1st of April 2019 while the remaining instalments will be paid every year end.

You are required to show:

i. Partners’ capital account

ii. Goodwill account
iii. Revaluation account
iv. Statement of financial Position of the firm immediately after Titi’s retirement.
v. Loan account (up to liquidation of the loan)

SOLUTION:

(i). Partners Capital Account

Tunde Yinka Titi Tunde Yinka Titi

N N N N N N

Loan - - 8,800 Balance c/d 10,000 8,000 7,000

Bal 15,400 11,600 Good will 3,000 2000 10,000

Revaluation 2,400 1,600 800

15,400 11,600 8,800 15,400 11,600 8,800

Bal b/d 15,400 11,600

(ii). Goodwill A/C

Capital: Tunde 3,000 Bal c/d 6,000

 Yinka 2,000

Titi 1,000

6,000 6,000

(iii). Revaluation A/C

Furniture 1,000 Land and building 8,000

Motor vehicles 1,500

Debtors 700

Capital – Tunde 2,400

Capital - Yinka 1,600

Capital – titi 800

8,000 8,000

(iv). Tunde and Yinka

Statement of financial Position as at 1st April 2019

Non-current Assets N N N

Land and building 18,000

Furniture 3,000

Motor vehicles 4,500

 25,500

Intangible assets

Goodwill 6000

Current assets 3,500

Stock 4,100

Debtors 1,700

Bank and cash 1,700

9,300

Current liabilities

Creditors 3,500

Accruals 1,500 (5000) 4300

35,800

Long term liability

Loan (Titi) (8,800)

Net assets (Capital) 27,000

Financed by

Capital accounts : Tunde 15,400

 Yinka 11,600

27,000

(v). The annual repayment can be computed using the annuity formula as follows:

P= a + a [1-(1+r)-n

P= present value

A= annual repayment

R= interest rate

N= no of years

= 8800 = a + a [1-0.05]-5

0.05

8800 = a (1-0.7835)

8800 = a + 4.33a

8800 = 5.33a

a= 8800

5.3 = N 1,,651

TITI’S LOAN ACCOUNT

Balance c/d 8,800 31/3/19x1 capital 8800

1/4/19x1 bank 1,651 1/4/19x1 ball B/d 8800

31/3/19x2 bank 1,651 31/3/x2 interest (5% x 7149) 357

Balance c/d 5,855

9,157 9,157

31/3/19x4 bank 1,651 1/4/19x2 bal b/d 5855

Balance c/d 4,497 31/3/19x3 bal (5% x 5855) 293

6148 6148

31/3/19x4 bank 1651 1/4/19x3 bal b/d 4497

Balance c/d 3071 31/3/x5 interest (5% x 4497) 225

4722 4722

31/3/19x5 bank 1,651 1/4/19x4 b/d 3071

Balance c/d 1574 31/3/19x5 interest (5% x 3071) 154

3,225 3225

31/3/19x6 bank 1,657 1/4/19x5 balance b/d 1,574

31/3/19x5 interest (5% x 1574) 77

1,651 1,651

Illustration – Settlement of amount due to ex-partner by payment of annuity.

X, Y, and Z are partners in a firm sharing profits and losses in ratio 3: 2: 1 respectively. X
retired from the firm on 31st December 2014, the determined amount of his share in business
being N20,000.

X agreed that the balance due to him should be commuted to an annuity of N3, 000 the first
payment being made on the following day and subsequent payments on 1st January of each
year. X died after receiving the fifth annuity payment.
 Show the annuity suspense account assuming that the outstanding amount earned interest at
the rate of 6% per annum. Make calculation to the nearest naira.

SOLUTION

Annuity Suspense Account

N N

31/12/14 Balance c/d 20,000 31/12/14 Capital- X 20,000

1/1/15 Bank 3,000 1/1/15 Balance b/d 20,000

31/12/15 Balance c/d 18,020 31/12/15 Interest(6%x17,000) 1,020

21,020 21,020

1/1/16 Bank 3,000 1/1/16 Balance b/d 18,020

31/12/16 Balance c/d 15,921 31/12/16 Interest(6%x 15,020) 901

18,921 18,921

1/1/17 Bank 3,000 1/1/17 Balance b/d 15,921

31/12/17 Balance c/d 13, 696 31/12/17 Interest(6%x12,921) 775

16,696 16,696

1/1/18 Bank 3,000 1/1/18 Balance b/d 13,696

31/12/18 Balance c/d 11,338 31/12/18 Interest(6%x10,696) 642

14, 338 14,338

1/1/19 Bank 3,000 1/1/19 Balance b/d 11,338

31/12/19 Capital - Y 5,559

31/12/19 Capital - Z 2,779

 11,338 11,338

IN-TEXT QUESTIONS (ITQ’s)

The sum due to the outgoing partner or the estate of the dead partner may be paid

immediately by the firm. But if the firm is unable to do so, state other ways in which it can

be done.

