Chapter 10 Partnership revaluation ( 合夥重估 )

Chapter 10 Partnership revaluation ( 合夥重估 ) 10.2 Need for revaluation ( 需要重估的原因 ) Whenever there is a change in the profit and loss sharing ratio ( 損益分配比率改變 ) (A change in the profit and loss sharing ratio) or a change in the composition of a partnership (Admission of a new partner ( 新合夥人加入 ), Withdrawal or death of an old partner ( 舊合夥人退出或去世 )), all assets (including goodwill) and liabilities must be revalued ( 重估 ) and adjusting entries are required to be made immediately. should be carried out by independent professional. Gain on revaluation ( 獲得重估收益 ): Fair value (Market value) ( 公允價值 ) > Net book value ( 帳面淨值 ) Loss on revaluation ( 蒙受重估虧損 ): Fair value (Market value) ( 公允價值 ) < Net book value ( 帳面淨值 ) The overall profit or loss on revaluation of all assets and liabilities of the partnership should be shared immediately ( 應立刻攤分 ) among the old partners ( 給舊合夥人 ) in the old profit and loss sharing ratio ( 按舊的損益分配比率 ). The partners capital balances ( 合夥人的資本餘額 ) would be increased by profit on revaluation ( 重估利潤 ) or decreased by the loss on revaluation ( 重估損失 ). 10.3 Accounting entries for revaluation ( 重估所需的會計分錄 ) A revaluation account ( 重估帳戶 ) will be opened to record the gain and losses on revaluation of assets and liabilities. 1. An increase in the value of an asset ( 資產值上升 ): Dr Asset account Cr account Example 1 Classwork 1 (a) If the value of the premise has risen from $20,000 to $30,000, show the entries in the revaluation account and premises accounts. Premises 10,000 Name : Serial No: (a) If the value of the Inventory has risen from $5,000 to $8,000, show the entries in the revaluation account and inventory accounts. Inventory 3,000 Premises 10,000 2. A decrease in the value of an asset ( 資產值下跌 ): Dr account Cr Asset account (b) If the value of the premise has dropped from $30,000 to $20,000, show the entries in the revaluation account and premises accounts. Premises 10,000 Inventory 3,000 (b) If the value of the Inventory has dropped from $8,000 to $5,000, show the entries in the revaluation account and inventory accounts. Inventory 3,000 Premises 10,000 Inventory 3,000 When an asset is revalued, the balance in its corresponding contra-asset account, such as the accumulated depreciation account, should be transferred out as follows: Dr Contra-asset account Cr Asset account (c) If the accumulated depreciation of the lorry is $2,500, show the entries for the revaluation of it. Accumulated Depreciation: Lorries Lorries 2,500 Balance b/f 2,500 Lorries Accumulate depreciation: Lorries 2,500 1 (c) If the accumulated depreciation of the machine is $1,500, show the entries for the revaluation of it. Accumulated Depreciation: Machine Machine 1,500 Balance b/f 1,500 Machine Accumulate depreciation: Machine 1,500

3. An increase in the amount of a liability ( 負債額上升 ): Dr account Cr Liability account (d) If the amount of the creditor has risen from $2,000 to $3,000, show the entries in the revaluation account and creditor accounts. Creditor 1,000 Creditor 1,000 4. A decrease in the amount of a liability ( 負債額下跌 ): Dr Liability account Cr account (e) If the amount of the creditor has decreased from $3,000 to $2,000, show the entries in the revaluation account and creditor accounts. Creditor 1,000 Creditor 1,000 (d) If the amount of the bank loan has risen from $3,000 to $5,000, show the entries in the revaluation account and bank loan accounts. Bank loan 2,000 Bank loan 2,000 (e) If the amount of the bank loan has decreased from $5,000 to $3,000, show the entries in the revaluation account and bank loan accounts. Bank loan 2,000 Bank loan 2,000 5. (i) Sharing of the overall profit on revaluation ( 分配重估的整體利潤 ): Dr account Cr Partners capital accounts (old profit and loss sharing ratio) (f) A and B were partners, sharing profits and losses in the ratio of 3 : 2. If the profit of revaluation is $10,000 and the new sharing profits and losses in the ratio of 4 : 3. Profit on revaluation : A (3/5) 6,000 : B (2/5) 4,000 (f) A and B were partners, sharing profits and losses in the ratio of 1 : 2. If the profit of revaluation is $3,000 and the new sharing profits and losses in the ratio of 1 : 1. Profit on revaluation : A (1/3) 1,000 : B (1/3) 2,000 $ A B Share of profit 6,000 4,000 A B A B Share of profit 1,000 2,000 (ii) Sharing of the overall loss on revaluation ( 分配重估的整體損失 ): Dr Partners capital accounts (old profit and loss sharing ratio) Cr account (g) A and B were partners, sharing profits and losses in the ratio of 3 : 2. If the loss of revaluation is $10,000 and the new sharing profits and losses in the ratio of 4 : 3. Loss on revaluation : A (3/5) 6,000 : B (2/5) 4,000 (g) A and B were partners, sharing profits and losses in the ratio of 1 : 2. If the loss of revaluation is $3,000 and the new sharing profits and losses in the ratio of 1 : 1. Loss on revaluation : A (1/3) 1,000 : B (2/3) 2,000 A B Loss of profit 6,000 4,000 2 A B Loss of profit 1,000 2,000

Class work 2 1. Tai, Suen and Chung were in partnership. The following shows their balance sheet as at 31 December 2009: Tai, Suen and Chung Balance Sheet as at 31 December 2009 $ Buildings, at net book value 80,000 Motor vehicles, at net book value 35,500 Office fittings, at net book value 13,100 Inventory 20,400 Accounts receivable 45,300 Bank 20,700 215,000 Less Accounts payable (6,800) 208,200 Tai 95,600 Suen 64,200 Chung 48,400 208,200 The partners had shared profits and losses in the ratio: Tai 5 : Suen 3 : Chung 2. On 1 January 2010, the profit and loss sharing ratio was altered to: Tai 2, Suen 3 and Chung 5. The following assets were revalued to: buildings $175,000, motor vehicles $26,000, inventory $18,900, office fittings $10,900. The partnership s goodwill was valued at $60,000 on the same date but no goodwill account was to be opened. (a) Show the required entries in the revaluation account. (b) Draw up a balance sheet as at 1 January 2010. (a) $ Motor vehicles ($35,500 $26,000) 9,500 Buildings ($175,000 $80,000) 95,000 Inventory ($20,400 $18,900) 1,500 Office fittings ($13,100 $10,900) 2,200 Profit on revaluation : Tai (5/10) 40,900 : Suen (3/10) 24,540 : Chung (2/10) 16,360 81,800 95,000 95,000 Buildings Balance b/f 80,000 Balance c/d 175,000 Increase 95,000 175,000 175,000 Motor Vehicles Balance b/f 35,500 Reduction 9,500 Balance c/d 26,000 35,500 35,500 Inventory Balance b/f 20,400 Reduction 1,500 Balance c/d 18,900 20,400 20,400 3

