(Mt) – AU Management Business Studies Worksheet

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University of Technology and Applied Sciences – Ibri Sultanate of Oman Business Studies Department Academic Year: 2020 – 2021 Semester: II Student Assignment Guidelines to the students: 1. Students should upload the assignments in Moodle through the link (Turnitin) provided by your course lecturer on or before the deadline. 2. Students should submit their assignments in typed format which is accepted by Turnitin. Hand written assignments are not be accepted. 3. The assignment file should be in a Word format and the file name should be: Student ID, Student First Name and Course Name. 4. The submitted assignment should comply with the academic integrity and honesty of UTAS (Academic Integrity and Honesty Policy). Sanctions for high plagiarism (above 25%) are: First offence: Written warning and repeat the work Second offence: Zero mark and suspension for one semester Third offence: Dismissal from the college 5. If a student is found violating rules and instructions or has used tricks to reduce the plagiarism percentage, a disciplinary action will be taken by the Department Council (DC). 6. Student is responsible for the consequences of submitting a wrong file in Moodle. 7. Submission of assignment after the deadline is treated as a late submission and penalties are applied. Below are the penalties for a late submission: Late submission by 1 day 2 days 3 days Reduction in Marks 15% 25% 30% 8. Students are advised to follow Harvard referencing style. A sle of referencing is shown below: ➢ For Books: Schneider, Z, Whitehead, D #038; Elliott, D 2007, Find them correct: The right steps for good handwriting, 3rd edn, Elsevier New Zealand, Marrickville, Auckland ➢ For Websites: Health Council 2019, Causes of bad health, Health 2019, . Council, viewed 2 January ➢ For Journals Khan I, P 2004, ‘Role of infrastructure in economic development’, Business Standard, vol. 19, no. 6, pp. 4652. Page 2 of 2 ➢ For Newspaper Articles Norvic, N 2012, ‘Education in pandemic: new mode of education’, The Arabic Education, 30 March, p. 5. Structured Assignment Course Name: Course Code: Date #038; Time of Issue: Corporate Accounting 1 BAAC2202 Level: 17/02/2021 Sec 1 2pm Sec 2 8am Second Year Section No.: Deadline (Date #038; Time): 1#038;2 17/03/2021 Sec 1 4pm Sec 2 10am Learning Outcomes Covered in the Assignment: Outcome No. 1 Understand exactly what a partnership is Outcome No. 2 Know what the main features of a partnership agreement should be Outcome No. 5 Calculate the amount of adjustments of capital needed when there is a change in partnership Assignment Question(s) (Allotted Marks: 10/15) Create your own partnership company and answer the following three questions? 1) Write the introduction and prepare the partnership deed of the company by your creativity? (300 – 400 words) 2) Pass the journal entries based on the introduction and Partnership deed, prepare partner’s capital account in fixed Page 2 of 2 method and Profit and Loss Appropriation Account. (400 – 500 words) 3) Give your conclusion along with bibliography based on Question 1 and 2. (200 – 300 words) Evaluation criteria Maximum = 15 marks 1) Creativity Maximum = 1.5 marks 2) Discussion #038; Analysis Maximum = 10.5 marks 3) Structure / Organizing content Maximum = 1.5 marks 4) Writing Quality Maximum = 0.75 marks 5) Bibliography / References Maximum = 0.75 marks Please ensure to remove the above contents before you submit your assignment in Moodle. University of Technology and Applied Sciences -Ibri Page 2 of 2 Sultanate of Oman Business Studies Department Academic Year: 20XX – 20XX Semester: X Assignment submitted for the below mentioned course: “Course Code #038; Course Name” Student ID : Student Name : Section No. : Submitted to: “Name of the Course Lecturer” Student Declaration I am/we hereby declare that my submission of this assignment is a result of my own original work except for source materials explicitly acknowledged by proper citations. I understand that Page 2 of 2 plagiarism is an offense that can lead to a disciplinary action depending on the seriousness of the case. I am also aware of all the instructions and rules related to the submission of the course assignment provided by the course lecturer. I understand that violation of these rules will result in disciplinary actions. Your answer for the assignment starts here Page 2 of 2 CHAPTER 2: ADMISSION OF PARTNER Learning Objectives After studying this Chapter, you will be able to:  Understand the need for admission of a partner.  Calculate the new profit sharing ratio and the sacrificing ratio.  Understand how the revaluation of assets and liabilities is taken into account.  Understand the need for distribution of accumulated reserves, profits or losses.  Learn the accounting treatment of goodwill.  Prepare revaluation account, capital accounts and balance sheet of a new firm.  Reconstitution of A Partnership Firm Partnership is an agreement between the members of a firm for sharing the profits of the business carried on by all or any of them acting for all. Any change in this relationship amounts to reconstitution of the partnership firm. A change in the partnership agreement brings to an end the existing agreement and a new agreement comes into being. Reconstitution of A Partnership Firm  This new agreement changes the relationship among the members of the partnership firm. Hence, whenever there is a change in the partnership agreement, the firm continues but it amounts to the reconstitution of the partnership firm. Reconstitution of the firm can take place on the following occasions:  Change in the profit sharing ratio of the existing partners  Admission of a new partner  Retirement of an existing partner  Death of a partner Admission of new partner A Partnership firm suffering from shortage of funds or administrative incapability may decide to admit a partner. Admission of a partner is one of the modes of reconstituting the firm. A person can be admitted only with the consent of all existing partner a person who is admitted to the firm is known as an incoming or a new partner. On admission of a new partner, the existing partnership comes to an end and a new partnership comes into effect. In other words, a new firm is reconstituted under a fresh agreement. Admission of new partner Whenever a partner is admitted into the partnership firm, he acquires two rights a) Right to share the assets of the partnership firm. b) Right to share the future profits of the partnership firm. The amount that the new partner brings in for the right to share in the partnership assets is called his capital and is credited to his Capital account. Whereas, the consideration which he pays to the old partners for the right to participate in the division of future profits is called Goodwill Adjustments While admitting a new partner, the following adjustments are necessary: 1) Recording the Capital of a new partner 2) Calculation of New Profit Sharing ratio and Sacrificing ratio 3) Revaluation of assets and liabilities 4) Transfer of Undistributed Profit or loss 5) Transfer of Accumulated reserves 6) Treatment of Goodwill 1) Recording of Capital of a New Partner  It is not compulsory that the new partner bring capital at the time of admission. He may be admitted in view of his talent, skill and reputation. However, in many cases, the incoming partner brings capital into the firm. With the consent of all the old partners, he may bring capital in cash or in kind or both The accounting treatment is Accounts Cash A/c Stock A/c Furniture A/c To New partners’ Capital A/c Debit Credit XXXX XXXX XXXX XXXX 2) Calculation of New Profit Sharing ratio and Sacrificing Ratio When a new partner is admitted, he acquires his share in profits from the old partners. This reduces the old partners’ shares in profit hence, new profit sharing ratio for old partners have to be calculated.  New Profit Sharing Ratio: The ratio in which all partners (including incoming partner) share the future profits and losses is known as the new profit sharing ratio. The determination of new profit sharing ratio depends upon the ratio in which the incoming partner acquires his share from the old partner. New share = Old share – Sacrifice 2) Calculation of New Profit Sharing ratio and Sacrificing Ratio The ratio in which the old partners have agreed to sacrifice their shares in profit in favor of a new partner is called the sacrificing ratio. Sacrificing ratio = Old profit sharing ratio – New profit sharing ratio Sacrifice = Old share – New share The purpose of this ratio is to determine the amount of compensation (goodwill) to be paid by the new partner to the old partners for the share of profit surrendered. Case 1: when the new partner’s share is given: Exle: A and B share profit in the ratio of 3:1. C is admitted and is given 1/5 share of profit. Show the calculation of new profit-sharing ratio and sacrificing ratio. New Profit Sharing ratio: Sacrificing ratio Let the total profit be = 1 sacrificing ratio =old share – new share C’s share = 1/5 Remaining Share of A and B = 1 – 1/5=4/5 Old ratio = 3 : 1 New Share of A =3/4×4/5 = 12/20= 3/5 New share of B =1/4×4/5 = 4/20 =1/5 New Share of B A : : C 3/5 : 1/5 : 1/5 New Ratio = 3: 1: 1 Sacrifice of =3/20 A =3/4-3/5 = 15-12 /20 Sacrifice of B= ¼-1/5 = 