FINANCE

PARTNERSHIP ACCOUNT

 

FINANCIAL  ACCOUNTING 1

 

AT THE END OF THE LECTURE STUDENT SHOULD KNOW THE FOLLOWING

-CORRECT ACCOUNTING ENTRIES-CHANGES IN THE CONSTITUTION OF PARTNERSHIP

-EXPLAIN CHANGES IN CONSTITUTION OF PARTNERSHIP

-ADMISSION AND RESSIGNTION OF PARTNERSHIP

-VALUATION OF GOODWILL

-AMALGAMATION OF PARTNERSHIP

-DISSOLUTION OF PARTNERSHIP

 

ADMISSION OF A PARTNER

Treatment of goodwill

On introduction of a new partner the share of the profit and loss taken by each partner must change. There will be constitution of capital and profit sharing ratio.

 

 

ILLUSTRATION 1

OBI and kola are in partnership sharing profit and loss equally. The balance sheet as at 31st dec 2010,

 

 

CAPITAL(NGN)

NET ASSET(NGN)

          350,000.00

OBI

                            150,000.00

KOLA

                            200,000.00

TOTAL

                            350,000.00

 

          350,000.00

 

 

                                          

It was decided to  admit musa to the partnership and he brought in cash 75,000. It was agreed that goodwill was worth 40,000NGN.The profit sharing ratio is obi 2,kola 2;musa 2

 

Required

Show the capital a/c and the balance sheet after goodwill has been considered

 

 

 

 

CAPITAL ACCOUNT

 

 

 

 

 

 

 

OBI (NGN)

KOLA(NGN)

MUSA(NGN)

 

OBI (NGN)

KOLA(NGN)

MUSA(NGN)

BAL C/D

  170,000.00

         220,000.00

      75,000.00

BAL B/D

   150,000.00

   200,000.00

 

BANK

      75,000.00

 

share of

 

goodwill

     20,000.00

     20,000.00

 

  170,000.00

         220,000.00

      75,000.00

 

   170,000.00

   220,000.00

      75,000.00

 

BALANCE SHEET

 

CAPITAL(NGN)

NET ASSET(NGN)

CAPITAL

NGN

ASSET

 NGN

OBI

  170,000.00

GOODWILL

      40,000.00

KOLA

  220,000.00

NET ASSET

    350,000.00

MUSA

    75,000.00

CASH

      75,000.00

TOTAL

  465,000.00

 

    465,000.00

 

 

GOODWILL WRITTEN OFF IN THE  BOOK

 

 

 

 

CAPITAL ACCOUNT

 

 

 

 

 

 

 

OBI (NGN)

KOLA(NGN)

MUSA(NGN)

 

OBI (NGN)

KOLA(NGN)

MUSA(NGN)

GOODWILL

       13,333.00

           13,333.00

      13,333.00

BAL B/D

        150,000.00

   200,000.00

(WRITTEN OFF)=40/3

BANK

      75,000.00

BAL C/D

    156,667.00

         206,667.00

      61,667.00

share of

 

goodwill

          20,000.00

     20,000.00

 

    170,000.00

         220,000.00

      75,000.00

 

        170,000.00

   220,000.00

      75,000.00

BALANCE SHEET

CAPITAL

NGN

ASSET

 NGN

OBI

    156,667.00

KOLA

    206,667.00

NET ASSET

    350,000.00

MUSA

       61,666.00

CASH

      75,000.00

TOTAL

    425,000.00

 

    425,000.00

 

 

 

REVALUATION OF  PARNERSHIP ASSET

ASSET CAN BE REVALUED IN THE FOLLOWING CIRCUMSTANCE

-when a partner dies

-introduction of a new partner

-changes in p & l sharing ratio

-resignation of a partner

 

OBI ,TAYO AND MUSA are in partnership sharing profit and  losses equally. The following is the balance sheet of  the business as at 31stDec 2012

 

CAPITAL

 NGN

 NGN

 

 

 

 OBI

    200,000.00

 

 PLANT AND MACHINERY

 

          25,500.00

 TAYO

    200,000.00

 

 PREMISES

 

        320,000.00

 MUSA

    200,000.00

          600,000.00

 FURNIT & FITT

 

        157,000.00

 

 

 

 MOTOR VEHICLE

 

          70,000.00

 CURRENT A/C

 

 

 

 

        572,500.00

 OBI

       15,000.00

 

 CURRENT ASSET

 

 

 TAYO

       20,000.00

 

 STOCK

     14,000.00

 

 MUSA

       17,000.00

             52,000.00

 DEBTORS

     26,000.00

 

 CREDITOR

 

             53,000.00

 BANK

   100,000.00

        140,000.00

 ACCRUALS

 

               7,500.00

 

 

 

 

 

 

 

 

 

 

 

          712,500.00

 

 

        712,500.00

 

 

 

 

 

 

 

