Chapter 16

Q16.1
The owner's equity of a partnership comprises of:
a. The capital contributed by each partner in cash.
b. Partners' capital plus partners' loans.
c. Partners' current and loan accounts.
d. Partners' capital and current accounts.
e. Partners' capital, current and loan accounts.

Q16.2
The balance on a partner's current account comprises of:
a. The partner's share of current profits.
b. Salary and interest earned by the partner less any distributions.
c. The cumulative excess of the partner's share of profits plus any salary or interest earned, over any
distributions.
d. Only distributions made by the partner.
e. The partner's share of current profits less any distributions.

Q16.3
The following information relates to questions 16.3.1, 16.3.2 and 16.3.3.

Ainsworthy, Buthelezi and Chada are in partnership sharing profits and losses in the ratio of 3:2:1. They operate a
small business selling imported spices in New Town. Their statement of financial position at 30 June 20X6 is as
follows:

Ainsworthy, Buthelezi & Chada

Statement of financial position
at 30 June 20X6
Assets C
Non-current assets 220 000
Equipment 90 000
Cost 170 000
Accumulated depreciation (80 000)
Motor vehicle 30 000
Cost 40 000
Accumulated depreciation (10 000)
Goodwill 100 000
Current assets 284 000
Inventory 20 000
Accounts receivable 100 000
Bank 164 000

504 000
Equity and liabilities
Equity
Capital accounts 468 000
Ainsworthy 234 000
Buthelezi 156 000
Chada 78 000

Current liabilities
Accounts payable 36 000
504 000

Daniels is admitted to the partnership on 1 July 20X6. He is to have a one-sixth share of the business, which
Ainsworthy, Buthelezi and Chada are to relinquish according to their existing profit-sharing ratio. The following
agreement is reached on the admission of Daniels:

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 1. The equipment is valued at C40 000.
2. The cash flow expected from accounts receivable is C60 000.
3. All other assets and liabilities are considered to be fairly valued.
4. Daniels is to pay a total of C129 600 into the partnership.

16.3.1
The new profit-sharing ratio is:

Ainsworthy Buthelezi Chada Daniels

a 8 5 2 3
b. 3 2 1 6
c. 18 12 6 6
d. 15 10 5 6
e. None of the above

16.3.2
On the statement of financial position of the new partnership at 1 July 20X6, the non-current tangible assets will
be reported as:

Cost Accumulated depreciation Carrying amount

C C C
a. 310 000 90 000 220 000
b. 170 000 — 170 000
c. 469 000 — 469 000
d. 210 000 90 000 120 000
e. 70 000 — 70 000

16.3.3
On the admission of Daniels to the partnership, goodwill is written up by an amount of:
a. C209 600
b. C299 600
c. C399 600
d. C317 600
e. C309 600

E16.1
Andy Arm and Leo Legg are in partnership practicing as physiotherapists. The partnership agreement provides
the following:
1. Interest is to be allowed on capital at 10% per annum but no interest is to be allowed on current
accounts or charged on drawings.
2. Arm is entitled to a salary of C60 000 per annum and Legg C48 000 per annum.
3. Arm is entitled to the first C10 000 of the remaining profit in each half-year, the balance being divided
equally between the partners.

The following is the trial balance of the partnership entity at 31 March 20X6, six months into the financial year:

Andy Arm and Leo Legg

Trial balance
at 31 March 20X6
Dr Cr

Bank 120
500
Capital – Arm 150
000
Capital – Legg 30 000

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 Current account – Arm (balance 30 September 20X5) 16 000
Current account – Legg (balance 30 September 20X5) 6 000
Distributions – Arm 68 000
Distributions – Legg 4 000
Equipment: cost 40 000
Equipment: accumulated depreciation 20 000
Accounts receivable 72 000
Allowance for doubtful debts 10 000
Accounts payable 4 000
Fees 132
300
Bad debts expense 5 600
General expenses 4 700
Rent expense 5 000
Salaries expense 47 200
Stationery expense 1 300
368 368
300 300

The following additional information is available:

1. Legg’s salary has been paid to him monthly and allocated to the salaries expense account but no entries
have been made in the accounting records in respect of Arm's salary. Salaries of the receptionist have
also been charged to the salaries expense account
2. The equipment is depreciated on the straight-line basis over a period of four years, with no residual
value.
3. At 31 March 20X6, an allowance of C12 000 is required for doubtful debts.