5-4/20 = 1/20 Sacrificing ratio of A and B 3:1 Let us consider the total profit of the firm = 1 New Partner C’s portion = 1/5 Remaining Portion = 1 – 1/5 = 4/5 New Ratio for A = 4/5 * 3/4 = 12/20 = 3/5 New Ratio for B = 4/5 * 1/4 = 4/20 = 1/5 New Ratio for C = 1/5 New Ratio for A, B #038; C = 3:1:1 Sacrificing Ratio = Old Share – New Share A = 3/4 – 3/5 = 5*3 – 4*3 / 4*5 = 15 – 12 / 20 = 3/20 B = 1/4 – 1/5 = 5*1 – 4*1 / 4*5 = 5 – 4 / 20 = 1 / 20 Sacrificing Ratio for A #038; B = 3:1 Case 2: when the new partner purchases his share from other partner in a particular ratio: Exle: P and Q are partners sharing profits in the ratio of 3:2. They admit R for 1/5th share of future profits which she acquires 3/20th from P and 1/20th from Q. Calculate New Profit sharing ratio and sacrificing ratio of old partners. Calculation of New ratio: Old ratio = P: Q: R 3: 2: – Old share = 3/5 : 2/5 : – Sacrifice = 3/20: 1/20 New Share = (Old share – Sacrifice) P’s New share = 3/5-3/20 = 12-3 =9/20 20 Q’s New share =2/5-1/20 = 8-1 =7/20 20 R’s Share = New ratio = Sacrificing ratio 3/20+1/20 9:7:4 3:1 = 4/20 Exle: P and Q are partners sharing profits in the ratio of 3:2. They admit R for 1/5th share of future profits which she acquires 3/20th from P and 1/20th from Q. Calculate New Profit sharing ratio and sacrificing ratio of old partners. New Ratio = Old Share – Sacrifice P = 3 / 5 – 3 / 20 = 12 – 3 / 20 = 9 / 20 Q = 2 / 5 – 1 / 20 = 8 – 1 / 20 = 7 / 20 R = 3 / 20 + 1 / 20 = 4 / 20 New Ratio = 9:7:4 Sacrifice = 3:1 Case 3: When the old partners surrender a particular portion of their shares in favor of new partner. (Share of new partner not given) Exle: S and T are partners sharing profits in the ratio of 3:2. They admit U as new partner. Which he acquires 1/5th of S’s share and 2/5 of T’s share. Calculate a) New ratio and b) Sacrificing ratio. New ratio: S: T: U Old ratio = 3 : 2 : Old share = 3/5: 2/5 Sacrifice of S = 3/5 x 1/5 = 3/25 Sacrifice of T = 2/5 x 2/5 = 4/25 New Share of S = 3/5 – 3/25 = 15-3 (Old share – Sacrifice) 25 New share of T = 2/5 – 4/25 = 10-4 = 12/25 =6/25 25 U’s new share = 3/25+4/25 = 3+4 25 New ratio = 12:6:7 Sacrificing ratio: S : 3/25 : T 4/25 Sacrificing ratio of S and T = 3:4 = 7/25 3) Revaluation of Assets and Liabilities Revaluation is the valuation of assets and liabilities at the time of reconstitution of the partnership firm. At the time of admission of a partner, the assets and liabilities are revalued so that the profit and loss arising on account of such revaluation may be adjusted in the old partners’ capital accounts in their old profit sharing ratio and the incoming partner may not be affected by the profit or loss on account of revaluation of assets and liabilities. For the purpose a revaluation account is opened. Revaluation Account is credited with the following profit items:  Increase in the value of assets,  Decrease in the amount of liabilities and  Unrecorded assets now recorded. Revaluation account is debited with the following loss items:  Decrease in the value of assets,  Increase in the amount of liabilities,  Unrecorded liabilities now recorded and  Creation of a new liability. The balance of Revaluation account shows the net effect on account of revaluation which is transferred to old partners’ capital accounts in their old profit sharing ratio. The assets and liabilities appear in the Balance Sheet of the reconstituted firm at their revised values. Accounting entries to record the revaluation of assets and liabilities: For profit items:  Increase in the value of assets,  unrecorded assets recorded and  Decrease in the amount of liabilities. Account Concerned Assets A/c Concerned Liabilities A/c To Revaluation A/c Debit Account Revaluation A/c To Concerned Assets A/c To Concerned Liabilities A/c Debit For loss items:  Decrease in the value of assets,  increase in the amount of liabilities,  Unrecorded liabilities recorded and  New liabilities created. Credit XXXX XXXX XXXX Credit XXXX XXXX XXXX To transfer profit or loss on revaluation If Profit: If Loss: Dr. Cr. Account Revaluation A/c To Partners’ Capital A/cs Dr. XXXX Cr. XXXX Account Dr. Partners’ Capital A/cs To Revaluation A/c XXXX Cr. XXXX Revaluation Account Particulars Decrease in the value of assets (Individually) … Increase in the value of liabilities (individually) Unrecorded liability or New liability Partners’ capital account (Revaluation Profit c/d Total R.O ——- Particulars Increase in the value of assets (individually) Un Recorded Asset Decrease in the value of Liabilities (individually Partners’ capital account(Loss on revaluation) Total R.O ——- Exle: Revaluation Account The following is the Balance Sheet of A and B who share profits in the ratio of 3:2. Balance Sheet of A and B as at April 1, 2019 Liabilities Amount Assets (RO.) Sundry Creditors 20,000 Capital Account A 30,000 B 20,000 Total 50,000 70,000 Amount (RO.) Cash in Hand 3,000 Debtors 12,000 Stock 15,000 Furniture 10,000 Plant and Machinery 30,000 Total 70,000 Exle: Revaluation Account On that date C is admitted into the partnership on the following terms:  That C is to bring in RO. 15,000 as capital and RO. 5,000 as premium for goodwill for 1/6th share.  That the value of stock is reduced by 10% while plant and machinery is appreciated by 10%.  That furniture is devalued at RO. 9,000.  That a provision for doubtful debt is to be created on sundry debtors at 5% and RO. 200 is to be provided for an electricity bill.  Investment worth RO. 1,000 (not mentioned in the balance sheet) is to be taken into account.  A creditor of RO. 100 is not likely to claim his money and is to be written off. Required: Record journal entries and prepare revaluation account and capital account of partners. Exle: Revaluation Account Solution Date Particulars 2019 Apr. 1 Bank a/c C’s Capital L.F. Debit Credit Amount Amount (RO.) (RO.) 20,000 a/c 15,000 Premium a/c (Goodwill) 5,000 (Cash brought in by C as a capital and premium/goodwill) Apr. 1 Premium a/c (Goodwill) 5,000 A’s Capital a/c 3,000 B’s Capital a/c 2,000 (Premium divided between A and B in sacrificing ratio 3:2) Apr. 1 Revaluation a/c 3,100 Stock a/c (RO. 15,000 × 10/100) 1,500 Furniture (RO. 10,000 – 9,000) 1,000 Provision for Doubtful Debt a/c 600 RO. 12,000 × 5/100 (The fall in the value of various assets on revaluation on C’s admission) Exle: Revaluation Account Solution Apr. 1 Plant and Machinery a/c (30,000 × 10/100) Investment a/c Dr. 3,000 1,000 Revaluation a/c (The increase in the value of assets on revaluation on C’s admission) Apr. 1 Apr. 1 Apr. 1 4,000 Revaluation a/c Outstanding Electricity a/c (The amount provided for outstanding electricity) Dr. Sundry Creditors a/c Revaluation a/c (The amount not likely to be claimed by the creditors written back) Dr. Revaluation a/c A’s Capital a/c (3/5) B’s Capital a/c (2/5) (Profit on revaluation of assets and re-assessment of liabilities transferred to A and B in profit sharing ratio 3:2) Dr. 200 200 100 100 800 480 320 Exle: Revaluation Account Solution Revaluation Account Date Particulars J.F. Amount(R.O) Date 2019 Apr 1. Particulars 2003 Stock 1,500 Furniture 1,000 Apr.1 Provision for doubtful debt J.F. Amount (RO.) Plant and Machinery 3,000 Investments 1,000 Sundry Creditors 100 600 Outstanding Electricity 200 A’s Capital 480 B’s Capital 320 (Profit on revaluation) Total 4,100 Total 4,100 Exle: Revaluation Account Solution Partners’ Capital Account Date 2019 April 1 Particular Bal. c/f A RO. B RO. 33,480 22,320 C RO. Date 2019 15,000 April1 A RO. Particular Balance b/f 30,000 B RO. 20,000 Bank Premium C RO. 15,000 3,000 2,000 480 320 33,480 22,320 (Goodwill) Revaluation a/c Total 33,480 22,320 15,000 Total 15,000 4) Transfer of Undistributed Profit or Loss Sometimes, the balance sheet of the partnership firm may show undistributed profits in the form of profit and loss account in the liabilities side. The undistributed loss in the business is generally shown at the assets side of the old Balance Sheet. The new partner is not entitled to have any share in the undistributed profit or loss. Therefore the undistributed profit or loss should be transferred to the old partners’ capital accounts in the old profit sharing ratio. The accounting treatment would be as follows:  For transfer of undistributed profit : Profit and Loss A/c Dr ….. Old Partners’ Capital A/cs …..  For transfer of undistributed loss: Old Partners’ Capital A/cs Dr …. Profit and Loss A/c Exle: undistributed profits or losses 1) Sami and Ravi are partners of a firm sharing profit and loss in the ratio of 4:3. Their Balance Sheet Shows R.O 14,000 as Profit and Loss A/c in the liabilities side. Accounts Profit and Loss A/c Sami’s Capital A/c Ravi’s Capital A/c Dr. 14,000 Cr. 8,000 6,000 (Undistributed profit transferred to Old Partners’ Capital Accounts in old ratio) 1) Mai and lee are partners sharing profit and loss in the ratio of 3:2. They admit David on 1st January 20016. On thatAccounts date, their Balance Sheet showed an Dr. amount of R.OCr. 25,000 as Profit and Loss A/c in the Asset side. Mai’s Capital A/c Dr Lee’s Capital A/c Dr Profit and Loss A/c 15,000 10,000 25,000 (Undistributed loss transferred to old partners’ Capital accounts in the old ratio) 5) Transfer of Accumulated Reserve: Sometimes, Partners of the firm, may set aside a portion or percentage of the profit earned to meet the unexpected or unforeseen losses arise in future in the name of Reserve, General Reserve, Reserve Fund, Contingency Reserve etc. At the time of admission of new partner, if there is any reserve, it should be transferred to the Capital accounts of the old partners in the old profit sharing ratio. The accounting treatment would be as follows: Reserve Fund A/c Dr ….. Old Partners’ Capital A/cs ….. 