 

 

 

 

 

 

-On 31st dec 2012 ,Edu was admitted into the partnership

-profit and losses would be shared equally

-Edu shall bring 145,000NGN as capital

-Goodwill is valued at  35,000

– The following asset were revalued       

                                                NGN

PREMISES                            300,0000

FURNITURE AND FITT     152,000

Motor vehicle                    63,000

Plant and machinery       45,000

Stock                                     16,000

You are required

a.       Prepare revaluation account

b.      Capital account

c.       Balance sheet after admission of  Edu

 

Solution        

 

B)CAPITAL ACCOUNT

 

 

 

 

CAPITAL ACCOUNT

 

 

 

 

 

 

 

OBI (NGN)

KOLA(NGN)

MUSA(NGN)

EDU

 

OBI (NGN)

KOLA(NGN)

MUSA(NGN)

EDU

 

BAL B/D

        200,000.00

   200,000.00

    200,000.00

 

BAL B/D

          15,000.00

     20,000.00

      17,000.00

 

 

   145,000

BAL C/D

    222,000.00

    227,000.00

    224,000.00

       145,000

share of

 

PROFIT

             7,000.00

       7,000.00

        7,000.00

 

    222,000.00

    227,000.00

    224,000.00

       145,000

 

        222,000.00

   227,000.00

    224,000.00

   145,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A)     REVALUATION ACCOUNT

 

 

REVALUATION ACCOUNT

 

 

 

 

NGN=DR

 

NGN=CR

DECREASE IN  ASSET

 

 

 

INCREASE IN ASSET

PREMISES

 

20,000

GOODWILL

   35,000.00

FIXTURE & FITTINGS

 

        5,000.00

PLANT & M

   19,500.00

MOTOR VAN

 

        7,000.00

STOCK

     2,000.00

PROV FOR BAD DEBT

 

        3,500.00

 

 

SHARE OF PROFIT=21/3

 

        7,000.00

 

 

SHARE OF PROFIT=21/3

 

        7,000.00

 

 

SHARE OF PROFIT=21/3

 

        7,000.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,500

 

   56,500.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C)

BALANCE SHEET

BALANCE SHEET

 CAPITAL

 NGN

 NGN

 

 

 

 

 OBI

    222,000.00

 

 PLANT AND MACHINERY

 

 

          45,000.00

 TAYO

    227,000.00

 

 PREMISES

 

 

        300,000.00

 MUSA

    224,000.00

 

 FURNIT & FITT

 

 

        152,000.00

 EDU

    145,000.00

    818,000.00

 

 

 

 

 

 

 

 MOTOR VEHICLE

 

 

          63,000.00

 

 

 

 

 

 

        560,000.00

 

 

 

 CURRENT ASSET

 

 

 

 

 

 

 STOCK

 

     16,000.00

 

 

 

 

 DEBTORS

 26-3.5

     22,500.00

 

 CREDITOR

 

      53,000.00

 BANK

 =100+145

   245,000.00

        283,500.00

 ACCRUALS

 

        7,500.00

 GOODWILL

 

 

          35,000.00

 

 

 

 

 

 

 

 

 

    878,500.00

 

 

 

        878,500.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISOLUTION OF PARTNERSHIP

REASON FOR DISOLUTION OF PARTNERSHIP.

 

-RETIREMENT OF PARTNERSHIP

-ADMISSION OF A NEW PARTNERSHIP

-INSANITY OF A PARTNER

-DEATH OF A PARTNER

-BANKRUPTCY OF A PARTNER

-NON- PERFORMANCE OF THE BUSINESS

-EXPIRATION OF THE TIME GIVEN

-ILLEGALITY OF A BUSINESS

 

ILLUSTRATION 3

OBI AND TAYO are in partnership sharing profit and loss equally. The following is the balance sheet as at 31st dec 2019 when it was dissolved

 

NGN

 NGN

CAPITAL

EQUIPMENT

    150,000.00

OBI

    100,000.00

MOTOR VEHICLE

      10,000.00

TAYO

    100,000.00

STOCK

      10,000.00

CREDITOR

         5,000.00

BANK

      17,000.00

LOAN

       55,000.00

DEBTOR

      70,000.00

GOODWILL

         3,000.00

TOTAL

    260,000.00

 

    260,000.00

 

 

The asset were realised 5% less their book value except bank,goodwill and debtor and expenses on realisation  amounted  to 1000NGN.

