Theory question 107
Partnership Admission, Retirement and DissolutionTaiwo and Kehinde are in partnership sharing profits and losses equally. Their balance sheet as at 31st December, 2007 is as follows:
Capital: Taiwo ₦36,000; Kehinde ₦36,000 = ₦72,000
Current Accounts: Taiwo ₦2,400; Kehinde ₦1,400 = ₦3,800
Current Liabilities: Creditors ₦20,000; Bills payable ₦7,000; Accruals ₦840 = ₦27,840
Total ₦103,640
Fixed Assets: Goodwill ₦12,000; Freehold property ₦20,000; Motor vehicles ₦30,000; Furniture and fittings ₦6,000 = ₦68,000
Current Assets: Stock ₦12,880; Debtors ₦18,400; Bank ₦3,360; Cash ₦1,000 = ₦35,640
Total ₦103,640
Additional information: (i) On 31st December, 2007, Idowu was admitted into the partnership. (ii) Profits and losses would still be shared equally (iii) Idowu introduced capital of ₦36,000 (iv) The following assets were revalued: Goodwill ₦18,000; Freehold property ₦30,000; Motor vehicles ₦50,000; Stock ₦12,000 (v) A provision of 5% is to be made on debtors (vi) Goodwill is no longer to be retained in the books.
You are required to prepare: (a) Revaluation Account; (b) Goodwill Account; (c) Partners' Capital Accounts, and (d) Partners' Current Account.
Show the model answer
(a) Revaluation Account: Cr gains – goodwill 6,000 (12,000 → 18,000); freehold property 10,000; motor vehicles 20,000 = ₦36,000. Dr losses – stock 880 (12,880 → 12,000); provision for bad debts 920 (5% × 18,400) = 1,800; profit on revaluation ₦34,200 shared equally: Taiwo 17,100, Kehinde 17,100
(b) Goodwill Account: Dr balance b/f 12,000; revaluation 6,000 = ₦18,000. Cr written off to capital accounts in the new ratio (1:1:1): Taiwo 6,000, Kehinde 6,000, Idowu 6,000 = ₦18,000
(c) Capital Accounts (Taiwo / Kehinde / Idowu): Cr balance b/f 36,000 / 36,000 / –; bank – / – / 36,000. Dr goodwill written off 6,000 / 6,000 / 6,000; balance c/d ₦30,000 / ₦30,000 / ₦30,000
(d) Current Accounts (Taiwo / Kehinde): Cr balance b/f 2,400 / 1,400; profit on revaluation 17,100 / 17,100; balance c/d ₦19,500 / ₦18,500
(If the revaluation profit is credited to the capital accounts instead, capitals become Taiwo 47,100, Kehinde 47,100, Idowu 30,000 and current accounts stay at 2,400 and 1,400; either treatment is acceptable if consistent.)
Revalue each asset, share the revaluation profit equally between the old partners, then write goodwill off among all three partners.