Office Fittings Balance b/f 13,100 Reduction 2,200 Balance c/d 10,900 13,100 13,100 : Tai Balance c/d 154,500 Balance b/f 95,600 Goodwill adjustment 18,000 Share of profit 40,900 154,500 154,500 : Suen Balance c/d 88,740 Balance b/f 64,200 Share of profit 24,540 88,740 88,740 : Chung Goodwill adjustment 18,000 Balance b/f 48,400 Balance c/d 46,760 Share of profit 16,360 64,760 64,760 (b) Tai, Suen and Chung Balance Sheet as at 1 January 2010 Non Buildings 175,000 Motor vehicles 26,000 Office fittings 10,900 211,900 Inventory 18,900 Accounts receivable 45,300 Bank 20,700 84,900 Less Accounts payable (6,800) 78,100 290,000 Tai ($95,600 + $40,900 + $18,000 (Workings)) 154,500 Suen ($64,200 + $24,540) 88,740 Chung ($48,400 + $16,360 $18,000 (Workings)) 46,760 290,000 2. Test 1 4

Alternative adjustment method for revaluation ( 重估的另一調整方法 ) The assets and liabilities would remain ( 仍然 ) at their original book value ( 原帳面淨值 ). However, the overall profit or loss on revaluation would still be reflected ( 仍然會反映 ) in the partners capital balances ( 合夥人的資本結餘 ). Example 2 A and B were partners with capital A $30,000 and B $15,000 and the sharing profits and losses in the ratio of 2 : 1. If the profit of revaluation is $18,000 and the new sharing profits and losses in the ratio of 1 : 1, the adjusting entries in the partners capital accounts for their share of revaluation profit are: Adjustment Partner profit shared in old profit shared in new Gain (loss) from change in ratio ratio ratio Required adjustment A (2/3)$12,000 (1/2)$9,000 ($3,000) Cr : A $3,000 B (1/3)$6,000 (1/2)$9,000 $3,000 Dr : B $3,000 $18,000 $18,000 A B A B 2011 2011 Jan 1 profit adjustment 3,000 Jan 1 Balance b/f 30,000 15,000 1 Balance c/d 33,000 12,000 1 profit adjustment 3,000 33,000 15,000 33,000 15,000 or A B A B 2011 2011 Jan 1 9,000 9,000 Jan 1 Balance b/f 30,000 15,000 1 Balance c/d 33,000 12,000 1 12,000 6,000 42,000 21,000 42,000 21,000 As a result, only the partners capital balances would be affected, while all the assets and liabilities of the new partnership remain at their original book value. This alternative method of adjustment for revaluation is usually adopted by firms which value assets on a historical cost basis ( 歷史成本基準 ). Therefore, the book value of their assets would not be affected by revaluation. Class work 3 1. Wendy and Yan were partners, sharing profits and losses in the ratio of 2 : 1. Starting from 1 January 2011, they would share profits and losses equally. The following is the balance sheet of their partnership as at 31 December 2010: Wendy and Yan Balance Sheet as at 31 December 2010 $ Accumulated Net book Non Cost depreciation value Office equipment 65,000 20,000 45,000 Furniture and fittings 40,000 25,000 15,000 105,000 45,000 60,000 Inventory 20,000 Accounts receivable 20,000 Less Allowance for doubtful accounts (1,000) 19,000 Bank 13,000 52,000 Less Current Liabilities Accounts payable (24,000) Net 28,000 88,000 Financed by: account: Wendy 30,000 Yan 15,000 45,000 Current account: Wendy 23,000 Yan 20,000 43,000 88,000 The following assets were revalued on 1 January 2011: Office equipment $46,000, Furniture and fittings $11,000, inventory $18,000. An extra allowance of $1,000 was to be made for doubtful accounts. The value of other assets and liabilities remained unchanged. The assets and liabilities of the partnership would remain at their original book value. The overall profit and loss on revaluation would be reflected in the partners capital balances. 5

(a) Show the adjusting entries in the revaluation account and capital accounts. 2011 $ 2011 Jan 1 Furniture and fittings (15,000 11,000) 4,000 Jan 1 Office equipment (46,000 45,000) 1,000 1 Inventory (20,000 18,000) 2,000 1 Loss on revaluation 1 Allowance for doubtful accounts 1,000 : Wendy (2/3) 4,000 : Yan (1/3) 2,000 6,000 7,000 7,000 Adjustment Partner loss shared in loss shared in Gain (loss) from change in old ratio new ratio ratio Required adjustment Wendy (2/3)$4,000 (1/2)$3,000 $1,000 Dr : Wendy $1,000 Yan (1/3)$2,000 (1/2)$3,000 ($1,000) Cr : Yan $1,000 $6,000 $6,000 Wendy Yan Wendy Yan 2011 2011 Jan 1 loss adjustment 1,000 Jan 1 Balance b/f 30,000 15,000 1 Balance c/d 29,000 16,000 1 loss adjustment 1,000 30,000 16,000 30,000 16,000 or Wendy Yan Wendy Yan 2011 2011 Jan 1 4,000 2,000 Jan 1 Balance b/f 30,000 15,000 1 Balance c/d 29,000 16,000 1 3,000 3,000 33,000 18,000 33,000 18,000 (b) Show the balance sheet of their partnership as at 1 January 2011 (after revaluation). Wendy and Yan Balance Sheet as at 31 January 2011 $ Accumulated Net book Non Cost depreciation value Office equipment 65,000 20,000 45,000 Furniture and fittings 40,000 25,000 15,000 105,000 45,000 60,000 Inventory 20,000 Accounts receivable 20,000 Less Allowance for doubtful accounts (1,000) 19,000 Bank 13,000 52,000 Less Current Liabilities Accounts payable (24,000) Net 28,000 88,000 Financed by: account: Wendy 29,000 Yan 16,000 45,000 Current account: Wendy 23,000 Yan 20,000 43,000 88,000 6