6) Treatment of Goodwill: The goodwill is the result of the old partners’ efforts in the past. Therefore, at the time of admission of new partner the goodwill is to be adjusted in the old partners’ capital account. From the accounting point of view, the Goodwill can be adjusted in one of the following three methods: 1. Revaluation Method 2. Memorandum Revaluation Method 3. Premium Method Among the above three methods, Premium method alone discussed in this chapter. Treatment of Goodwill at the time of admission Goodwill is the result of the efforts made by the existing partners in the past. Therefore, on the eve of the admission, the new partner who is going to acquire the right to share future profits must compensate the existing partners by making payment to them. This payment is called premium (share of goodwill). From accounting point of view, there may be different situations related to treatment of goodwill. Accounting treatment of goodwill at the time of admission of a partner is classified in four parts: (1) When new partner pays amount of goodwill privately: In this case no entry will be passed in the books of the firm. 6) Treatment of Goodwill: (2) When new partner brings his share of goodwill in Cash or kind. In this case the following entries are passed: For amount of Capital + Goodwill brought in by new partner Cash / Bank/ Assets A/c Dr. To New Partner’s Capital A/c (for amount of capital) To Premium A/c (for amount of goodwill) For amount of goodwill brought in by new partner credited to Old Partner’s Capital A/c s in their Sacrificing Ratio. Premium A/c Dr. To Old Partner’s Capital A/c s When old partners withdraw the amount of goodwill. Old Partners’ Capital A/c Dr. To Cash/Bank A/c Condition: When new partner brings his share of goodwill in cash, in this case no goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be: Old Partner’s Capital A/c s Dr. To Goodwill A/c Exle: Case 2 A and B are partners sharing profit and losses in the ratio of 5:3. C is admitted as a new partner for 1/5th share. C brings RO. 15,000 as his Capital and necessary amount of his share of goodwill in cash. Total goodwill of the firm is RO. 60,000. Goodwill already appears in the Balance Sheet of A and B is RO. 20,000. Pass necessary journal entries. S. No. (i) Particulars Cash A/c /BANK A/C Dr. L.F. Debit Credit RO. RO 27,000 To C’s Capital A/c 15,000 12,000 To Premium A/c – 60000*1/5 (For amount of Capital and Goodwill brought in by C) (ii) Premium A/c Dr. 12,000 To A’s Capital A/c 12000*5/8 7,500 4,500 To B’s Capital A/c 12000*3/8 (iii) (For amount of goodwill brought in by C credited to A and B in their Sacrificing Ratio, which is 5:3) A’s Capital A/c Dr. 20000*5/8 B’s Capital A/c Dr. 20000*3/8 To Goodwill A/c (For existing goodwill written off in Old Ratio) 12,500 7,500 20,000 6) Treatment of Goodwill: (3) When new partner does not bring his share of goodwill in cash. In this case new partner’s share of goodwill is charged to his capital account and t/f to old partners’ capital accounts in their sacrificing ratio. Entries for this will be: (i) For amount of capital brought in by new partner Cash / Bank/ Assets A/c Dr. To New Partner’s Capital A/c (ii) For new partner’s share of goodwill credited to old partner’s capital accounts in their sacrificing ratio New Partner’s Capital A/c Dr. To Old Partner’s Capital A/c (iii) When old partners withdraw the amount of goodwill. Old Partner’s Capital A/c Dr. To Cash/Bank A/c Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be: Old Partner’s Capital A/c Dr. To Goodwill A/c Exle: case 3 A and B are partners sharing profits and losses in the ratio of 5:3. C is admitted as a new partner for 1/5th share. C brings RO. 50,000 as his capital but he is not able to bring his share of Goodwill in cash. Total Goodwill of the firm is RO. 60,000. Pass necessary journal entries when in the books of A and B: (a) No Goodwill already appears. (b) Goodwill already appears at RO. 24,000. Exle: case 3 solution Date (a) (b) Particulars Bank A/c Dr. To C’s Capital A/c (For amount of capital brought in by C) C’s Capital A/c Dr. To A’s Capital A/c To B’s Capital A/c (For C’s share of goodwill credited to A’s and B’s Capital A/ in their sacrificing ratio.) L.F. Debit Credit RO. 50,000 RO. 50,000 12,000 7,500 4,500 Bank A/c Dr. To C’s Capital A/c (For amount of capital brought in by C) C’s Capital A/c Dr. To A’s Capital A/c To B’s Capital A/c (For C’s share of goodwill credited to A’s and B’s Capital A/ in their sacrificing ratio.) 50,000 A’s Capital A/c Dr. 24000*5/8 B’s Capital A/c Dr. 24000*3/8 To Goodwill A/c (For existing goodwill in the books written off in old ratio) 15,000 9,000 50,000 12,000 7,500 4,500 24,000 6) Treatment of Goodwill: (4) When new partner brings only a part of his share of goodwill in cash or kind. In this case amount brought in by new partner as his share of goodwill t/f to old partner’s capital accounts in their sacrificing ratio and the amount that is not brought in by him is charged to his capital account and is also t/f to old partner’s capital accounts in their sacrificing ratio. Entries will be in following manner: For amount of Capital + Goodwill brought in by new partner Cash / Bank/ Assets A/c Dr. To New Partner’s Capital A/c (Amount of Capital) To Premium A/c (Amount of Goodwill brought in by new partner) For amount of goodwill brought in by new partner credited to old partner’s capital accounts in their sacrificing ratio. Premium A/c Dr. To Old Partner’s Capital A/c For amount of goodwill not brought in by new partner charged to his capital account and credited to old partner’s capital accounts in their sacrificing ratio. New Partner’s Capital A/c Dr. To Old Partner’s Capital A/c Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be: Old Partner’s Capital A/ Dr. To Goodwill A/c Exle: case 4 A and B are partners sharing profits and losses in the ratio of 5:3. C is admitted as a new partner for 1/5th share. C brings RO. 50,000 as his capital and brings only 60% of his share of Goodwill in cash. Total Goodwill of the firm is RO. 60,000. Pass necessary journal entries when A and B withdraw 50% of the amount brought in by C as his share of goodwill in cash. Goodwill already appears in the books at RO. 16,000. = 60000*1/5 = 12000 12000*60% = 7200 @50% = 3600 Balance = 4800 Exle: case 4 solution Date Particulars Bank A/c Dr To C’s Capital A/c To Premium A/c 60000*1/5 = [email protected]% (For amount of capital and goodwill brought in by C) L.F. Debit. 57,200 50,000 7,200 Premium A/c Dr. To A’s Capital A/c 7200*5/8 To B’s Capital A/c 7200*3/8 (For amount of goodwill brought in by credited to old partner’s capital account in their sacrificing ratio) 7,200 C’s Capital A/c Dr. To A’s Capital A/c 4800*5/8 To B’s Capital A/c 4800*3/8 (For amount of goodwill not brought in by C charged to his capital A/c and credited to old partner in their sacrificing ratio) 4,800 A’s Capital A/c Dr. 3600*5/8 B’s Capital A/c Dr. 3600*3/8 To Bank A/c (For amount of goodwill withdrawn by old partners) 2,250 1,350 A’s Capital A/c Dr. 16000*5/8 B’s Capital A/c Dr. 16000*3/8 To Goodwill A/c (For existing goodwill in the books written off in old ratio) Credit. 4,500 2,700 3,000 1,800 3,600 10,000 6,000 16,000 Exle: Admission of new partner  A and V are partners sharing profits and losses in the ratio of 3:1 Their Balance sheet as on 31st March 2015 is as Liabilities Amount (RO) Assets Amount (RO) Creditors Bills Payable General Reserve Capital: A 80,000 V 40,000 60,000 Cash 20,000 Debtors 40,000 Stock Plant Buildings 120,000 Profit #038; Loss A/c 5,000 70,000 30,000 25,000 100,000 10,000 Total 240,000 Total 240,000 Exle: Admission of new partner On 1st April 2015, they agreed to admit K into the firm for 1/5th Share of future profits on the following terms: a) Building is revalued at RO 120,000 b) Stock is revalued at RO 21,500 c) Goodwill is raised at RO 40,000 d) Provision for bad debts is made at 5% e) K to bring in a Capital of RO 50,000 but she was unable to bring the amount of goodwill.  Required: Prepare Revaluation account, Capital accounts, Cash account and the Balance Sheet of the reconstituted firm. Solution Revaluation Account Particulars Amount (RO) To Stock To Provision for doubtful debt To Profit on revaluation transferred to Capital A/C: A 6,000 8,500 3,500 V 8,000 Total 2,000 20,000 Particulars Amount (RO) By Building A/c 20,000 Total 20,000 Solution Capital Accounts Particular To Profit #038; loss A/c A 2,500 K Particulars A V 80,000 40,000 K ….. By Balance b/d A’s capital A/c 6,000 By Cash A/c V’s capital A/c 2,000 By General Reserve 30,000 10,000 …. 42,000 K’s Capital A/c 6,000 2,000 ….. By Revaluation 6,000 2,000 ….. 