IN-TEXT ANSWERS (ITA’s)

The other ways in which it can be done are :

i. Amount due can be credited to loan account and

ii. Amount due may be settled by way of an annuity.

Unit 2.7 Accounting entries for retirement or death of partner(s) during an accounting year

Whenever a partner retires or dies during the year, the necessary adjustments may not be passed

until the end of the year when the trial balance is drawn up. In the case, the profit/loss of the year

will have to be apportioned between the periods before retirement/death and period after

retirement/death just like it was due for admission of partners during the year.

ILLUSTRATION
A, B and C had been in partnership for some years sharing profits and losses in ratio 2: 2: 1
respectively, after making provision for interest on capital at the rate of 5% per annum and
annual salaries of #40,500 and #36,000 for A and B respectively. On August 31st, 2017. B
decided to retire and the partners agreed to create B with interest at 8% pert annum on the
balance on his capital account after crediting him with his share of goodwill (valued at #18,750)
pending settlement on 1st January 2018.

The sum of #7500 was paid to B on 31st Dec., 2017 and the partners had withdrawn all profits to
31st Dec 2016. N1500 is to be provided on furniture and fittings as depreciation while stock at
31st Dec 2017 was valued at #15,000. The partners decided not to close the bocks of the firm
when B retired but to use the accounts for the year ended 31st Dec. 2017 as the basis of
settlement. After B’s retirement, the profit sharing ratio of A and C was adjusted to 3: 2
respectively.

Gross profit and expenses are to be apportioned on time basis unless otherwise medicated.

The following trial balance was extracted from the books as at 31st Dec. 2017

DR CR
# #
Purchase 270,000
Sales 450,000
Stock 22,500
Bank 12,090
Furniture & fitting (Carrying Value) 24,000
Repairs & maintenance (#255 of which relates to 4
month to 31/12/17) 2,520
Provision for bad debt at 31/12/16 3,000
Bad debt written off (August 2017) 300
Salaries and wages 60,000
Debtors 25,455
Creditors 17,550
Loan – B 7500
Salary- A 40,500
B 24,000
Capital – A 30,000
B 25,000
C 20,000
Drawings – A 15,000
- B (to 31st Aug. 2017) 15,000
C 13,500
Office expenses 9,900
Medical expenses 3,285
545,550 545,550

The bad debt provision was no longer required as at 31st August 2017

You are required to prepare the final accounts for the year ended 31st Dec. 2017 and write up Y’s
loan account

SOLUTION

A, B, and C

Income Statement for the year ended 31st Dec. 2017

Jan. – Aug Sept. – Dec. Total

Sales 450,000

Less: cost of goods sold

Opening stock 22,500

Add: purchases 270,000

Goods available for sale 292,500

Less: closing stock (15,000)

115,000 57,000 277,500

Gross profit 172,500

Less: expenses: 2,265

255
Repairs and
maintenance 2,520
(3000)
-
Provision for B/D no
longer required (3000)
300
Bad debt
-
Salaries and wages 40,000
300
Office expenses 20,000
6,600
Medical expenses 60,000
2190 3,300
Interest on Y’s loan
- 1,095
9,900
Depreciation
618
3,285
1000
618
Net profit 49,355 500

Less: salaries – A 25,768

1,500
65,645
B 75,123
27,000 31,732

13,500
97,377
Interest on capital: 24,000
40,500
- A 51,000 -
- B 13,500
 24,000
- C
64,500

1000

Divisible profits 625

833

- 1,625
Share profits: A
667
B
396 833
C 2,500

1021 1,063

12,145

17,211 3,521

29,356
4,858

10,327

4858

2,429 - 15,185

12,145 6,884

17,211 4,858

9,313

29,356