10.4 of goodwill ( 商譽重估 ) The goodwill of a partnership should be revalued together with other separable assets and liabilities whenever there is a change in the profit and loss sharing ratio or a change in the composition of the partnership. A goodwill account was opened from an account with no goodwill account Class work 4 1. K and C had been in partnership, sharing profits and losses in the ratio of 1 : 1 respectively. They decided to admit L as a partner. He would contribute $20,000 cash as capital on 1 April 2009. In addition, the profits and losses would be shared in the ratio of K 3 : C 3 : L 2. The last balance sheet before L s admission was as follows: K and C Balance Sheet as at 31 March 2009 $ Premises, at net book value 80,000 Machinery, at net book value 30,000 Motor vehicles, at net book value 40,000 Fixtures, at net book value 8,000 Inventory 10,000 Accounts receivable 12,000 Bank 15,000 195,000 Less Accounts payable (5,000) 190,000 K 95,000 C 95,000 180,000 Upon L s admission, a goodwill account with a value of $48,000 was opened. In addition, the following assets were revalued to: premises $100,000, machinery $28,000, motor vehicles $38,000, fixtures $5,000 and inventory $9,000. You are required to: (a) Show the necessary entries in the revaluation account and capital accounts. (b) Draw up the balance sheet as at 1 April 2009. (c) Show the necessary entries in the revaluation account and capital accounts if no goodwill account was opened. (a) Goodwill 48,000 Balances c/f 48,000 $ Machinery ($30,000 $28,000) 2,000 Goodwill 48,000 Motor vehicles ($40,000 $38,000) 2,000 Premises ($100,000 $80,000) 20,000 Fixtures ($8,000 $5,000) 3,000 Inventory ($10,000 $9,000) 1,000 Profit on revaluation : K (1/2) 30,000 : C (1/2) 30,000 60,000 68,000 68,000 K C L K C L Balances c/f 125,000 125,000 20,000 Balances b/f 95,000 95,000 Share of profit 30,000 30,000 Bank 20,000 125,000 125,000 20,000 125,000 125,000 20,000 7

(b) K, C and L Balance Sheet as at 1 April 2009 Non Premises 100,000 Machinery 28,000 Motor vehicles 38,000 Fixtures 5,000 171,000 Goodwill 48,000 219,000 Inventory 9,000 Accounts receivable 12,000 Bank ($15,000 + $20,000) 35,000 56,000 Less Accounts payable (5,000) 51,000 270,000 : K 125,000 C 125,000 L 20,000 270,000 A goodwill account was not opened from an account with no goodwill account (c) $ Machinery ($30,000 $28,000) 2,000 Premises ($100,000 $80,000) 20,000 Motor vehicles ($40,000 $38,000) 2,000 Fixtures ($8,000 $5,000) 3,000 Inventory ($10,000 $9,000) 1,000 Profit on revaluation : K (1/2) 6,000 : C (1/2) 6,000 12,000 20,000 20,000 Goodwill Adjustment Partner Goodwill shared in old ratio Required entries Goodwill shared in new ratio Required entries K (1/2)$24,000 Cr : K $24,000 (3/8)$18,000 Dr : K $18,000 C (1/2)$24,000 Cr : C $24,000 (3/8)$18,000 Dr : C $18,000 L (2/8)$12,000 Dr : L $12,000 $48,000 $48,000 K Ci L K C L Goodwill (3 : 3 : 2) 18,000 18,000 12,000 Balances b/f 95,000 95,000 Balances c/f 107,000 107,000 8,000 Goodwill (1 : 1) 24,000 24,000 Share of profit 6,000 6,000 Bank 20,000 125,000 125,000 20,000 125,000 125,000 20,000 2. Test 2 8

3. Paul and Mary were partners, sharing profits and losses equally. The balance sheet of their partnership as at 31 March 2010 is as follows: Paul and Mary Balance Sheet as at 31 March 2010 $ Accumulated Net book Non Cost depreciation value Equipment 478,000 125,000 353,000 Motor vehicles 265,000 87,000 178,000 743,000 212,000 531,000 Inventory 26,200 Accounts receivable 63,500 Less Allowance for doubtful accounts (3,175) 60,325 86,525 Less Current Liabilities Accounts payable 22,540 Bank overdraft 8,795 (31,335) Net 55,190 586,190 Less Non-current liabilities Loan from Paul (60,000) 526,190 Financed by: account: Paul 274,000 Mary 175,000 449,000 Current account: Paul 94,490 Mary (17,300) 77,190 526,190 On 1 April 2010, Paul retired and Jane was admitted to the partnership on the following terms: 1 Mary and Jane were to share profits and losses in the ratio of 2 : 1 2 Jane would bring in $100,000 cash as her capital and an additional sum for her share of goodwill. 3 Goodwill was estimated to have a value of $90,000. No goodwill account was to be opened in the partnership books. 4 Equipment was revalued upwards by $16,200 and motor vehicles were to be revalued to 60% of the original cost. 5 An item of inventory costing $2,400 was estimated to have a net realizable value of $1,800. 6 Allowance for doubtful account was to be increased by 2% of accounts receivable. 7 The balance due to Paul was to be retained as a loan to the new partnership. (a) Show the entries in the revaluation account and capital accounts. (b) Draw up the balance sheet as at 1 April 2010. (a) 2010 $ 2010 Apr 1 Motor vehicles($178,000 $265,000x60%) 19,000 Apr 1Equipment 16,200 1 Inventory ($2,400 $1,800) 600 1Loss on revaluation 1 Allowance for doubtful accounts : Paul (1/2) 2,335 ($63,500 x 2%) 1,270 : Mary (1/2) 2,335 4,670 20,870 20,870 Partner Goodwill shared in old ratio Goodwill shared in new ratio Gain (loss) from change in ratio Required adjustment Paul (1/2)$45,000 ($45,000) Cr : Paul $45,000 Mary (1/2)$45,000 (2/3)$60,000 $15,000 Dr : Mary $25,000 Jane (1/3)$30,000 $30,000 Dr : Jane $30,000 $90,000 $90,000 9

Paul Mary Jane Paul Mary Jane 2011 $ 2011 $ Apr 1Goodwill adj. 25,000 30,000 Apr 1Balances b/f 274,000 175,000 1 Share of loss 2,335 2,335 1Bank 100,000 1Loan from Paul 411,155 1 Bank Share of goodwill 30,000 1Balance c/d 157,665 100,000 1Goodwill adj. 45,000 1Current 94,490 413,490 175,000 130,000 413,490 175,000 130,000 or Paul Mary Jane Paul Mary Jane 2011 $ 2011 $ Apr 1Goodwill (2 : 1) 60,000 30,000 Apr 1Balances b/f 274,000 175,000 1 Share of loss 2,335 2,335 1Bank 100,000 1Loan from Paul 411,155 1 Bank Share of goodwill 30,000 1Balance c/d 157,665 100,000 1Goodwill (1 : 1) 45,000 45,000 1Current 94,490 413,490 220,000 130,000 413,490 220,000 130,000 (b) Paul and Mary Balance Sheet as at 31 March 2010 $ Accumulated Net book Non Cost depreciation value Equipment ($353,000 + $16,200) 369,200 369,200 Motor vehicles ($265,000x60%) 159,000 159,000 528,000 528,000 Inventory ($26,200 $600) 25,600 Accounts receivable 63,500 Less Allowance for doubtful accounts ($3,175 $1,270) (4,445) 59,055 Bank ( $8,795 + $100,000 + $30,000) 121,205 205,860 Less Current Liabilities Accounts payable (22,540) Net 183,320 711,520 Less Non-current liabilities Loan from Paul ($60,000 + $411,155) (471,155) 240,365 Financed by: account: Mary 157,655 Jane 100,000 257,665 Current account: Mary (17,300) Jane (17,300) 240,365 10

