Solution Manual: To Accompany

Solution Manual
to accompany
Accounting 8e
by
John Hoggett, John Medlin, Lew Edwards,

Matthew Tilling & Evelyn Hogg
Chapter 15: Partnerships: formation, operation and reporting
John Wiley & Sons Australia, Ltd 2012
© John Wiley & Sons Australia, Ltd 2012 15.1

Solutions Manual to accompany Accounting 8e by Hoggett et al
CHAPTER 15
PARTNERSHIPS: FORMATION, OPERATION AND
REPORTING
DISCUSSION QUESTIONS
SOLUTIONS
Suggested topics for discussion are provided for each question. Discussion need not be
confined to the topics indicated.
1. ‘The big disadvantage of a sole trader business is that the personal liability of the
owner is unlimited – the owner could lose everything. I think I will take on a partner
and convert my business to a partnership. That way I will certainly reduce the
chances of losing my personal assets if the business fails.’ Discuss.
The principle of unlimited liability exists for partners of a partnership as for
a sole trader. Admitting a new partner does not remove the liability to
contribute personal assets to pay creditors of the firm on the part of the old
partners or any incoming partner.
Whether the amount of the liability of the old partner is reduced will depend
on the circumstances, such as the state of the partnership assets and liabilities
at the time of insolvency of the firm, and the state of the personal financial
affairs of the partners. Consider the case where the incoming partner is
insolvent when the partnership debts are to be paid – the old partner would
have to cover all the partnership debts!
2. ‘There is really no need for a partnership agreement since all issues likely to arise
among partners are adequately covered in the appropriate Partnership Act.’
Discuss.
 The Partnership act is designed to cater for partnership and partner inter-
relationships generally: e.g. profits are shared equally, the percentage
appropriate for interest on partner advances, etc.
Normally, the relationship and arrangements among partners is specific to
each particular partnership. Partners usually prefer to specify rights, duties,
and interests as amongst themselves in a particular business relationship, e.g.
managerial rights, profit-sharing rights, drawing rights, arrangements for
interest on capital and drawings, managerial responsibilities, etc.
Since each partnership is generally unique, a written partnership agreement
should be drawn up to cover those items of concern to individual partners.
The Partnership Act then need only be relied upon for those items not
specifically addressed in the partnership agreement.
3. Which is likely to last longer and why, a partnership or a company?

 a company is likely to last longer than a partnership

 a partnership is dissolved for a number of reasons
 a partnership is dissolved on the death of a partner, the bankruptcy of the
partnership or an individual partner etc.
 refer to “Limited life” on page 617.
4. Liam sold his partnership interest to Jason even though his other partners were
unaware that Liam intended to do so. Does Jason have the right to be a partner?
Does Jason have the right to take over Liam’s position as manager of the business?
Would Jason be entitled to share in the partnership profits, and if so, how much?
 Yes, Jason is entitled to be a partner in the firm
No, because Jason does not have the right to participate in the management
of the firm unless he is accepted by all partners. Old partners, and only they,
may decide to allow Jason to assume a managerial role.
 Yes, Jason is entitled to a share in the profits which Liam would have
received.
5. ‘The accounting treatment of a partner’s drawings differs when separate Retained

Earnings accounts are kept for each partner as opposed to not having Retained
Earnings accounts. Choice of method is immaterial.’ Discuss.
If each partner’s capital account is used to reflect his or her share of profits
or losses, and no retained earnings account is kept (Method 1 as in the book),
any withdrawals are recorded by debiting the drawings account of the partner
concerned and crediting cash at bank . The drawings account is then closed to
capital at the end of the period. Under Method 2 (as in the book), which
consists of capital accounts with fixed balances and retained earnings
accounts, after the initial capital contribution very few entries are made to the
fixed capital account. Withdrawals in anticipation of profits are debited to the
drawings account which is eventually closed off to the retained earnings
account. Only withdrawals of capital are debited to the capital account.
Method 2 closely follows company accounting procedures and is in line with
relevant accounting standards.
 The choice of accounting treatment is influenced by how partners want
equity and changes in equity recorded and disclosed and, particularly, whether
they wish to maintain “fixed” capital accounts which only reflect capital
invested unaffected by profit share, interest on capital, drawings, and salary
arrangements for partners. However, although there is greater disclosure
under Method 2, the total of each partner’s equity interest is ultimately the
same under either method.
6. A student of accounting was heard to remark: ‘You really do not need a Profit
Distribution account when accounting for profit distribution in a partnership.
Everything can be done through the Profit and Loss Summary account.’ Discuss.
 The statement is correct from a strictly accounting viewpoint.
 If no Distribution account is used, the Profit and Loss Summary account

