In each case pass the journal entry for goodwill adjustment and analyze the effect on capital of the adjustment. Example 1: Goodwill adjustment Three partners A, B and C run a partnership business. A has contributed $60,000 in capital and B has contributed $40,000 and C contributed $20,000. Their profit sharing ratio is 3:2:1 Case 1: D is admitted to the partnership and goodwill is valued at $24,000. Goodwill will remain in the books of the partnership and the new profit sharing ratio is 2:2:1:1 Case 2: D is admitted into the partnership. New profit sharing ratio is 2:2:1:1. No goodwill account is to be maintained in the books. Case 3: C has decided to retire from the partnership. The profit sharing ratio after his retirement will be 3:2. Goodwill will be valued at $30,000 and it will remain in the books. Case 3: C has decided to retire from the partnership. The profit sharing ratio after his retirement will be 3:2. Goodwill will be valued at $30,000 and it will not remain in the books. Example 2: Goodwill adjustment by incoming partner A and B are equal partners in a business, each contributing $50,000 to the business. C was admitted into the business on the following terms. C would introduce $30,000 cash into the business which would include $5,000 as his share of partnership goodwill. The new profit sharing ratio would be 2:2:1.
Example of Revaluation of partnership assets The following is the statement of financial position of the partnership business of A and B who shared profits and losses equally. Statement of financial position as at 31st December 2014 $ $ $ Non-current assets Plant and machinery 60,000 Motor vehicles 30,000 Premises 40,000 130,000 Current assets inventory 20,000 receivables 35,000 cash at bank 4,000 59,000 Current liabilities payables 12,000 Working capital 47,000 Capital employed 177,000 Finance by Capital Partner A 85,000 partner B 85,000 170,000 Current account Partner A Cr 10,000 Partner B Dr (3,000) 7,000 177,000
At the end of the financial year they decided to admit C into the partnership. One of the clauses of the agreement was a revaluation of the partnership assets. The revalued amounts were as follows Plant and machinery 55,000 Motor vehicles 28,000 Premises 80,000 inventory 18,000 receivables 34,000 The new partnership profit sharing ratio would be 2:2:1 Required: Prepare the revaluation account for the partnership business showing the transfers to the capital accounts.
Question: Change in partnership and goodwill calculation in the middle of the year The following information relates to the partnership of Bowler and Derby [until 30 September 1994) and Bowler Derby and Topper (from 1 October 1994). (1) The net profit for 1994 was $24,000. The profit sharing ratios changed on 1 April 1994 from Bowler 40%, Derby 60%, to equal shares. No adjustments were required to the partnership goodwill at that date. The profit sharing ratio changed again on 1 October 1994 when Topper was admitted as a partner. The share of profit became Bowler 40%, Derby 40%, and Topper 20%. (2) Topper was unable to introduce cash into the partnership, but brought in fixtures and fittings with an agreed value of $20,000. (3) On Topper s admission to the partnership, goodwill was valued at one and a half times the average net profit for 1991, 1992 and 1993. The net profit figure for 1991 was $ 12,000 and for 1993 was $ 16,000. Unfortunately a fire had destroyed the records for 1992, but it was known that tax on profits had been paid totaling $2,500, and the relevant tax rate in that year was 20% on the first $5,000 profits and 25% thereafter. (4) No goodwill account was opened in the partnership s books. (5) Topper had drawings of $1,500 in the 3 months to 31 December 1994. Required (a) Calculate the profit share for each of the three partners for 1994 (b) Show a journal entry recording the transfer of goodwill between partners at 1 October 1994. (c) Show Topper s capital account for the 3 months ended 31 December 1994 in as much detail as possible.
Question: Admission of partner in the middle of the year Brass and Smith have been partners for many years. They operate a foundry which produces a variety of metal goods which are sold from a shop attached to the foundry. The accounting year end is 31 st December and profits and losses are shared between Brass and Smith in the ratio 2: 1 respectively. On 1 April 1993 they decided to admit Fender as an additional partner and from that date profits and losses would be shared between Brass, Smith and Fender in the ratio 4:2:1 respectively. On the same date goodwill was valued at $21,000. Goodwill has not appeared in the partnership accounts in the past and it was agreed that this policy should be continued. Fender paid $19,000 into the partnership to cover both his capital contribution and his share of goodwill. All adjustments relating to goodwill were to be processed through the partners'.capital accounts. It was further agreed that from 1 st April 1993 interest of 5% per annum would be allowed on the capital account balances at that date (after making the adjustments for goodwill), and that interest would be charged on drawings as follows - Brass $360, Smith $240 and Fender $150. It was also agreed that from 1st April 1993 Smith and Fender would be allowed salaries of $8,000 per annum and $ 12,000 per/annum respectively.