HKCEE (2009, 4) Ivan and Joe were in partnership sharing profits and losses in the ratio of 2 : 3 respectively. The balance sheet as at 31 December 2008 was as follows: Owing to shortage of cash, Ivan and Joe agreed to admit Kerry as a partner on the following terms: (i) Ivan, Joe and Kerry were to share profits and losses in the ratio 3 : 2 : 1 respectively. (ii) Partner The motor Goodwill vehicles shared were in to old be ratio revalued Goodwill to 80% shared of the in book new value ratio and Gain the (loss) equipment from change was to in be ratio revalued Required upwards adjustment by $20,000. (iii) Ivan Stock was to (2/5)$120,000 be revalued to $35,000 (3/6)$150,000 $30,000 Dr : Ivan $30,000 (iv) Joe Only 98% of the (3/5)$180,000 debtors were expected to be (2/6)$100,000 collectible. ($80,000) Cr : Joe $80,000 (v) Kerry Kerry was to introduce $200,000 as capital and (1/6)$50,000 his share of goodwill was to be $50,000. Dr : Kerry $50,000 (vi) No goodwill account $300,000 was to be opened in the $300,000 books of the partnership. REQUIRED: (a) Prepare the revaluation account of the partnership. (b) For each of the following independent situations, prepare the journal entries related to the partners capital accounts to record the admission of Kerry: Ivan Joe Kerry Ivan Joe Kerry (1) Kerry paid cash into the partnership $ for his $ capital contribution, $ plus the amount for his share of goodwill. $ Goodwill (2) (3:2:1) Kerry paid cash into the 150,000 partnership 100,000 for his capital 50,000 contribution. Balances b/f 300,000 240,000 (3) Kerry brought in motor vehicles of $120,000 and stock of Goodwill $80,000 (2:3) to the partnership as his 120,000 capital contribution 180,000 and paid Balance c/f Ivan and Joe privately for his share of goodwill. (Note: Narrations are not required.) Cash 1,032,000 (a) Motor vehicles ($430,000 x 20%) 86,000 Equipment 20,000 Stock ($40,000 $35,000) 5,000 loss Provision for bad debts ($38,500 x 2%) 770 Ivan (2/5) 28,708 Joe (3/5) 43,062 71,770 91,770 91,770 (b) Journal Details Dr Cr (1) Cash ($200,000 + $50,000) 250,000 Ivan 30,000 Joe 80,000 Kerry 200,000 (2) Cash 200,000 Ivan 30,000 Joe 80,000 Kerry 150,000 (3) Motor vehicles 120,000 Stock 80,000 Kerry 200,000 11

HKALE (2006, Paper 1, 2) Robert and William commenced their partnership on 1 January 2005. Their partnership agreement included the following terms: 1 Robert and William are to introduce cash of $70,000 and $90,000, respectively as capital. Additionally, Robert is to bring in office equipment at a fair value of $40,000. 2 A fixed capital account is to be maintained for each partner. 3 Robert and William are entitled to partners salaries annually in the amounts of $150,000 and $180,000, respectively. 4 Profits and losses are to be shared equally. No proper books and accounts had been kept by the partnership. The following relates to the year ended 31 December 2005: (i) All transactions were made through the business bank account. A summary of receipts and payments based on the bank statements for the 12 months from January to December 2005 is given below: Receipts Receipts from trade debtors 5,828,760 introduced: Robert 70,000 William 90,000 5,988,760 Payments Payments to suppliers (net of refund) 3,474,000 Purchase of office equipment 360,000 Office rent 279,000 Rental deposit 23,250 Salaries paid to office staff 940,000 Drawings: Robert 120,000 William 150,000 Miscellaneous expenses 441,260 5,787,510 Balance as at 31 December 2005 201,250 (ii) It was ascertained from the bank statement for the month of December 2005 that a cheque of $225,000 paid to a supplier had not been presented for payment. (iii) All sales were made on credit. A 2% cash discount was granted to trade debtors who settled their accounts within 15 days of sales. During the year, discounts had been allowed on cash receipts of $158,760 from trade debtors. (iv) Goods were sold to customers at a standard mark up of 80%. During the year, credit notes amounting to $210,600 were issued for goods returned by customers. These goods were ultimately returned to the supplier for a full refund. There were no other purchase returns during the year. (v) During the year 2005, Robert drew goods with a sale value of $32,400. (vi) A two-year tenancy agreement for the office premises commenced on 1 January 2005. Apart from the monthly rental of $23,250 payable on the first day of each month, a rental deposit of $23,250 was also paid on 1 January 2005. (vii) Provision for depreciation on all fixed assets was calculated at an annual rate of 20% using the reducing balance method. (viii) A cheque was mistakenly drawn as $800 for the payment of an electricity bill of $500 for the month of December. The cheque had been sent out and cleared. In addition, a cheque of $2,790 was drawn for paying the gas bill for Robert s private residence. These electricity and gas expenses were included as miscellaneous expenses. (ix) Balances at 31 December 2005 included: Trade debtors The reason for $639,900 refund in credit side of Creditor: Trade creditors $594,000 Firstly, we enter the returns outwards in the debit side because we need to Inventories $679,500 (at cost) Bonus accrued to office staff deduct the returns $40,000 outwards in the amount of owing of creditors However, the amount of returns outwards is fully refund so we need to add back You are required to: (a) Prepare for the partnership the business amount of Robert of returns and William outwards the trading to settle and profit the deducting and loss and amount. appropriation Hence account we credit for the year ended 31 December 2005 and the balance sheet as at 31 December 2005. the refund in credit side of Creditor. This is the oppose side of Bank account. W1 Sales for the year Debtors Sales (balancing figure) 6,682,500 Bank 5,828,760 Discount allowed (158,760 x 2/98) 3,240 Returns inwards 210,600 Balance c/d 639,900 6,682,500 6,682,500 W2 Purchases for the year Creditors Bank (3,474,000 + 225,000 + 117,000) 3,816,000 Purchases (balancing figure) 4,410,000 Returns outwards 117,000 Bank: refund 117,000 Balance c/d 594,000 4,527,000 4,527,000 12

Robert and William Trading and profit and loss and appropriation account for the year ended 31 December 2005 Sales (W1) 6,682,500 Less: Returns inwards 210,600 6,471,900 Less: Cost of goods sold: Purchases (W2) 4,410,000 Less Returns outwards 117,000 Drawings [32,400 (1 + 80%)] 18,000 4,275,000 Less Closing inventory 679,500 3,595,500 Gross profit 2,876,400 Less Depreciation: Office equipment [(40,000 + 360,000) x 20%] 80,000 Office rent (23,250 x 12) 279,000 Salaries to staff (940,000 + 40,000) 980,000 Miscellaneous expenses (441,260 300 2,790 ) 438,170 Discounts allowed 3,240 1,780,410 Net profit 1,095,990 Less Partners salaries Robert 150,000 William 180,000 330,000 765,990 Share of profit Robert (1/2) 382,995 William (1/2) 382,995 765,990 Robert and William Trading and profit and loss and appropriation account for the year ended 31 December 2005 $ Fixed assets Office equipment at cost 400,000 Provision for depreciation (80,000) 320,000 Inventories 679,500 Trade debtors 639,900 Rental deposit 23,250 Prepaid electricity expenses 300 1,342,950 Current laibilities Trade creditors (594,000) Accrued bonus (40,000) Bank overdraft (201,250 225,000) (23,750) (657,750) 685,200 1,005,200 Robert William account 110,000 90,000 200,000 Current account Partner salaries 150,000 180,000 Share of profit 382,995 382,995 Drawings (120,000 + 2,790 + 18,000) (140,790) (150,000) 392,205 412,995 805,200 13 1,005,200

