Theory question 108
Partnership AccountsGovu, Tuga and Kano are partners engaged in retail business, sharing profits and losses in the ratio 2: 1:2 respectively. The following are the details of the extracts from their books as at 31st January, 2013. (Govu / Tuga / Kano, GH¢) Capital 50,000 / 45,000 / 60,000; Current Account 20,800 / (5,000) / 8,500
Additional Information: (i) The firm's sundry assets were valued at GH¢431,000. (ii) The firm was cash strapped and on 01/07/2013, Tuga advanced a loan of GH¢100,000 to the partnership at the rate of 5% per annum. Interest was payable six monthly and was to be credited to his account. (iii) Govu and Kano were to receive salaries of GH¢25,000 per annum each. (iv) The profit for the partnership before charging loan interest was GH¢158,000 for the year ended 31st December, 2013. The loan was not repayable until after the year 2016.
You are required to prepare: (a) Profit and loss and Appropriation Account for the year ended 31st December, 2013; (b) Partners' Current Accounts in a columnar form.
Show the model answer
(a) Profit and loss (GH¢): profit before loan interest 158,000; less loan interest to Tuga (5% × 100,000 × 6/12) 2,500; net profit 155,500.
Appropriation: net profit 155,500; less salaries - Govu 25,000, Kano 25,000 = 50,000; residual profit 105,500 shared 2:1:2 - Govu 42,200; Tuga 21,100; Kano 42,200.
(b) Current accounts (Govu / Tuga / Kano): balance b/f 20,800 Cr / 5,000 Dr / 8,500 Cr; salaries 25,000 / - / 25,000; loan interest - / 2,500 / -; share of profit 42,200 / 21,100 / 42,200.
Closing balances c/d (credit): Govu 88,000; Tuga 18,600; Kano 75,700.
Loan interest is a charge against profit, not an appropriation; it runs only from 1 July.