122,000 54,000 50,000 To Balance c/d 7,500 V 114,500 51,500 122,000 54,000 50,000 …… 50,000 Solution Bank A/c Particulars To Balance To K’s Capital A/c Amount (RO) 5,000 50,000 55,000 Particulars By Balance c/d Amount (RO) 55,000 55,000 Balance sheet of the new firm Liabilities Creditors Bills Payable Capital: A 114,500 V K 51,500 42,000 Amount (RO) 60,000 20,000 208,000 288,000 Assets Cash Debtors 70,000 Less: Provision for bad debt Stock Plant Buildings Amount (RO) 55,000 3,500 66,500 21,500 25,000 120,000 288,000 Questions Bank 1) Sharifa and Huda were partners sharing profit and loss in the ratio of 3:2. They decided to admit Fatima into the partnership and revalue their assets and liabilities as indicated here under:   To bring into record investment of R.O 18,000 which had not so far been recorded in the books of the firm?  To depreciate stock, furniture and machinery by R.O 18,000, R.O 6,000 and R.O 30,000 respectively.  To provide for workmen’s compensation of R.O 24,000. Required: show the revaluation account. Questions Bank 2) V and K were partners sharing profits and losses as 60% to V and 40% to K. Their Balance Sheet as at 1st January, 2005 stood as under Balance Sheet Liabilities Sundry creditors Bills Payable Capital accounts: V: 90,000 K: 80,000 Amount 96,000 34,000 170,000 300,000 Assets Cash in Hand Sundry debtors Stock Plant #038; machinery Land #038; Buildings Amount 4,000 56,000 40,000 80,000 120,000 300,000 The partners agreed to admit E into the firm subject to revaluation of the following items: (i) Stock was to be reduced by R.O 4.000 (ii) Land and Buildings were to be valued at R.O 160,000 (iii) A provision of 2 ½% was to be created for doubtful debtors (iv) A liability of R.O 2,600 for outstanding expenses had been omitted to be recorded in the books. E contributed R.O 60,000 as his share of capital. Required: Prepare the revaluation account, capital accounts and the balance sheet after the above adjustment. (Ans. Profit on Revaluation: R.O 32,000; Balance Sheet Total: R.O 334,600) Questions Bank 3) The following is the Balance Sheet of Amutha and Rama sharing profits 3:2, as on 31.3.2015. Balance Sheet Liabilities Sundry creditors Bills Payable Capital Account: Amutha 40,000 Rama 30,000 Amount 80,000 20,000 70,000 Assets Bank Sundry debtors Stock Machinery Land #038; Buildings 170,000 Amount 10,000 30,000 20,000 40,000 70,000 170,000 On 1.4.2015 they decided to admit Latha into the partnership for 1/5th of the future profits on the following terms: (a) Latha shall bring in a capital of R.O 30,000 and R.O 4,000 as her share of goodwill. (b) Goodwill of the firm being valued at R.O 20,000 (c) Land and buildings be appreciated by 10% (d) Stock is depreciated by R.O 3,000 and provision for outstanding liability is created at R.O 2,000. Required: Prepare the Revaluation account, Capital accounts, Bank account and the Balance Sheet of the reconstituted partnership. (Ans.: Revaluation Profit: R.O 2,000; B/s : R.O2,24,000) References:  A Mukherjee #038; M. Hanif (2008), “Advanced Accounting”, McGraw Hill Publication  A Mukherjee #038; M. Hanif (2011), “Financial Accounting”, Tata McGraw Hill Publication.  A Mukherjee #038; M. Hanif (2005), “Corporate Accounting”, McGraw Hill Publication  R.L gupta #038; M. Radhaswamy (2013 Volume I and II), “Corporate Accounting”, sultan chand #038; son’s publication.  Haman #038; Edward A (2004). “Corporate Partnership Book”, sphinx publishing  Larson, Wild #038; Chiappetta (2002), “Fundamental Accounting Principles”, Sixteen Edition, McGraw Hill Irwin  Vataliya K.S. (2009) “Practical Financial Accounting: Advance Methods, Techniques and Practices”, Global Media.  R.Amutha (2006) Accountancy Higher Secondary Second Year. Volume-II, fifth edition, Chennai, Tamil Nadu Text Book Corporation.  P.C.Tulsian (2009) Tulsians accountancy Part A, 10th edition New Delhi , Ratna Sagar publishers  T. S Reddy, A.Murthy (2013)Financial Accounting sixth revised edition ,Margam Publication CONTACT INFORMATION: Name of the Faculty: Mr. FAHEEM KHAN Office: BS046 Email: [email protected] VERSION HISTORY Version No Date Approved Changes incorporated 01 Sem. (I) 2019/2020 JULY 2020 46 Chapter 1 PARTNERSHIP Learning Outcomes  Understand the meaning and the features of partnership.  Prepare the capital accounts of partners under fixed and fluctuating capital methods.  Understand the distribution of profits among the partners.  Prepare the Profit and Loss appropriation account.  Know the meaning, nature and methods of valuation of goodwill.  Draw the final accounts of partnership firms. Definition  Partnership is the economic relationship between 2 or more persons who have agreed to share profits of a business carried on by all or any of them acting for all.  “a commercial company is a contract by which two or more persons undertake to participate in an enterprise for profit, each contributing a share of the capital in the form of tangible or intangible property or services with a view to share any profits or losses resulting from the enterprise.” The Commercial Company Law No.4/1974 Advantages ▪ Increased capital ▪ Increased knowledge and specialist skills ▪ Shared risk ▪ Flexible working and cover for holidays and illness. Disadvantages ▪ Less profit because profit is shared ▪ Possible disagreement over money ▪ Possible disagreement over the direction of the business Partnership features Association of two or more: To form a partnership, there must be at least two persons. There is, however, a limit on the maximum number of persons who constitute a partnership firm. The maximum number of partners is based on country regulators and type of sectors.  Partnership Agreement: since partnership is an agreement between two or more persons, it is advisable that partnership agreement (partnership deed) should be written and signed by all partners. Their agreement become partnership contract. While the agreement should be in writing, the contract is valid even if it is expressed verbally.  Partnership features  Mutual Agency: The business must be carried on by all or any partner acting for all. it means that each partner is fully authorized agent of the partnership and can commit or bind the partnership to any contract within the scope of partnership activities. For instance, a partner in a merchandise business, can sign a contract binding the partnership buying merchandise, lease a store building, borrow money or hire employees.. Partnership features  Limited life: the life of a partnership is limited. The partnership may be ended each time there is change in the constitution, such as change in profit sharing ratio, admission of a new partner, retirement or death of a partner.  Legal Business: The agreement should be for carrying on some legal business. A joint ownership of some property by itself does not constitute partnership. However, the joint ownership of the property may be used for forming the partnership in order to pursue the business objectives for which the partnership is formed. Partnership features  Unlimited Liability: it means that each partner is liable to all partnership liabilities. If the assets of a partnership are not sufficient to pay its liabilities, creditors can claim to partners’ personal assets.  Co-ownership of property: partnership assets are jointly owned by all partners. Any investment by a partners, such as building, become the joint property of all partners. Each partner has a claim on partnership assets based on his capital account. Partnership features  Sharing of profits: The agreement should be to share the profits and losses of the business. If some persons join hands to carry on some charitable activity, it will not be termed as partnership. Of course, the ratio in which the partners will share the profits and losses is determined by the agreement or in the absence of the agreement; it is shared based on capital contributed. Types of Partnership In partnership, Management rights, profit share and personal liability will vary depending on which of the four relatively common partnership types. General Partnership General partnership is formed by two or more persons and which aims at carrying a business. The partners of a general partnership shall be jointly and severally liable for the business’s debts to the full extent of their property.  