On 1 January 2006, Paul was admitted to the partnership. The terms of the new partnership agreement are as follows: (1) Each partner is to maintain a fixed capital account of $400,000 each. Any surplus or deficiency in the capital accounts of Robert and William is to be made up by a transfer to or from their current accounts. (2) Paul is to introduce each to pay for the fixed capital and his share of goodwill. In addition, he is to make a loan of $200,000 to the business. (3) Robert, William and Paul are entitled to partners salaries annually in the amounts of $150,000, $180,000 and $210,000 respectively. (4) Profits and losses are to be shared equally. Upon Paul s admission to the partnership, it was agreed that the following revaluations were to be made: (i) Office equipment was to be revalued at $280,000. (ii) Inventories were to be revalued upwards by 60%. (iii) Uncollectible trade debts were estimated to be $22,900. Goodwill was valued at 3 years purchase of the super profit after the deduction of partners salaries. The average annual net profit for the business was estimated to be $1,100,000. The industry average return on net assets was 10%. For the purpose of calculating goodwill, the fair value of the net assets for the business was agreed to be $1,380,000 (Ignore the asset revaluations in (i) to (iii) above.). It was decided that no account is to be kept for goodwill. You are required to: (b) Prepare the partners capital accounts at 1 January 2006 in columnar form. (c) Explain why most partnership businesses prefer not to maintain a goodwill account even though its fair value has been estimated upon changes in the partnership. Robert William Paul Robert William Paul Goodwill (1:1:1) 632,000 632,000 632,000 Balances b/f 110,000 90,000 Current (balancing figure) 198,400 178,400 Goodwill (1:1) 948,000 948,000 Balance c/f 400,000 400,000 400,000 Share of profit 172,400 172,400 Cash 1,032,000 1,230,400 1,210,400 1,032,000 1,230,400 1,210,400 1,032,000 W3 Goodwill $ Net profit 1,100,000 Partners salaries (150,000 + 180,000) (330,000) Industry average return on net assets (1,380,000 x 10%) (138,000) Super profit 632,000 Goodwill = 3 x $632,000 = $1,896,000 Goodwill Adjustment Partner Goodwill shared in old ratio Required entries Goodwill shared in new ratio Required entries Robert (1/2)$948,000 Cr : Robert $948,000 (1/3)$632,000 Dr : Robert $632,000 William (1/2)$ 948,000 Cr : William $948,000 (1/3)$632,000 Dr : William $632,000 Paul (1/3)$632,000 Dr : Paul $632,000 $1,896,000 $1,896,000 W4 profit Office equipment (320,000 280,000) 40,000 Inventory (679,500 x 60%) 407,700 Provision for doubtful debts 22,900 Balance c/f 344,800 407,700 407,700 (c) Reasons for not maintaining goodwill account: valuation may be subjective; estimated value may not be reliable not arise from arms length transaction intangible nature of the asset relationship with future economic benefit not easily identifiable or measurable 14

A goodwill account was opened from an account with opening goodwill account A and T were partners, sharing profit and losses in the ratio of 3 : 2. Their balance sheet as at 31 December 2010 was shown as follows: A and T Balance Sheet as at 31 December 2010 $ Non-current assets accounts Fixtures, at net book value 98,600 A 210,000 Goodwill 194,000 T 177,000 292,600 387,000 Inventory 39,000 Current liabilities Accounts receivable 49,500 Accounts payable 5,470 Bank 11,370 99,870 392,470 392,470 They decided to admit C into the partnership on 1 January 2011, with the profit and loss sharing ratio being changed to: A 5, T 3 and C 2. C would introduce $110,000 cash as capital. of assets was then made as follows: fixtures at $110,000 and inventory at $36,400. An allowance of $1,500 was to be made for doubtful accounts. If Goodwill was revalued at $250,000 if a goodwill account was opened. Show the necessary entries in the revaluation account. $ Inventory ($39,000 $36,400) 2,600 Fixtures ($110,000 $98,600) 11,400 Allowance for doubtful accounts 1,500 Goodwill ($250,000 $194,000) 56,000 Profit on revaluation : A (3/5) 37,980 : T (2/5) 25,320 63,300 67,400 67,400 A T C A T C Balances c/d 247,980 202,320 110,000 Balances b/f 210,000 177,000 Share of profit 37,980 25,320 Cash 110,000 247,980 202,320 110,000 247,980 202,320 110,000 Goodwill Balance b/f 194,000 Balance c/f 250,000 56,000 250,000 250,000 A and T Balance Sheet as at 31 December 2010 $ Non-current assets accounts Fixtures, at net book value 110,000 A 247,980 Goodwill 250,000 T 202,320 360,000 C 110,000 560300 Inventory 36,400 Current liabilities Accounts receivable 49,500 Accounts payable 5,470 Less Allowance for doubtful accounts 1,500 48,000 Bank ($11,370 + $110,000) 121,370 565,770 565,770 15

Class work 5 1. Jimmy and Sam have been partners for many years. On 1 January 2009, they changed the profit and loss sharing ratio from: Jimmy 3 : Sam 1 to Jimmy 1 : Sam 1. At the same time, goodwill was valued at $20,000 and credited to the partners capital accounts in the old ratio. On 1 January 2011, Steve was admitted as a new partner and required to bring in $20,000 cash as capital. Moreover, the profit and loss sharing ratio was changed as follows: Jimmy 2 : Sam 2 : Steve 1. The following is the balance sheet of the partnership as at 31 December 2010: Jimmy and Sam Balance Sheet as at 31 December 2010 $ Accumulated Net book Non Cost depreciation value Machinery 78,000 24,000 54,000 Motor vehicles 64,000 28,000 36,000 142,000 52,000 90,000 Goodwill 20,000 110,000 Inventory 17,800 Accounts receivable 24,200 Cash and bank 14,300 56,300 Less Current Liabilities Accounts payable (19,100) Net 37,200 147,200 Financed by: account: Jimmy 40,000 Sam 40,000 80,000 Current account: Jimmy 35,800 Sam 31,400 67,200 147,200 The following assets were revalued on 1 January 2011: Machinery $79,800, Motor vehicles $30,000, Goodwill $30,000 and inventory $16,000. Adjusting entries are required in the partners capital accounts immediately upon the admission of Steve. Show the entries in the revaluation account, capital accounts and balance sheet at 1 January 2011 if a goodwill account was opened. 2011 2011 $ Jan 1 Motor vehicles ($36,000 $30,000) 6,000 Jan 1 Machinery ($79,800 $54,000) 25,800 1 Inventory ($17,800 $16,000) 1,800 1 Goodwill ($30,000 $20,000) 10,000 1 Profit on revaluation : Jimmy (1/2) 14,000 : Sam (1/2) 14,000 28,000 35,800 35,800 Goodwill 2011 $ 2011 $ Jan 1 Balance b/f 20,000 Jan 1 Balance c/f 30,000 1 10,000 30,000 30,000 Jimmy Sam Steve Jimmy Sam Steve 2011 $ 2011 $ Jan 1 Balance c/d 54,000 54,000 20,000 Jan 1 Balances b/f 40,000 40,000 1 Cash 20,000 1 Share of profit 14,000 14,000 54,000 54,000 20,000 54,000 54,000 20,000 16