You are required to:

a. Prepare a statement of profit or loss for the six months ending 31 March 20X6.
b. Prepare a statement of changes in equity for the six months ending 31 March 20X6.
c. Prepare a statement of financial position at 31 March 20X6.

E16.2
Martin Moodley and Leigh Lawrence are in partnership business, sharing profits and losses in the ratio 3:2. Their
statement of financial position at 30 June 20X6 was as follows:

Martin Moodley and Leigh Lawrence

Statement of financial position
at 30 June 20X6
Assets C
Non-current assets 129 000
Land and buildings at carrying amount 90 000
Equipment at carrying amount 24 000
Motor vehicles at carrying amount 15 000
Current assets 225 000
Inventory 120 000
Accounts receivable 60 000
Cash at bank 45 000

354 000
Equity and liabilities
Equity
Capital accounts 285 000
Martin Moodley 177 000
Leigh Lawrence 108 000

Current liabilities
Accounts payable 69 000
354 000

On 1 July 20X6, Ruby Rikhotso is admitted to the partnership on the following conditions:

© 2017 David Kolitz

 1. Rikhotso is to pay C90 000 for a quarter share of the business which Moodley and Lawrence give up
equally.
2. Land and buildings are valued at C120 000.
3. Equipment is valued at C33 000.
4. The cash flow from accounts receivable is expected to be C57 000.
5. Inventory has a net realisable value of C111 000.

You are required to:

a. Record the above transactions in the general journal of the partnership.
b. Prepare the statement of financial position for Moodley, Lawrence and Rikhotso at 1 July 20X6.

P16.1
A Anderson, B Bilal and C Chaplin are in partnership sharing profits and losses in the ratio 5:3:2. They own and
manage a business selling educational toys, trading as ‘ABC’. The following trial balance has been extracted from
their accounting records at 31 March 20X7:

ABC
Trial balance
at 31 March 20X7
Dr Cr
Interest received 750
Capital accounts (at 1 April 20X6):
A Anderson 80 000
B Bilal 15 000
C Chaplin 5 000
Carriage inwards 4 000
Carriage outwards 12 000
Cash at bank 4 900
Current accounts (at 1 April 20X6):
A Anderson 1 000
B Bilal 500
C Chaplin 400
Distributions:
A Anderson 25 000
B Bilal 22 000
C Chaplin 15 000
Motor vehicles:
Cost 80 000
Accumulated depreciation (at 1 April 20X6) 20 000
Office expenses 40 400
Equipment:
Cost 100 000
Accumulated depreciation (at 1 April 20X6) 36 600
Purchases 225 000
Rent, rates and electricity 8 800
Sales 409 030
Inventory (at 1 April 20X6) 30 000
Accounts payable 16 500
Accounts receivable 14 300
Allowance for doubtful debts (at 1 April 20X6) 420
583 300 583 300

Additional information:
1. Inventory at 31 March 20X7 cost C35 000.
2. Depreciation on the non-current assets is to be calculated as follows:
3. Motor vehicles — 25% per annum on the diminishing balance method.
4. Plant and machinery — 20% per annum on the straight-line method.
5. There were no purchases or sales of non-current assets during the year to 31 March 20X7.
6. The future cash flows from the accounts receivable are considered to be C13 585.
7. At 31 March 20X7, office expenses of C405 was payable, and rent amounting to C1 500 had been paid
in advance.

© 2017 David Kolitz

 8. Interest on distributions and on the debit balance on each partner's current account is to be charged as
follows:
9. A Anderson C1 000
10. B Bilal C900
11. C Chaplin C720
12. According to the partnership agreement, C Chaplin is allowed a salary of C13 000 per annum. This
amount was owing to C Chaplin for the year to 31 March 20X7, and needs to be accounted for.
13. The partnership agreement also allows each partner interest on his/her capital account at a rate of 10%
per annum. There were no movements on the respective partners' capital accounts during the year to 31
March 20X7, and the interest had not been credited as at that date.

You are required to:

a. Prepare the statement of profit or loss of ABC Partnership for the year ending 31 March 20X7.
b. Prepare the statement of changes in equity of ABC Partnershipfor the year ending 31 March 20X7.
c. Prepare the current accounts of ABC Partnership (in columnar format) for the year from 1 April 20X6 to
31 March 20X7.

© 2017 David Kolitz