Types of Partnership  Limited Partnership Limited partnership meets the need of those individuals who are unwilling to accept the risk of unlimited liability. This type is identified in its name with the word “limited Partnership” or “Ltd”. The limited partnership is commercial company, which comprises two categories of partners: One or more general partners who shall be jointly and severally liable for the limited partnership debts to the full extent of their property. At least one partner must be a general partner who assume management duties and unlimited liability for the debts of the partnership. Types of Partnership  Limited Partnership One or more limited partners whose liability for the partnership’s debt shall be limited to the amount of their contribution to the partnership’s capital. The limited partners have no personal liability beyond the amount they invest in the partnership. Limited partners have no active management role except as specified in partnership agreement. Limited Partnership  At least one general partner and one limited partner  General partner: manage the firm unlimited liability Limited partner: invest capital only limited liability Types of Partnership  Limited Liability Partnership This type is identified in its name with the word “Limited Liability Partnership” or “LLP”. It is designed to protect innocent partners from malpractice or negligence claims resulting from the act of other partner. In case of malpractice claim, only the partners who are responsible of the action are personally liable for the claim. Remaining partners who are not responsible for the claim are not personally liable for it. However, partners remain personally liable for other type of obligations owed to partnership’s debts. This type is usually preferable by professional such as lawyers, doctors and accountant. Types of Partnership  Limited Liability Company The name of this type of business usually include the words “Limited liability Company” or “LLC”. Some features of this type of business is similar to Corporation and some are similar to limited partnership. The owners, who are called members, are protected with the same limited liability feature as owners of corporations. However, the members of limited liability company can actively participate in management role. Partnership Deed  Partnership Deed or partnership Agreement is an agreement between the partners that show the terms and conditions and it should be drawn up and signed by all partners. It can be orally or written on paper, however it is advisable that the firm have a Partnership Deed in writing to manage the economic relationship between the partners. Partnership Deed  The following are some of the points that can be included in the partnership Deed: 1. Partners names 2. The name of the firm 3. The nature of the business carried by the firm 4. Date of commencement of the partnership 5. The duration of the partnership 6. The amount of capital contributed by each partner Partnership Deed  The following are some of the points that can be included in the partnership Deed: 1. Profits or losses division 2. Salary, commission and interest on capital 3. Interest on drawings to be charged on withdrawals 4. Methods and rules to be followed in case of reconstitution. 5. Settlement of accounts on dissolution of the firm Accounting rules in absence of Partnership Deed The Partnership Act states that if there is no written, legal agreement for the partnership then the following must apply: ▪ Equal profit shares ▪ No salaries ▪ No interest on capital. Accounting rules in absence of Partnership Deed Interest on Capital: no Interest on Capital is allowed for the partners. If as per the partnership deed, it will only be paid if there is profit.  Interest on Drawings: no interest will be charged on drawings made by the partners.  Salary/ commission to partner: no partner is entitled to salary or commission from the firm, unless partnership deed provides for it.  Interest on Loan: if any partner advances money to the firm as a loan, the partner will be entitled to interest on such amount at the rate of 6% per year.  Profit sharing ratio: in absence of an agreement, partners shares the profits and losses based on the law of the country. According to The Commercial Companies Law of Oman, each partner’s share shall be in proportion to his share in the capital of the company.  Partners’ Capital Accounts  In partnership firm, the transactions relating to partners are recorded in their respective capital accounts. Normally, each partner’s capital account is prepared separately. There are two methods by which the capital accounts of partners can be maintained. These are Fluctuating Capital method 2. Fixed Capital method. 1. Fluctuating Capital Method  Under the fluctuating capital method, only one account, viz., the capital account for each partner, is maintained. It records all adjustments relating to drawings, interest on capital, interest on drawings, salary and share of profit or loss in the capital account itself. As a result, the balance in the capital accounts keeps on fluctuating. Date Particulars J.F Amount (RO.) Date Particulars J.F. Amount (RO.) Drawings *** Opening balance *** Interest on *** Addition to capital *** Interest on capital *** Salary *** Commission/Bonus *** Share of profit *** Total *** drawings Share of loss *** Withdrawal of capital *** Closing balance *** Total *** Exle(Fluctuating Capital Account) A and B commenced business as partners on April 1, 2000. A and B contributed RO. 40,000, RO. 25,000 as their share of capital. The partners decided to share their profits in the ratio of 2:1. A was entitled to a salary of RO. 6,000 p.a. Interest on capital was to be provided @ 6% p.a. A and B withdraws for the year ending March 31, 2001 were RO. 4,000 and RO. 8,000, respectively. The profits of the firm after providing A’s salary and interest on capital were RO. 12,000. Draw up the Capital Accounts of the partners when capitals are fluctuating, and Exle(Fluctuating Capital Account) A and B commenced business as partners on April 1, 2000. A and B contributed RO. 40,000, RO. 25,000 as their share of capital. The partners decided to share their profits in the ratio of 2:1. A was entitled to a salary of RO. 6,000 p.a. Interest on capital was to be provided @ 6% p.a. A and B withdraws for the year ending March 31, 2001 were RO. 4,000 and RO. 8,000, respectively. The profits of the firm after providing A’s salary and interest on capital were RO. 12,000. Draw up the Capital Accounts of the partners when capitals are fluctuating, and SolutionBooks of A and B A’s #038; B’s Capital Account Particulars Drawings A (RO) 4,000 B (RO) Particulars 8,000 Cash A (RO) B (RO) 40,000 25,000 Salary 6,000 Interest on Capital 2,400 1,500 8,000 4,000 56400 30,500 Profit and Loss Appropriation A/c. Balance c/f Total 52,400 56400 22,500 (Share of profit 2/3:1/3 of RO. 12000 30,500 Total Fixed Capital Method  Under this method, two accounts are maintained for each partner viz., Capital account and ❑ Current account. ❑  The capital account will continue to show the same balance from year to year unless some amount of capital is introduced or withdrawn. In the current account, the transactions relating to drawings, interest on capital, interest on drawings, salary, share of profit or loss etc., are recorded. Hence, the balance in the current accounts changes every year. Fixed Capital Method Date Particulars J.F Amount (RO.) Date Withdrawal of capital Date **** Closing balance **** Total **** Particulars J.F Amount (RO) Date Particulars J.F. Amount (RO.) Opening balance **** Addition to capital **** Total **** Particulars J.F. Amount (RO) Opening balance* **** Opening balance* **** Drawings **** Interest on capital **** Interest on **** Salary **** drawings **** Commission/Bonus **** Share of loss **** Share of profit **** Closing balance* **** Closing balance* **** Total **** Total **** Exle(Fixed Capital Account) A and B commenced business as partners on April 1, 2000. A and B contributed RO. 40,000, RO. 25,000 as their share of capital. The partners decided to share their profits in the ratio of 2:1. A was entitled to a salary of RO. 6,000 p.a. Interest on capital was to be provided @ 6% p.a. A and B withdraws for the year ending March 31, 2001 were RO. 4,000 and RO. 8,000, respectively. The profits of the firm after providing A’s salary and interest on capital were RO. 12,000. Draw up the Capital Accounts of the partners when capitals are fluctuating, and Solution Books of A and B A’s #038; B’s Capital Account Particulars Balance c/f Total A (RO) 40000 40000 B (RO) Particulars A (RO) B (RO) Cash 40,000 25,000 25000 Total 40000 25000 25000 Exle(Fixed Capital Account) Books of A and B A’s #038; B’s Current Account Particulars Drawings A (RO) 4,000 B (RO) Particulars 8,000 Salary Interest on Capital A (RO) B (RO) 6,000 2,400 1,500 8,000 4,000 Profit and Loss Appropriation A/c. (Share of profit 2/3:1/3 of RO. 12000 Balance c/f 12400 16400 Balance c/f 8000 2500 16400 8000 Profit and Loss Appropriation Account (Distribution of Profit)  In a sole trading concern, the net profit disclosed by the Profit and Loss Account belongs to the sole trader and is transferred to his capital account. However, in a partnership firm, the net profit as shown by the Profit and Loss Account need certain adjustments with regard to interest on capitals, interest on drawings, salary and commission to the partners for this purpose, Profit and Loss Appropriation Account may be prepared. This is merely an extension of the Profit and Loss Account and is prepared to show how net profit has been distributed among the partners Profit and Loss Appropriation Account (Distribution of Profit)  This account is credited with net profit and interest on drawings and debited with interest on capitals, salary or commission to partners. Net loss will be shown on the debit side. After these adjustments have been made, this account will show the amount of profit or loss which shall be distributed among the partners in the agreed profit sharing ratio. Adjustments to Net Profits 1. ❑ Interest on capital is allowed to partners only, if the partnership deed specifically allows it. Interest is usually calculated on the opening capital and on the capital introduced during the year. To adjust interest on capital: Date ❑ Accounts Interest on Capital a/c Partners’ Capital/Current a/c xxxx Debit Credit xxxx For transferring Interest on Capital to Profit and Loss Appropriation Account: Date Accounts Profit and Loss Appropriation a/c Interest on Capital a/c Debit Credit xxxx xxxx Exle (Interest on Capital) Ahmed and Ali started business on April 1, 2019 with capitals of RO.90,000 and RO.70,000 respectively. Ahmed introduced RO.10,000 