Jimmy and Sam Balance Sheet as at 1 January 2011 $ Accumulated Net book Non Cost depreciation value Machinery 79,800 79,800 Motor vehicles 30,000 30,000 109,000 109,800 Goodwill 30,000 139,800 Inventory 16,000 Accounts receivable 24,200 Cash and bank ($14,300 + $20,000) 34,300 74,500 Less Current Liabilities Accounts payable (19,100) Net 55,400 195,200 Financed by: account: Jimmy 54,000 Sam 54,000 Steve 20,000 128,000 Current account: Jimmy 35,800 Sam 31,400 67,200 195,200 2. Test 3 17

A goodwill account was not opened from an account with opening goodwill account (with all other assets and liabilities stated at revalued amounts) A and T were partners, sharing profit and losses in the ratio of 3 : 2. Their balance sheet as at 31 December 2010 was shown as follows: A and T Balance Sheet as at 31 December 2010 $ Non-current assets accounts Fixtures, at net book value 98,600 A 210,000 Goodwill 194,000 T 177,000 292,600 387,000 Inventory 39,000 Current liabilities Accounts receivable 49,500 Accounts payable 5,470 Bank 11,370 99,870 392,470 392,470 They decided to admit C into the partnership on 1 January 2011, with the profit and loss sharing ratio being changed to: A 5, T 3 and C 2. C would introduce $110,000 cash as capital. of assets was then made as follows: fixtures at $110,000 and inventory at $36,400. An allowance of $1,500 was to be made for doubtful accounts. Goodwill was revalued at $250,000 but would not be entered in the books of the new partnership. Since the goodwill would not be entered in the book, we need to deduct back the goodwill from the capital account according to the partners old sharing ratio. The capital balances on 31 December 2010 with no goodwill are: 1. Find the original goodwill shared in old ratio: Partner Calculation Original Goodwill shared in old ratio A 194,000 x 3/5 116,400 T 194,000 x 2/5 77,600 2. Deduct back the goodwill from the capital account. (Sometimes, we start with the opening balance of adjusting amount so this step may be omitted.) A T C A T C Goodwill 116,400 77,600 Balances b/f 210,000 177,000 Balance c/d 93,600 99,400 210,000 177,000 210,000 177,000 Goodwill Balance b/f 194,000 : A (3/5) 116,400 T (2/5) 77,600 194,000 194,000 The goodwill account will be zero balance and closed. 3. Make the entries in the revaluation account without goodwill $ Inventory ($39,000 $36,400) 2,600 Fixtures ($110,000 $98,600) 11,400 Allowance for doubtful accounts 1,500 Profit on revaluation : A (3/5) 4,380 : T (2/5) 2,920 7,300 11,400 11,400 The profit on revaluation of A = 4,380 The profit on revaluation of B = 2,920 18

4. Find the goodwill adjustments in the partners capital account for the admission of partners on 1 January 2011. Partner Goodwill shared in old ratio Goodwill shared in new ratio Gain (loss) from change in ratio Required adjustment A (3/5)$150,000 (5/10)$125,000 ($25,000) Cr : A $25,000 T (2/5)$100,000 (3/10)$75,000 ($25,000) Cr : T $25,000 C (2/10)$50,000 $50,000 Dr : C $50,000 $250,000 $250,000 5. Make the entries for revaluation and goodwill adjustment in partners capital accounts for the admission of partners when a goodwill account is not opened. A T C A T C Goodwill adj. 50,000 Balances b/f 93,600 99,400 Balance b/f 122,980 127,320 60,000 Share of profit 4,380 2,920 Goodwill adj. 25,000 25,000 Cash 110,000 122,980 127,320 110,000 122,980 127,320 110,000 Usually, we make the step 2 and 5 together and the adjustment entries of capital account would be: A T C A T C Goodwill 116,400 77,600 Balances b/f 210,000 177,000 Balance c/d 93,600 99,400 210,000 177,000 210,000 177,000 Goodwill adj. 50,000 Balances b/f 93,600 99,400 Balance b/f 122,980 127,320 60,000 Share of profit 4,380 2,920 Goodwill adj. 25,000 25,000 Cash 110,000 122,980 127,320 110,000 122,980 127,320 110,000 6. Draw up the balance sheet as at 31 December 2010. A and T Balance Sheet as at 31 December 2010 $ Non-current assets accounts Fixtures, at net book value 110,000 A 122,980 T 127,320 C 60,000 310300 Inventory 36,400 Current liabilities Accounts receivable 49,500 Accounts payable 5,470 Less Allowance for doubtful accounts 1,500 48,000 Bank ($11,370 + $110,000) 121,370 315,770 315,770 19

Class work 6 1. Jimmy and Sam have been partners for many years. On 1 January 2009, they changed the profit and loss sharing ratio from: Jimmy 3 : Sam 1 to Jimmy 1 : Sam 1. At the same time, goodwill was valued at $20,000 and credited to the partners capital accounts in the old ratio. On 1 January 2011, Steve was admitted as a new partner and required to bring in $20,000 cash as capital. Moreover, the profit and loss sharing ratio was changed as follows: Jimmy 2 : Sam 2 : Steve 1. The following is the balance sheet of the partnership as at 31 December 2010: Jimmy and Sam Balance Sheet as at 31 December 2010 $ Accumulated Net book Non Cost depreciation value Machinery 78,000 24,000 54,000 Motor vehicles 64,000 28,000 36,000 142,000 52,000 90,000 Goodwill 20,000 110,000 Inventory 17,800 Accounts receivable 24,200 Cash and bank 14,300 56,300 Less Current Liabilities Accounts payable (19,100) Net 37,200 147,200 Financed by: account: Jimmy 40,000 Sam 40,000 80,000 Current account: Jimmy 35,800 Sam 31,400 67,200 147,200 The following assets were revalued on 1 January 2011: Machinery $79,800, Motor vehicles $30,000, Goodwill $30,000 and inventory $16,000. Adjusting entries are required in the partners capital accounts immediately upon the admission of Steve. Show the entries in the revaluation account, capital accounts and balance sheet at 1 January 2011 if a goodwill account was not opened. Since the goodwill was not opened, we need to deduct the goodwill back from the capital account according to the partners old sharing ratio. The capital balances on 31 December 2010 with no goodwill are: 1. Find the original goodwill shared in old ratio: Partner Calculation Original Goodwill shared in old ratio Jimmy 20,000 x 3/4 15,000 Sam 20,000 x 1/4 5,000 2. Deduct back the goodwill from the capital account. Jimmy Sam Jimmy Sam Goodwill 15,000 5,000 Balances b/f 40,000 40,000 Balance c/f 25,000 35,000 40,000 40,000 40,000 40,000 Goodwill Balance b/f 20,000 : Jimmy (3/4) 15,000 Sam (1/4) 5,000 20,000 20,000 20