CREDITOR PAID 4,000NGN

PREPARE  THE NECESSARY ACCOUNT

 

 

REALISATION ACCOUNT

 

 

BOOK VALUE

 

NGN

REALISED

NGN

EQUIPMENT

 

    150,000.00

EQUIPMENT

       142,500.00

MOTOR VEHICLE

 

10000

MOTOR VEHICLE

            9,500.00

STOCK

 

10000

STOCK

            9,500.00

GOODWILL

 

3000

GOODWILL

            2,850.00

REALISA EXP

 

1000

DISC CREDTOR

500

 

 

 

 

 

 

 

SHARE OF LOSS

 

 

 

 

OBI

4575

 

 

 

 

TAYO

4575

            9,150.00

 

 

    174,000.00

 

       174,000.00

 

 

 

 

 

 

 

BANK ACCOUNT

 

 

 

 

 

NGN

 

 

NGN

BAL B/F

 

       17,000.00

 

 

 

EQUIPMENT

 

142500

DISC REC

 

500

MOTOR VEHICLE

 

9500

DISSOLUTION COST

 

1000

STOCK

 

9500

CREDITOR

 

4500

GOODWILL

 

2850

LOAN

 

55000

 

 

 

CAPITAL

 

 

DEBTOR

 

70000

OBI

 

95,425

 

 

 

TAYO

 

95,425

 

 

 

 

 

 

 

 

    251,350.00

 

 

251850

SHARE CAPITAL

OBI

TAYO

SHARE OF LOSS

4575

4575

BAL B/F

100,000

100,000

BANK

95,425

95,425

 

100000

100000

 

100,000

100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMALGAMATION

AMALGAMATION OF PARTNERSHIP.

This is the coming together of two or more partnership together.

Procedures.

1.ARRANGE THE ASSET AND LIABILITIES OF THE FIRST SOLE TRADER INORDER TO CALCULATE THE CAPITAL.

2.ARRANGE THE ASSET AND LIABILITIES OF THE SECOND SOLE TRADER IN ORDER TO DETERMINE HIS CAPITAL

3.PREPARE THE COMBINED BALANCE SHEET

 

ILLUSTRATION

OBI AND TAYO have been friend and they both agreed to amalgamate their sole trading business and form a partnership with effect from 3ist December 2019. The balance sheet is as follows

 

OBI’S BALANCE   SHEET

 

 

CAPITAL

130,000

FIXTURE

100,000

CREDITOR

47000

STOCK

60,000

 

 

DEBTORS

21000

 

 

BANK

31000

 

 

 

 

 

177,000

 

             177,000.00

 

TAYO’S BALANCE   SHEET

 

 

CAPITAL

120,000

LAND AND BUILDING

60,000

CREDITOR

62000

FIXTURE

15,000

 

 

STOCK

18000

 

 

DEBTOR

29000

 

 

BANK

60000

 

182,000

 

182,000

 

 

a..OBI  to  be credited with goodwill of 21,000NGN.

b.Tayo  land and building to be valued  80,000NGN

C.Obi’s fixture to be valued at 20,000NGN, DEBTORS 19,000NGN, STOCK 23,000

b.all other asset is taken over  as per balance sheet

 

 

 

 

 

 

 

 

 

 

 

 

SOLUTION

 

OBI’S BALANCE   SHEET

 

 

CAPITAL

70,000

FIXTURE

20,000

CREDITOR

47000

STOCK

26,000

 

 

DEBTORS

19000

 

 

BANK

31000

 

 

GOODWILL

21000

 

177,000

 

             117,000.00

 

TAYO’S BALANCE   SHEET

 

 

CAPITAL

145,000

LAND AND BUILDING

80,000

CREDITOR

62000

FIXTURE

20,000

 

 

STOCK

18000

 

 

DEBTOR

29000

 

BANK

60000

 

207,000

 

207,000

BALANCE SHEET

 

 

NGN

 

 NGN

CAPITAL

215,000

LAND AND BUILDING

80,000

CREDITOR

109000

FIXTURE

40,000

 

 

STOCK

44,000

 

 

DEBTOR

48000

 

 

BANK

91000

 

 

GOODWILL

21000

 

324,000

 

324,000

 

 

 

 

 

 

 

GOODWILL CALCULATION/ESTIMATION

Goodwill is benefit accruing to a firm due to goodname, connection,position a reputation,connection,position and reputation.

APPROACH TO VALUATION

 

A.      SUPERPROFIT  APPROACH

B.      PURCHASE OF AVERAGE PROFIT.

C.      PURCHASE OF ANNUAL GROSS PROFIT.

 

 

A.SUPER PROFIT

ILLUSTRATION

2019=50,000NGN

2018=30,000NGN

2017=10,000NGN

NORMAL PROFIT=25,000

WHAT IS GOODWILL

(50,000+30,000+10000)/3=30,000

30,000-25,000=5,000

SUPER PROFIT =5,000*3=15,000

 

B.PURCHASE OF 2 YEARS AVERAGE PROFIT

=(50,000+30,000+10000)/3=30,000

30,000*2=60,000

 

C.PURCHASE OF 2 YEARS  GROSS ANNUAL INCOME

ILLUSTRATION.

IF GROSS ANNUAL INCOME IS =20,000

GOODWILL= 20,000*2=40,000NGN