as additional capital on July 1, 2019. Interest on capital is to be allowed @ 10%. Calculate the interest on Capital payable to Ahmed and Ali for the year ending March 31, 2020. Solution: Interest on Ahmed’s capital = (90,000 x 10/100) + (10,000 x10/100 x 9/12) = 9,000 + 750 =RO 9,750 Total interest payable to Ahmed is RO 9,750. Interest on Ali’s capital = 70,000 X10/100 = RO 7,000 Interest payable to Ali is RO 7,000 Drawings A partner will take drawings from the partnership. The partnership agreement may state that the partners will be charged interest on the amount of drawings they make. The reason for charging interest on drawings is to stop a partner from drawing large amounts of cash from the business. It may help to prevent a cash flow problem. Interest on drawings Accounting entries for interest on drawings: Debit Partners’ current accounts Credit Appropriation account Exam tip: make the interest on drawings your first entry in the appropriation account and current accounts. Adjustments to Net Profits 2. for Interest on Drawing A drawing is the amount withdrawn in cash for personal purpose. A Drawings Account is opened in the name of each partner and the drawings are debited to this account. At the end of the year the account is closed by a transfer to the respective partner’s Capital Account or Current Account. Interest on partners’ drawings is changed only, if the partnership deed specifically allows it at a particular rate. To charge interest on drawings. Interest on Drawings is a gain to the firm and is charged to Partner’s Capital/Current Account: Adjustments to Net Profits 2. for Interest on Drawing To charge interest on drawings. Interest on Drawings is a gain to the firm and is charged to Partner’s Capital/Current Account: Date Accounts Debit xxxx Partners’ Capital/Current a/c Interest on Drawings a/c Credit xxxx For transferring Interest on Drawings to Profit and Loss Appropriation Account, the Following entry is to be recorded: Date Accounts Interest on Drawings a/c Profit and Loss Appropriation a/c Debit xxxx Credit xxxx Adjustments to Net Profits 3. Partner’s Salary Salary or commission to partner: Some partners may devote more time or possess better skills and experience in comparison with their fellow partners as a result they should be allowed a special compensation either in the form of salary or commission. (i) Salary allowed to a partner is a gain of the individual partner and charge against the profits of the firm as per partnership agreement. For this following entry is recorded: Date (ii) Accounts Salary to Partner a/c Partner Capital/Current a/c Debit xxxx Credit xxxx For charging salary allowed to a partner: Date Accounts Profit and Loss Appropriation a/c Salary to partner a/c Debit xxxx Credit xxxx Adjustments to Net Profits 4. Partner’s Commission Commission may be allowed as a percentage of net profit before charging the commission or after charging the commission. Commission under the two methods, is computed as under i) Percentage of Net profit before charging such commission Rate of commission Net Profit before commission x –––––––––––––––––– = 60000*10/100 = ? 100 ii) Percentage of Net profit after charging such commission Rate of commission Net Profit AFTER commission x –––––––––––––––––––––– = 60000*10/110 = ? 100+Rate of Commission Adjustments to Net Profits Accounting Entries to be passed in case of charging commission Commission is an expense for the firm and a gain to the partner. For this, following entry is made: Date Accounts Commission to partner a/c Partner’s capital/current a/c Debit xxxx Credit xxxx Commission paid to a partner is charged to Profit and Loss Appropriation account by recording the following entry; Date Accounts Profit and Loss Appropriation a/c Commission to partners a/c Debit xxxx Credit xxxx Adjustments to Net Profits 5. For Transfer to Reserve: Date Accounts Profit and Loss Appropriation a/c Reserve a/c Debit xxxx xxxx 6. For Share of profit or loss on appropriation: If Profit: Date Accounts Profit and Loss Appropriation a/c Partner’s capital/current a/c Debit xxxx Credit xxxx If loss: Date Accounts Partner’s capital/current a/c Profit and Loss Appropriation a/c Debit xxxx Credit Credit xxxx Profit #038; loss Appropriation Account Format Date Particulars J.F. Net Loss as per Amount(R.O) Date ** Particulars Net profit as per Profit and Loss A/c Profit and Loss A/c (if loss) Interest on Capital (if profit) Interest on drawings A B ×× ×× ** J.F. A B Amount(R.O) ….. ×× ×× ××× ×× ×× ××× Share of loss (if loss) Partner’s Salary Partner’s commission …… …… A B Share of profit (if profit) A B Total ×× ×× *** ……… Total ……… Exle ( Profit distribution) Ali, Hamid and Ahmed started a partnership firm on January 1, 2019. They contributed RO. 50,000, RO. 40,000 and RO. 30,000 respectively as their capitals and decided to share profits in the ratio of 3:2:1. The partnership deed provided that Ali is to be paid salary of RO. 1,000 p.m. and Hamid commission of RO. 5,000. It also provided that interest on capital be allowed @ 6% p.a. The drawings for the year were: Ali RO. 6,000, Hamid RO. 4,000 and Ahmed RO. 2,000. Interest on drawings was RO. 270 for Ali, RO.180 for Hamid and RO. 90 for Ahmed. The net amount of profit as per the profit and loss account for the year ended 2020 was RO. 35,660. You are required to record the necessary journal entries relating to appropriation of profit and prepare the profit and loss appropriation account and the partners’ capital accounts. Exle ( Profit distribution) Solution Books of Ali, Hamid and Ahmed Journal Date Particulars L.F. 2001 End of the year Profit and Loss a/c Profit and Loss Appropriation (Transfer of Profit to Profit and Loss Appropriation Account) Debit Amount (RO.) Credit Amount (RO.) 35,660 a/c 35,660 Ali’s Salary a/c Ali’s Capital a/c (Amount of Ali’s Salary) 12,000 Profit and Loss Appropriation a/c 12,000 12,000 Ali’s Salary a/c (Transfer of Ali’s Salary to Profit and Loss Appropriation Account) 12,000 Hamid’s Commission a/c Hamid’s Capital a/c (Amount of Hamid’s Commission) 5,000 Profit and Loss Appropriation a/c Hamid’s Commission a/c (Transfer of Hamid’s Commission to Profit and Loss Appropriation Account) 5,000 5,000 5,000 Exle ( Profit distribution) Solution Interest on Capital a/c Ali’s Capital a/c Hamid’s Capital a/c Ahmed’s Capital a/c 7,200 3,000 2,400 1,800 (Amount of interest on capital) Profit and Loss Appropriation a/c Interest on Capital a/c 7,200 7,200 (Transfer of Interest on Capital to Profit and Loss Appropriation Account) Ali’s Capital a/c Hamid’s Capital a/c Ahmed’s Capital a/c Interest on Drawings a/c 270 180 90 540 (Amount of interest on drawings) Interest On Drawings a/c Profit and Loss Appropriation a/c (Transfer of Interest on drawings to Profit and Loss Appropriation Account) Profit and Loss Appropriation a/c Ali’s Capital a/c Hamid’s Capital a/c Ahmed’s Capital a/c (Amount of profit on appropriation) 540 540 12,000 6,000 4,000 2,000 Exle ( Profit distribution) Solution Profit and Loss Appropriation Account For the year ended December 31, 2001 Particulars Amount R.O Particulars Ali’s Salary Hamid’s Commission Interest on Capital: Ali’s Capital Ac Hamid’s Capital Ac Ahmed’s Capital Ac Share of Profits: Ali’s Capital Hamid’s Capital Ahmed’s Capital 12,000 Net Profits 5,000 Interest on Drawings: Ali’s Capital Ac 3,000 Hamid’s Capital Ac 2,400 Ahmed’s Capital Ac 1,800 Total 36,200 Total Amount R.O 35,660 270 180 90 6,000 4,000 2,000 36,200 Exle ( Profit distribution) Solution Ali’s Capital Account Particulars Drawings Interest on Drawings Balance c/f Total Amount R.O Particulars 6,000 Cash 270 Salary Interest on Capital Share of profit Amount R.O 50,000 12,000 3,000 6,000 64,730 71,000 Total 71,000 Hamid’s Capital Account Particulars Drawings Interest on Drawings Balance c/f Total Amount R.O Particulars 4,000 Cash 180 Commission Interest on Capital Share of Profit 47,220 51,400 Total Amount R.O 40,000 5,000 2,400 4,000 51,400 Exle ( Profit distribution) Solution Ahmed’s capital Account Date Particulars Drawings Interest on Drawing Balance c/f Total J.F Amount (RO.) 2,000 90 31,710 33,800 Date Particulars Cash J.F Amount (RO.) 30,000 Interest on Capital 1,800 Profit and Loss Appro. (Share of profit) 2,000 Total 33,800 Goodwill Over a period of time, a well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such advantage is known as ‘goodwill’. It is regarded as an intangible asset. In other words, goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits. It is generally observed that when a person pays for goodwill, he/she pays for something, which places him in the position of being able to earn super profits as compared to the profit earned by other firms in the same industry. Goodwill In simple words, goodwill can be defined as ”the present value of a firm’s anticipated excess earnings” or as “the capitalized value attached to the differential profit capacity of a business”. Thus, goodwill exists only when the firm earns super profits. Any firm that earns normal profits or is incurring losses has no goodwill. Factors giving rise to Goodwill The main factors helping the creation of goodwill are as follows:  Nature of Business: A firm that produces high value added products or having a stable demand is able to earn more profits and therefore has more goodwill.  