3. Find the goodwill adjustments in the partners capital account for the changing in the profit and loss sharing ratio when a goodwill account is not opened. The goodwill adjustments made in capital accounts on 1 January 2009 would be as follows: Partner Goodwill shared in old ratio Goodwill shared in new ratio Gain (loss) from change in ratio Required adjustment Jimmy (3/4)$15,000 (1/2)$10,000 ($5,000) Cr : Jimmy $5,000 Sam (1/4)$5,000 (1/2)$10,000 $5,000 Dr : Sam $5,000 $20,000 $20,000 4. Make the entries for goodwill adjustment in partners capital accounts for the changing in the profit and loss sharing ratio when a goodwill account is not opened. Jimmy Sam Jimmy Sam Goodwill adjustment 5,000 Balances b/f 25,000 35,000 Balance c/d 30,000 30,000 Goodwill adjustment 5,000 30,000 35,000 30,000 35,000 or Jimmy Sam Jimmy Sam Goodwill (1 : 1) 10,000 10,000 Balances b/f 25,000 35,000 Balance c/d 30,000 30,000 Goodwill (3 : 1) 15,000 5,000 40,000 40,000 40,000 40,000 5. Make the entries in the revaluation account without goodwill $ Motor vehicles ($36,000 $30,000) 6,000 Machinery ($79,800 $54,000) 25,800 Inventory ($17,800 $16,000) 1,800 Profit on revaluation : Jimmy (1/2) 9,000 : Sam (1/2) 9,000 18,000 25,800 25,800 6. Find the goodwill adjustments in the partners capital account for the admission of partners when a goodwill account is not opened. The goodwill adjustments made in capital accounts on 1 January 2009 would be as follows: Partner Goodwill shared in old ratio Goodwill shared in new ratio Gain (loss) from change in ratio Required adjustment Jimmy (1/2)$15,000 (2/5)$12,000 ($3,000) Cr : Jimmy $3,000 Sam (1/2)$15,000 (2/5)$12,000 ($3,000) Cr : Sam $3,000 Steve (1/5)$6,000 $6,000 Dr : Steve $6,000 $30,000 $30,000 7. Make the entries for revaluation and goodwill adjustment in partners capital accounts for the admission of partners when a goodwill account is not opened. Jimmy Sam Steve Jimmy Sam Steve Goodwill adj. 6,000 Balances b/f 30,000 30,000 Balance c/d 42,000 42,000 14,000 Cash 20,000 Share of profit 9,000 9,000 Goodwill adj. 3,000 3,000 42,000 42,000 20,000 42,000 42,000 20,000 21

or Jimmy Sam Steve Jimmy Sam Steve Goodwill (2 : 2 : 1) 12,000 12,000 6,000 Balances b/f 30,000 30,000 Balance c/d 42,000 42,000 14,000 Cash 20,000 Share of profit 9,000 9,000 Goodwill (1 : 1) 15,000 15,000 54,000 54,000 20,000 54,000 54,000 20,000 We make the step 2, 5 and 7 together and the adjustment entries of capital account would be: Jimmy Sam Steve Jimmy Sam Steve Goodwill 15,000 5,000 Balances b/f 40,000 40,000 Balance c/f 25,000 35,000 40,000 40,000 40,000 40,000 Goodwill adjustment 5,000 Balances b/f 25,000 35,000 Balance c/d 30,000 30,000 Goodwill adjustment 5,000 30,000 35,000 30,000 35,000 Goodwill adjustment 6,000 Balances b/f 30,000 30,000 Balance c/d 42,000 42,000 14,000 Cash 20,000 Share of profit 9,000 9,000 Goodwill adjustment 3,000 3,000 42,000 42,000 20,000 42,000 42,000 20,000 8. Draw up the balance sheet as at 31 December 2010. Jimmy and Sam Balance Sheet as at 31 December 2010 $ Accumulated Net book Non Cost depreciation value Machinery 79,800 79,800 Motor vehicles 30,000 30,000 109,800 109,800 Inventory 16,000 Accounts receivable 24,200 Cash and bank ($14,300 + $20,000) 34,300 74,500 Less Current Liabilities Accounts payable (19,100) Net 55,400 165,200 Financed by: account: Jimmy 42,000 Sam 42,000 Steve 14,000 98,000 Current account: Jimmy 35,800 Sam 31,400 67,200 165,200 22

2. Au and Tong were partners, sharing profit and losses in the ratio of 3 : 2. Their balance sheet as at 31 December 2010 was shown as follows: Au and Tong Balance Sheet as at 31 December 2010 Non- Fixtures, at net book value 98,600 Goodwill 194,000 292,600 Inventory 39,000 Accounts receivable 49,500 Bank 11,370 99,870 Less Current liabilities Accounts payable (5,470) Net current assets 94,400 387,000 Goodwill : Au 210,000 Tong 177,000 Balance b/f 194,000 : Au (3/5) 150,000 387,000 56,000 Tong (2/5) 100,000 250,000 250,000 They decided to admit Chu into the partnership on 1 January 2011, with the profit and loss sharing ratio being changed to: Au 5, Tong 3 and Chu 2. Chu would introduce $110,000 cash as capital. of assets was then made as follows: fixtures at $110,000 and inventory at $36,400. An allowance of $1,500 was to be made for doubtful accounts. Goodwill was revalued at $250,000 but would not be entered in the books of the new partnership. Show the necessary entries in (a) The revaluation account. (b) The partners capital accounts in columnar form. Answer: (a) $ Inventory ($39,000 $36,400) 2,600 Fixtures ($110,000 $98,600) 11,400 Allowance for doubtful accounts 1,500 Goodwill ($250,000 $194,000) 56,000 Profit on revaluation : Au (3/5) 37,980 : Tong (2/5) 25,320 63,300 67,400 67,400 (b) Au Tong Chu Au Tong Chu Goodwill 150,000 100,000 Balances b/f 210,000 177,000 Balance c/d 97,980 102,320 Share of profit 37,980 25,320 247,9800 202,3200 247,9800 202,3200 Goodwill (5 : 3 : 2) 125,000 75,000 50,000 Balances b/f 97,980 102,320 Balance c/d 122,980 127,320 60,000 Bank 110,000 Goodwill (3 : 2) 150,000 100,000 247,980 202,320 110,000 247,980 202,320 110,000 23

