Theory question 101
Partnership AccountsSection A (compulsory)
Odigwe Garuba and Taiwo are running a partnership whose terms are: (a) Payment of commission of ₦3,000 and salary of ₦6,020 yearly to Odigwe and Garuba respectively; (b) Interest at 5% per annum on partnership capital at the beginning of the year; (c) Equal share of profit. The Trial Balance of the firm as at 31st December 1989 was:
Capital 1st Jan. 89: Odigwe Cr ₦30,000; Garuba Cr ₦30,000; Taiwo Cr ₦25,000
Drawings: Odigwe Dr ₦2,500; Garuba Dr ₦2,000; Taiwo Dr ₦1,000
Purchases and Sales: Dr ₦100,000, Cr ₦160,000
Stock 1st Jan.: Dr ₦5,000
Debtors and Creditors: Dr ₦27,500, Cr ₦15,780
Bad Debts: Dr ₦500
Electricity: Dr ₦300
Postage and Stamps: Dr ₦100
Provision for doubtful debts 1st Jan.: Cr ₦3,000
Premises at cost: Dr ₦70,000
Salaries and wages: Dr ₦10,000
Leasehold property at cost: Dr ₦25,000
Motor Vehicle at cost: Dr ₦42,000
3% Bank Loan: Cr ₦25,000
Furniture: Dr ₦3,200
Provision for depreciation of furniture Jan. 1: Cr ₦320
Totals: ₦289,100, ₦289,100
Additional information: (i) Closing stock ₦3,000 (ii) Provision for doubtful debts is to be adjusted to 10% of debtor (iii) Expenses accrued were: Electricity ₦100; Postage and stamps ₦50. (iv) Depreciation of the furniture is at 10% per annum. (v) The leasehold property is to be written off over ten years (vi) Bank loan interest for the year is outstanding.
Prepare: (a) Partnership Trading, Profit and Loss Account and Appropriation Account for the year ended 31st December 1989. (b) Partner's Capital Accounts and (c) Balance Sheet as at 31st December 1989.
Show the model answer
(a) Trading, Profit and Loss and Appropriation Account for the year ended 31 December 1989
Sales 160,000; opening stock 5,000 + purchases 100,000 − closing stock 3,000 = cost of sales 102,000; gross profit ₦58,000
Add decrease in provision for doubtful debts (3,000 − 10% × 27,500 = 2,750) 250 = 58,250
Expenses: bad debts 500; electricity 400; postage and stamps 150; salaries and wages 10,000; loan interest (3% × 25,000) 750; depreciation of furniture (10% × 3,200) 320; leasehold written off (25,000 ÷ 10) 2,500; total 14,620
Net profit ₦43,630
Appropriation: commission Odigwe 3,000; salary Garuba 6,020; interest on capital Odigwe 1,500, Garuba 1,500, Taiwo 1,250; total 13,270; residual profit 30,360 shared equally: ₦10,120 each
(b) Capital Accounts (Odigwe | Garuba | Taiwo): opening 30,000 | 30,000 | 25,000; + commission/salary 3,000 | 6,020 | –; + interest 1,500 | 1,500 | 1,250; + share of profit 10,120 each; − drawings 2,500 | 2,000 | 1,000; closing ₦42,120 | ₦45,640 | ₦35,370 (total 123,130)
(c) Balance Sheet as at 31 December 1989
Fixed assets: premises 70,000; leasehold 25,000 − 2,500 = 22,500; motor vehicle 42,000; furniture 3,200 − 640 = 2,560; total 137,060
Current assets: stock 3,000; debtors 27,500 − 2,750 = 24,750; total 27,750
Current liabilities: creditors 15,780; accrued electricity 100, postage 50, loan interest 750; total 16,680
Net assets 137,060 + 27,750 − 16,680 = 148,130; less 3% bank loan 25,000 = ₦123,130 = total capital
The provision falls from ₦3,000 to ₦2,750, so the ₦250 decrease is a gain credited to profit and loss.