Location: If the business is centrally located or is at a place having heavy customer traffic, the goodwill tends to be high.  Efficiency of Management: A well-managed concern usually enjoys the advantage of high productivity and cost efficiency. This leads to higher profits and so the value of goodwill will also be high. Factors giving rise to Goodwill The main factors helping the creation of goodwill are as follows:  Market situation: The monopoly condition or limited competition enables the concern to earn high profits which leads to higher value of goodwill.  Special Advantages: The firm that enjoys special advantages like import licenses, low rate and assured supply of electricity, long-term contracts for supply of materials, well-known collaborators, patents, trademarks, etc. enjoy higher value of goodwill. Need #038; Methods of valuation of goodwill Normally, the need for valuation of goodwill arises at the time of the sale of a business. But, in case of a partnership firm it may also arise in the following circumstances: ❑ Change in the profit sharing ratio amongst the existing partners; ❑ Admission of a new partner; ❑ Retirement of a partner; ❑ Death of a partner; ❑ Dissolution of a firm which involves sale of business as a going concern; and The following are the methods of valuation of goodwill of a firm: A. Average Profit method B. Super Profit method C. Capitalization method A. Average Profit Method In this method, past profits of a number of years are taken into account. Such profits are added and the average profit is found out. The average profit is multiplied by a certain number of years to arrive at the value of goodwill. The steps involved under this method are: Step 1 Calculate total profits by adding each year’s profit or deducting loss if any. Step 2 Calculate the average profit by applying the following formula. Average profit = Total Profits No. Of Years Step 3 Calculate the Goodwill by applying the following formula. Goodwill = Average Profit x No. of years’ purchase Exle (Average Profits Method) Calculate goodwill at twice the average profits of last four years’ profits. The profits of the last four years were: RO. 27,000 RO. 39,000 RO. 16,000 (Loss) RO. 40,000 Solution: ( steps of Calculations) 1. Total Profit for last four years = RO. 27,000+ RO. 39,000-RO. 16,000+ RO. 40,000 = RO. 80,000 2. Average Profit = RO. 80,000/4 = RO. 20,000. 3. Goodwill = RO. 20,000 x 2 = RO. 40,000. B. Super Profit Method The excess of average profit over normal profit is called super profit. The goodwill under the Super profits method is calculated by multiplying the super profits by certain number of years purchase. The steps involved under this method are: Step 1Calculate the average profit – it may be adjusted for partner’s remuneration. Step 2 Calculate the normal profit on capital employed by applying the following formula. Normal Profit = Capital employed x Normal rate of return Step 3 Calculate the super profit by applying the following formula. Super profit = Average Profit – Normal profit Step 4 Calculate the value of goodwill by multiplying the amount of super profit by the given number of years’ purchase Goodwill = Super Profit x No. of years of purchase Exle ( Super Profit Method) The books of a business showed that the capital employed on January 1, 2019 was RO. 450,000 and the profits for the last five years were as follows: 2015-Rs. 40,000; 2016 -RO. 50,000; 2017 – RO. 60,000; 2018 -RO. 70,000 and 2019 -RO. 80,000. You are required to find out the value of goodwill, based on three years’ purchase of the super profit of the business given that the normal rate of return is 10%. Solution: 1. Total Profit of last five years = RO. 40,000 + RO. 50,000 + RO. 60,000 + RO. 70,000 + RO. 80,000 = RO. 300,000 2. Average Profit = RO. 300,000/5 =RO. 60,000 3. Normal Profit = RO. 450,000 x 10/100 = RO. 45,000 4. Super Profit = Actual/Average Profit – Normal Profit Super Profit = RO. 60,000 – RO. 45,000 = RO. 15,000 1. Goodwill = RO. 15,000 x 3 = RO. 45,000. C. Capitalization of Average Profit Method Under this method goodwill is difference between the total Capitalized value of the firm and the net assets of the firm. Goodwill = Capitalized Value the firm – Net Assets Capitalized Value of the firm = Average Profit x 100/ Normal Rate of Return Net Assets = Total Assets – External Liabilities CAPITAL = 100,000 NRR = 12% = 100,000*12/100 = RO12,000 PROFIT = 12,000 NRR = 12% = 12000/12*100 OR 12000*100/12 = 100,000 Exle ( Capitalization of Average Profit Method) A firm earns RO. 65,000 as its average profits. The usual rate of earning is 10%. The total assets of the firm amounted to RO. 680,000 and liabilities are RO. 180,000. Calculate the value of goodwill. Solution: 1. Total Capitalized value of the firm = RO. 65,000 x 100/10 = RO. 650,000 2. Net Assets = RO. 680,000 – RO. 180,000 = RO. 500,000 3. Goodwill = Total Capitalized value of the firm – Net Assets Goodwill = RO. 650,000 – RO. 500,000 = RO. 150,000. Partnership Final Accounts  Preparation of Income Statement (Profit #038;Loss Ac) is the same as for a sole proprietorship business. Same accounting principles and methods are followed in case of partnership as well.  However, to compute and divide the profits and losses among partners, Profit and Loss Appropriation is required after preparing the Income Statement and calculating the net profit/Income. This account will show how the net profit of the business is being apportioned among partners. In addition, the capital account need to be adjusted separately at the end of each accounting period before it is reported in the balance Sheet of the company. Accounting Treatments for Adjustments  Companies make adjusting entries at the end of the accounting period, in order to record revenue and expenses in the correct period. Adjusting entries reflect unrecorded economic activities that has taken place but has not yet been recorded because it is either more convenient to wait until the end of the period to record the activity, or because no document concerning that activity has yet come to the accountant’s attention. Adjusting entries ensure that both revenue recognition and matching principles are followed. Accounting Treatments for Adjustments  Each adjusting entry has a dual purpose: 1. To make the income statement report the proper revenue or expenses in the correct period and 2. To make the balance sheet report the proper assets or liability. Thus, every adjusting entry effects at least one income statement account and one balance sheet account.  Adjusting entries are classified as either Deferrals or Accruals. Deferrals (to postponed or delay) are prepaid expenses and unearned revenue. Accrued (to grow or accumulate) are accrued revenues and accrued expenses. Final Account Adjustments  The following table briefly show the dual effect of each adjustment: Adjustment Explanation Income statement Balance sheet Prepaid Expenses Expenses paid in advance such as insurance, rent and supplies Deducted from corresponding Added to assets expense Unearned Revenue Deducted from revenue/Sale Accrued Expense /outstanding Expense Revenue/income received in advance before work has been performed Expense has been incurred but not yet recorded in the book and not yet paid Accrued Revenue /outstanding revenue Revenue has been earned (service is completed) but has Added to Revenue /Sale not yet recoded in the book and not yet received. Depreciation Expense Is the amount of asset cost assigned as an expense to a particular period Provision for doubtful debt It is the estimated amount of bad debt that will arise from account Receivable that have been issued but not yet collected Added to liability Added to operating expenses Added to liability Added to operating Expense Added to assets Deducted from the related assets New provision –old provision Deduct the new ( an increase in the provision provision from is a loss and a decrease in the Debtor account provision is a gain) Exle ( partnership Final A/c) Ahmed and Said are in partnership, sharing profit and losses in the ratio 3:1. The following trail balance was extracted after the preparation of their trading account for the year ended 31 December 2019: Name of Accounts Provision for depreciation:- Equipment Provision for depreciation:- Fixtures Bank Balance Drawings:-Ahmed Drawings:-Said Equipment at cost Fixtures at cost Premises at cost Commission received Debtors and creditors Current accounts :-Ahmed Current accounts :- Said Provision for doubtful debts Gross profit Insurance Wages and Salaries Cash Capital Accounts :-Ahmed Capital Accounts :-Said Debit Credit RO RO 2,000 1,800 830 1,600 900 20,000 9,000 40,000 16,000 200 Nil 200 7,500 Nil 320 24,000 950 2,550 450 91,650 40,000 15,000 91,650 Exle ( partnership Final A/c) At 31 December the following information needs to be taken into consideration: a)The provision for doubtful debts is to maintained at 2% of debtors b)commission received of RO 300 is still owed c)An insurance invoice of RO 50 has yet to be paid d)RO 150 of wages have been prepaid e)Depreciation needs to be provided for on the following basis: •Equipment at 10% straight line method •Fixtures at 15% reducing (diminishing) balance method •The partnership agreement provides for the following: 1.Interest on drawings is charged at 5% per annum 2.Interest on capital is allowed at 8 % per annum 3.Said is to receive a salary of RO 3,745 You are required to: 1. prepare the partnership profit and loss account for the year ended 31 December 2. prepare the partnership appropriation account for the year ended 31 December 3. prepare each partner current account at 31 December 4. prepare the partnership Balance Sheet as at 31st December. Exle ( Final Account) Solution Profit and Loss Account Year ended december31st Gross profit +commission received + commission owed Operating Expenses: Depreciation-equipment Depreciation-fixture Provision on doubtful debt(old) Provision on doubtful debt(new) Insurance Wages and salary Prepaid wages Net Profit 24,000 200 300 2,000 1080 (320) 320 1,000 2,550 (150) 24,500 6,480 18,020 Exle ( Final Account) Solution Profit and Loss Appropriation Ac Dr. Interest on Capital: Ahmed Said Salary to Said Share of profit: Ahmed Said Dr. Balance Drawings Interest on drawing balance Amount Cr. Net profit 3,200 Interest on drawing: 1,200 Ahmed 3,745 Said Amount 18,020 80 45 7,500 2,500 18,145 Ahmed Said 200 1,600 80 8,820 10,700 Current Ac Cr. …….. interest on capital 900 Salary to partners 45 Share of profit: 6,500 7,445 18,145 Ahmed Said 3,200 …….. 