A goodwill account was not opened from an account with opening goodwill account (with all other assets and liabilities stated at original book value) A and T were partners, sharing profit and losses in the ratio of 3 : 2. Their balance sheet as at 31 December 2010 was shown as follows: A and T Balance Sheet as at 31 December 2010 $ Non-current assets accounts Fixtures, at net book value 98,600 A 210,000 Goodwill 194,000 T 177,000 292,600 387,000 Inventory 39,000 Current liabilities Accounts receivable 49,500 Accounts payable 5,470 Bank 11,370 99,870 392,470 392,470 They decided to admit C into the partnership on 1 January 2011, with the profit and loss sharing ratio being changed to: A 5, T 3 and C 2. C would introduce $110,000 cash as capital. of assets was then made as follows: fixtures at $110,000 and inventory at $36,400. An allowance of $1,500 was to be made for doubtful accounts. Goodwill was revalued at $250,000 but would not be entered in the books of the new partnership. If all other assets and liabilities of the new partnership remained at their original book value and there was no goodwill account, the overall profit on revaluation and necessary goodwill adjustments would be reflected in the partners capital account. Since the goodwill would not be entered in the book, we need to deduct back the goodwill from the capital account according to the partners old sharing ratio. The capital balances on 31 December 2010 with no goodwill are: 1. Find the original goodwill shared in old ratio: Partner Calculation Original Goodwill shared in old ratio A 194,000 x 3/5 116,400 T 194,000 x 2/5 77,600 2. Deduct back the goodwill from the capital account. A T C A T C Goodwill 116,400 77,600 Balances b/f 210,000 177,000 Balance c/f 93,600 99,400 210,000 177,000 210,000 177,000 Goodwill Balance b/f 194,000 : A (3/5) 116,400 T (2/5) 77,600 194,000 194,000 The goodwill account will be zero balance and closed. 3. Make the entries in the revaluation account without goodwill $ Inventory ($39,000 $36,400) 2,600 Fixtures ($110,000 $98,600) 11,400 Allowance for doubtful accounts 1,500 Profit on revaluation : A (3/5) 4,380 : T (2/5) 2,920 7,300 11,400 11,400 The profit on revaluation of A = 4,380 The profit on revaluation of B = 2,920 24

4. Find the goodwill adjustments in the partners capital account for the admission of partners when a goodwill account is not opened on 1 January 2011. The goodwill adjustments made in capital accounts on 1 January 2011 would be as follows: Partner Goodwill shared in old ratio Goodwill shared in new ratio Gain (loss) from change in ratio Required adjustment A (3/5)$150,000 (5/10)$125,000 ($25,000) Cr : A $25,000 T (2/5)$100,000 (3/10)$75,000 ($25,000) Cr : T $25,000 C (2/10)$50,000 $50,000 Dr : C $50,000 $250,000 $250,000 5. Find the revaluation adjustments in the partners capital account for the admission of partners when all other assets and liabilities of the new partnership remained at their original book value and there was no goodwill account. Adjustment Partner profit shared in profit shared in Gain (loss) from change in ratio old ratio new ratio Required adjustment A (3/5)$4,380 (5/10)$3,650 ($730) Cr : A $730 T (2/5)$2,920 (3/10)$2,190 ($730) Cr : T $730 C (2/10)$1,460 $1,460 Dr : C $1,460 $7,300 $7,300 6. Make the entries for revaluation adjustment and goodwill adjustment in partners capital accounts for the admission of partners when all other assets and liabilities of the new partnership remained at their original book value and there was no goodwill account. A T C A T C Goodwill adj. 50,000 Balances b/f 93,600 99,400 profit adj. 1,460 Goodwill adj. 25,000 25,000 Balance c/f 119,330 125,130 58,540 Cash 110,000 profit adj. 730 730 119,330 125,130 110,000 119,330 125,130 110,000 or A T C A T C Goodwill 125,000 75,000 50,000 Balances b/f 93,600 99,400 3,650 2,190 1,460 Goodwill 150,000 100,000 Balance c/f 119,330 125,130 58,540 Cash 110,000 4,380 2,920 247,980 202,320 110,000 247,980 202,320 110,000 7. Draw up the balance sheet as at 31 December 2010. A and T Balance Sheet as at 31 December 2010 $ Non-current assets accounts Fixtures, at net book value 98,600 A 119,330 T 125,130 C 58,540 303,000 Inventory 39,000 Current liabilities Accounts receivable 49,500 Accounts payable 5,470 Bank ($11,370 + $110,000) 121,370 209,870 308,470 308,470 25

Class work 7 Jimmy and Sam have been partners for many years. On 1 January 2009, they changed the profit and loss sharing ratio from: Jimmy 3 : Sam 1 to Jimmy 1 : Sam 1. At the same time, goodwill was valued at $20,000 and credited to the partners capital accounts in the old ratio. On 1 January 2011, Steve was admitted as a new partner and required to bring in $20,000 cash as capital. Moreover, the profit and loss sharing ratio was changed as follows: Jimmy 2 : Sam 2 : Steve 1. The following is the balance sheet of the partnership as at 31 December 2010: Jimmy and Sam Balance Sheet as at 31 December 2010 $ Accumulated Net book Non Cost depreciation value Machinery 78,000 24,000 54,000 Motor vehicles 64,000 28,000 36,000 142,000 52,000 90,000 Goodwill 20,000 110,000 Inventory 17,800 Accounts receivable 24,200 Cash and bank 14,300 56,300 Less Current Liabilities Accounts payable (19,100) Net 37,200 147,200 Financed by: account: Jimmy 40,000 Sam 40,000 80,000 Current account: Jimmy 35,800 Sam 31,400 67,200 147,200 The following assets were revalued on 1 January 2011: Machinery $79,800, Motor vehicles $30,000, Goodwill $30,000 and inventory $16,000. Adjusting entries are required in the partners capital accounts immediately upon the admission of Steve. Show the entries in the revaluation account, capital accounts and balance sheet at 1 January 2011 for all other assets and liabilities stating at original book value when a goodwill account was not opened. Since the goodwill was not opened, we need to deduct the goodwill back from the capital account according to the partners old sharing ratio. The capital balances on 31 December 2010 with no goodwill are: 1. Find the original goodwill shared in old ratio: Partner Calculation Original Goodwill shared in old ratio Jimmy 20,000 x 3/4 15,000 Sam 20,000 x 1/4 5,000 2. Deduct back the goodwill from the capital account. Jimmy Sam Jimmy Sam Goodwill 15,000 5,000 Balances b/f 40,000 40,000 Balance c/f 25,000 35,000 40,000 40,000 40,000 40,000 Goodwill Balance b/f 20,000 : Jimmy (3/4) 15,000 Sam (1/4) 5,000 20,000 20,000 26