The following is a list of balances as at 31 December. 1993 after the preparation of the profit and loss account: Vehicles at cost 32,000 Foundry equipment at cost 69,000 Freehold land at cost 65,000 Provision for depreciation on vehicles 24,000 Provision for depreciation on foundry equipment 51,750 Capital accounts (before goodwill adjustment) Brass 38,000 Smith 19,000 Fender 19,000 Bank overdraft 4,800 Cash in hand 1,250 Accrued expenses 1,050 Creditors 21,120 Debtors 25,950 Expenses prepaid 600 Stock at cost 7920 Drawings Brass 12,000 Smith 8,000 Fender 5,000 Net profit for the year 48,000 $ Note: Net Profits are deemed to have accrued evenly throughout the year. Required: (a). Prepare the profit and loss appropriation accounts of the partnership covering the year ended 31 December 1993. (b). Compile, for year ended 31 December 1993: (i) The partners' capital accounts (ii} the partners' current accounts (c) Prepare the partnership statement of financial position as at 31 December 1993
Question: admission and retirement simultaneously James, Peter and Paul have been in partnership for several years, trading as Goodgame and Co. On 1 st January 1982, Peter announces his intention to retire. James and Paul invite John, a young accountant, to join them in partnership. James, Peter and Paul share profits 3:2:1, respectively, and their agreement allows for interest on capitals at 5 per cent per annum. Peter finally retires on 30 June 1982, and John is admitted into the partnership on 1 July 1982. On Peter s retirement the goodwill of the business is valued at $30,000. Before John is admitted James and Paul agree to revalue the premises to $120,000 and Fittings to $18,000. Because the stock contains several obsolete items it is decided that the value should be reduced by $2,000. The agreement between James, Paul and John allows for interest on capital at 8 per cent and a partnership salary to John of $8,000 per annum. John is to receive one fourth of the profits and James and Paul are to share the remainder equally. John is asked to bring in $5,000 as his share of the goodwill and $5,000 capital. John agrees that he will leave $5,000 of his profit per annum in the business as capital until it equals $25,000. Profits will then be shared equally. Until this time John will not receive interest on his capital. On the entry of John, Paul agrees to leave his share of the goodwill brought in by John in his Capital account. James is allowed to withdraw his share of this goodwill at any time. At 31 December 1982 the following trial balance is prepared from the books. No adjustments have been made in the books for any of the items agreed at the time of the change of partnership. The only entries made are that all the payments made by John have been credited to his current account. Peter's share of the goodwill has been paid to him on 30 June 1982, and his capital account has been reduced by the same amount. He has agreed to leave the remainder in the partnership until 1 January 1983.
Trial Balance - Goodgame & Co. At 31 December 1982 $ $ Capital James 30,000 Peter 10,000 Paul 23.600 Current account James 7,500 Peter 5,500 Paul 5,100 John 10,000 Drawings- James 6,400 Peter 3,200 Paul 2,000 Net trading profit for 31 st December 1982 53,760 Freehold premises at cost 60,000 Motor vehicles at cost 22,500 Fixtures and fittings at cost 14,000 Inventory at 31 st December 1982 8,400 Bank balance 40,300 Receivables and payables 12,800 10,540 Provision for depreciation at 31 st December Fixtures and fittings 4,200 Motor vehicles 10,250 Expenses prepaid and accrues 4,040 3,190 173,640 173,640 NOTES: 1. It can be assumed that profit-accrued evenly over the year. 2. Provision for depreciation has been charged on the cost of the Fixture and Fittings and Motor Vehicles at 5 per cent per annum and 10 per cent per annum, respectively. 3. A goodwill account is not to be raised in the books and all adjustments are to be capitalized.
You are required to prepare: (i) The Capital and Current accounts of the partners, showing the adjustments necessary on the change of the partnership. (ii) The Appropriation account for the year ending 31 December 1982. (iii) The Balance Sheet at 31 December 1982.
Question: Change in terms of agreement in the middle of the year Bob and Peter had been trading as partners for the past couple of years. The business had primarily been looked after by Bob who was a major contributor to capital and managed the affairs of the business. Their profit sharing agreement allows for interest on capital at 5% per annum, a salary of $8,000 per annum for Bob and profit sharing ratio of 70:30 with Bob getting the majority of the share. Bob has now decided to reduce his involvement in the partnership because of other commitments and the partners have now decided to change the partnership agreement and become equal partners. The new profit sharing agreement will take effect from 1st July 2010 and will contain the following terms a. Interest on capital of 10% per annum for each partner b. A salary for Bob of $4,000 per annum and a commission of 10% for Peter on the net profit after interest on capital c. Profits and losses will be shared equally d. Goodwill is valued at $20,000 but will not be retained in the books e. Bob will immediately withdraw 40% of his opening capital in the form of cash and Peter will transfer $5,000 from his current account to his capital account at the end of the year. f. The partnership assets will be revalued based on the following information Book Value Revalued amount $ $ Premises 80,000 120,000 Motor vehicles 60,000 50,000 Equipment 30,000 20,000
Other relevant information is as follows. 1. Net profit for the year ended 31 st December 2010 is $50,000 2. Capital account balances for the partners at the start of the year were $80,000 for Bob and $30,000 for peter 3. Drawings during the year amounted to $20,000 for Bob and $8,000 for Peter 4. The profits accrue evenly throughout the year. 5. Opening balances on the current accounts are $1400 credit for Bob and $800 debit for Peter. Requirement: i. The partnership appropriation account ii. The Capital account iii. The current account for the year iv. The balance sheet extract for the finance by section