1,200 3,745 7,500 2,500 10,700 7,445 Exle ( Final Account) Solution Balance sheet Liabilities Creditors Outstanding insurance Capital Ac: Ahmed Said Current Ac: Ahmed Said Amount 7,500 50 40,000 15,000 8,820 6,500 77,870 Assets Bank Cash Debtors Provision for doubtfull debt Equipment Accumulated DepreciationEquip. Fixtures Accumu. Depre.-Fixtures Premises Prepaid wages Commission owed Amount (830) 450 16,000 (320) 20,000 (4,000) 9,000 (2,880) 40,000 150 300 77,870 Exle ( Final Account) Solution Working note 1* Depreciation on fixtures at WDv or diminishing balance method Cost of fixtures = 9000 Less provision 1800 Less15%dep7200x15/100 7200 Current year depreciation = 1080 Working note 2** Debtors = New provisions 2% on debtors 16000×2/100 16000 320 Current year provision for bad and doubtful debts In income statement New provision – old provision 320-320 = 0* Balance sheet debtors – New provision 16000-320=15680*** Questions Bank 1. Show how the following items will appear in the capital accounts of the partners Ali and Ahmed when their capital is a) fixed b) fluctuating Particulars Capital on 1.4.2015 Drawings during 20152016 Interest on drawings Interest on capital Partner’s salary Commission Share of profit for 2015-16 Ali (R.O ) 90000 12000 Ahmed(R.O) 70000 9000 360 5400 12000 —6000 270 4200 –6000 4000 ALI BALANCE C/F AHMED ALI 90000 70000 BALANCE B/F 90000 70000 90000 70000 90000 70000 90000 70000 BALANCE B/F ALI DRAWINGS INTEREST ON DRAWINGS BALANCE C/F AHMED AHMED 12000 360 11040 ALI 9000 INTERSET ON CAPITAL 270 SALARY 4930 COMMISSION PROFIT #038; LOSS APPRO 23400 14200 AHMED 5400 4200 12000 – – 6000 6000 4000 23400 14200 Questions Bank 2. Mahesh and Ramesh are partners sharing profits in the ratio of 3:2 with capitals of R.O 50,000 and R.O 40,000 respectively. Interest on capital is agreed at 8% p.a. Interest on drawings is fixed at 10% p.a. The drawings of the partners were R.O 15,000 and R.O 10,000, the interest for Mahesh R.O 750 and for Ramesh R.O 500. Mahesh is entitled to a salary of R.O 12,000 p.a. and Ramesh is entitled to get a commission of 10% on the Net Profit before charging such commission. The Net Profit of the firm before making the above adjustments was R.O 60,000 for the year ended 31st March, 2005. Prepare the profit and loss appropriation account and capital Accounts Questions Bank 3. Raja and Sam were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were RO. 80,000 and RO. 60,000 respectively. The firm stared business on April 1, 2001. According to the partnership agreement interest on capital and drawings are 12% and 10% p.a. respectively. Raja and Sam are to get a monthly salary of RO. 2,000 and RO. 3,000 respectively. The profits for year ended March 31, 2002 before making above appropriation was RO. 100,300. The drawings of Raja and Sam were RO. 40,000 and RO. 50,000, respectively. Interest on drawings amounted to RO. 2,000 for Raja and RO 2,500 for Sam. Prepare Profit and Loss Appropriation Account and partners’ capital accounts assuming that their capitals are fluctuating. Questions Bank 4. The Goodwill is to be valued at two years’ purchase of last four years’ average profit. The profits were R.O 40, 000, R.O 32,000, R.O 15,000 and R.O 13,000 respectively. Find out the value of goodwill 5. Goodwill of a firm is to be valued at two years’ purchase of three years’ average profits. The profits of the last three years were: 2000 — RO. 30,000, 2001 —RO. 40,000 and 2002 — RO. 35,000. Calculate the amount of goodwill. 6. The average net profits expected in future by Khalifa and Co. are RO. 30,000 per year. The average capital employed in the business by firm is RO. 200,000. The normal rate of return on the capital employed in similar business is 10%. Calculate goodwill of the firm by: 1. Super Profit Method on the basis of two-year purchase 2. Capitalization Method Questions Bank 7. The following is the trail Balance of X and y Co. as on 31 st March, 2008. The partners sharing profits and losses in the ratio 2:1. Dr. Freehold premises Plant and Machinery Wages Opening Stock: Finished Goods Raw material Work in Progress Sundry debtors Carriage inwards Carriage outwards Factory Expenses Royalties Purchase of Raw material (net) Factory rent #038; taxes Discount Office rent Insurance Bad debts Office Expenses Salaries of works manager Cash at bank Cr. 150,000 X Capital A/c Y Capital A/c 45,000 Sundry creditors 20,000 Sales (net) Discount 40,000 20,000 18,000 50,000 Provision for bad debts 1,500 Commission 900 Y’s Loan A/c 7,500 1,500 75,000 6,500 2,900 4,000 2,000 1,500 7,500 12,000 8,200 474,000 50,000 30,000 25,000 325,000 2,500 1,500 10,000 30,000 474,000 Questions Bank The following additional information is to be taken into consideration: • Closing Stock: Finished goods R.O 50,000; Raw material R.O 30,000; Work in Progress R.O 25,000. • Outstanding liabilities: Wages R.O 5,000; Office salaries R.O 6,000 and office rent R.O 2,000. • Provision for bad debts to be adjusted to 2.5% on debtors. Insurance premium paid in advance R.O 500. • Depreciate freehold premises by 2.5% and plant and machinery by 5%. • Partnership salary to be allowed to X R.O 6,000 and to Y R.O 3,000. The loan account of Y was raised in the books before the beginning of the year. Required: prepare the Profit #038; Loss Account and the Balance Sheet. References           A Mukherjee #038; M. Hanif (2008), “Advanced Accounting”, McGraw Hill Publication A Mukherjee #038; M. Hanif (2011), “Financial Accounting”, Tata McGraw Hill Publication. A Mukherjee #038; M. Hanif (2005), “Corporate Accounting”, McGraw Hill Publication R.L gupta #038; M. Radhaswamy (2013 Volume I and II), “Corporate Accounting”, sultan chand #038; son’s publication. Haman #038; Edward A (2004). “Corporate Partnership Book”, sphinx publishing Larson, Wild #038; Chiappetta (2002), “Fundamental Accounting Principles”, Sixteen Edition, McGraw Hill Irwin Vataliya K.S. (2009) “Practical Financial Accounting: Advance Methods, Techniques and Practices”, Global Media. R.Amutha (2006) Accountancy Higher Secondary Second Year. Volume-II, fifth edition, Chennai, Tamil Nadu Text Book Corporation. P.C.Tulsian (2009) Tulsians accountancy Part A, 10th edition New Delhi , Ratna Sagar publishers T. S Reddy, A.Murthy (2013)Financial Accounting sixth revised edition, Margam Publication CONTACT INFORMATION: Name of the Faculty: Mr. FAHEEM KHAN Office: BS046 Email: [email protected] VERSION HISTORY Version No Date Approved Changes incorporated 01 Sem. (I) 2019/2020 JULY 2020 79 Assignment Question(s) (Allotted Marks: 10/15) Create your own partnership company and answer the following three questions? 1) Write the introduction and prepare the partnership deed of the company by your creativity? (300 – 400 words) 2)Pass the journal entries based on the introduction and Partnership deed, prepare partner’s capital account in fixed method and Profit and Loss Appropriation Account (400 – 500 words) 3) Give your conclusion along with bibliography based on Question 1 and 2. (200 – 300 words) management, liability, profits, or losses. Partnership, however, requires a clear outline of their firm’s specification, hence the need to develop a partnership deed. The partnership deed must contain detailed information about the name of the partnership profit and loss sharing ratio, interest on Capital, drawings, and admission of a new partner in the business. An exle of a partnership deed is as shown below; Partnership Deed This partnership deed is done in Oman on this day, March 21, 2021, between: 1.) Mr. Ibrahim, aged 22 years residing at Al Buraimi, herein take the First Party position 2.) Mr. Alshukaili, aged 24 years a resident of Muscat herein, takes the second party position Whereas we have mutually agreed to start a business of Computer Accessories or any other business partners of such terms and conditions which are appearing in the future NOW HENCEFORTH THE DEED OF PARTNERSHIP WITNESS, WE BOTH AGREE TO FOLLOW THE FOLLOWING TERMS AND CONDITIONS UNCONDITIONALLY: 1.) Name of the Partnership The name of this partnership is agreed to be IBRAHIM $ ALSHUKAILI LTD. 2.) Nature of the Business The nature of this partnership will be Selling

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