contains income/revenues, expenses, and capital adjustments as amongst the
partners such as drawings, interest on capital and drawings, and other
arrangements such as salary adjustments.
Use of a Distribution account clearly separates items of operating income
and expenses which appear in the Profit and Loss Summary from items which
constitute capital adjustments and profit sharing. The Distribution account
clearly shows how profits are shared, and provides a summary of adjustments
to partners’ equity. Discussion could concentrate on whether this
arrangement is useful or not.
7. ‘Partners’ advances and capital both represent money contributed to the partnership
by the partners. Therefore the accounting treatment for interest paid on advances
and capital should be the same.’ Discuss.
The distinction lies in the extent of the partner providing the resources to the
firm. Capital contributions represent an investment and a commitment to
finance the firm for the long term. A loan or advance, on the other hand,
represents the provision of funds for use in the partnership on a normal
commercial basis in return for interest.
 A partner who provides loan funds via an advance, will expect the
partnership to treat such an advance as a normal commercial loan and account
for it as such.
Interest on an advance will be treated as an operating expense, while interest
on capital constitutes an adjustment among the partners for differing amounts
of capital invested by the partners. Differences in accounting treatment
appear to be justified.
8. Hannah and Jeremy set up a partnership to run a café. At the time of establishing
the business Hannah was in a better financial position than Jeremy and so
contributed 60% of the capital required. Jeremy believes that he contributes as much
effort to running the café as Hannah and therefore assumes that any profit made will
be distributed evenly between Hannah and him as they are partners. Is Jeremy
correct and what factors might determine how much profit each of the partners will
receive?
 Jeremy is correct that in the absence of an agreement or if the partners are
unable to reach an agreement, the Partnership Act provides that profits are to
be divided equally, regardless of the amount invested by the partners.
 Factors that might determine how much profit each partner will receive
include:
- return for the personal services performed by the partners
- return on the capital provided by the partners
- return for the business risks assumed by the partners
 The profit and loss agreement should reward each partner for resources and
services contributed to the business
 As the partners contribute the same effort but Hannah contributed more
capital then it would be fair for Hannah to get more than half of the share of
the profits.
9. Eduardo and Evanthia run a craft shop as a partnership. During the year Eduardo
incurred an unusual amount of personal expenses in relation to his family and felt
that his share of the partnership profit for the year would not cover these costs.
Eduardo approached Evanthia to see if he can get any extra cash out of the business
just for the current year to cover the shortfall in his personal finances. What options

are there for Eduardo to receive extra cash and what are some of the future
implications of this?
 Eduardo can receive extra cash from the partnership with Evanthia’s
agreement
 The extra cash could be treated as a withdrawal of future profits so that in
future periods Eduardo gets less of the share of the profits
 Alternatively the extra cash could be treated as a withdrawal of Eduardo’s
capital contribution. If this happens then Eduardo’s contribution of capital to
the business could be less than Evanthia’s and this may leave him entitled to
a lower proportion of future profits.
 The partnership agreement may also require that Eduardo pay interest on any
drawings or capital that he withdraws from the partnership
10. Ethan and Amy who have been friends for a long time, decide to go into partnership
selling a range of pet accessories. They seek advice from an accountant regarding
the best system, the generally accepted accounting principles to be used in the
accounting records, and the format and contents of the financial reports. The
accountant replies that since the partnership will be a non-reporting entity, they can
account any way they like, and include whatever they like in the reports to suit their
own requirements. The partners point out that they have other business interests
and would like to have some comparability in accounting and reports. As the
accountant, how would you advise the partners?
Since the partnership and, presumably, the other businesses referred to, are
non-reporting entities, the accountant is correct – special purpose reports are
prepared. These reports do not have to comply with accounting standards.
There is probably a need to ascertain how and on what basis reports for the
other business interests of the partners are prepared, and the degree of
compliance with some or all of the accounting standards. It will obviously be
of some benefit to the partners if there is consistency in the preparation of the
various reports from the different businesses for interpretation purposes. If
any of the other businesses are reporting entities, it may be useful to prepare
general purpose financial reports for the partnership.
The accountant could seek input from the partners on how best to employ
“their” particular accounting concepts and principles to enable him/her to
produce reports which are the most useful.

EXERCISE SOLUTIONS
Exercise 15 .1 Partnership formation
SUDJAI AND SUTRIN
Required:
A. Assuming that Sudjai and Sutrin agree that their capitals should be equal to the fair value
of the net assets contributed, prepare general journal entries to record the formation of the
partnership.
B. If Sudjai and Sutrin agree that their respective capitals should be $220 000, show the
general journal entries to establish the partnership.
A.
2012
July 1 Cash at Bank $80 000
Accounts Receivable 12 000
Inventory 45 000
Plant and Equipment 90 000
Accounts Payable 12 500
Sudjai, Capital 214 500
Cash at Bank 90 000

Inventory 40 000
H Hogart, Capital 199 500

B.
2012
Inventory 45 000
Goodwill 5 500
L Lewin, Capital 220 000
Cash at Bank 90 000

Inventory 40 000
Goodwill 20 500
H Hogart, Capital 220 000

BECKER AND DICKSON
Required:
Prepare separate journal entries to record the initial investment of each partner, assuming
assets are recorded by the business to reflect their purchase price, and the arrangement is
GST-free.
Cash at Bank $6 200

Inventory 21 500
Equipment 48 000
Becker, Capital 75 100
Cash at Bank 5 800

Inventory 18 300
Equipment 32 000
Dickson, Capital 54 700

BECKER AND DICKSON
Required:
Prepare separate journal entries to record the initial investment of each partner, assuming
assets are recorded by the business to reflect their purchase price, the capital is set at
$80 000 for each partner, and the arrangement is GST-free.
Cash at Bank $6 200

Inventory 21 500
Equipment 48 000
Goodwill 4 900
Becker, Capital 80 000
Cash at Bank 5 800

Inventory 18 300
Equipment 32 000
Goodwill 25 300
Dickson, Capital 80 000

Exercise 15 .4 Partnership profit distribution – fixed ratio
GOTTSCHE AND GUTTERIDGE
Required:
A. Prepare the closing entry to transfer the profit disclosed in the Profit and Loss
Summary to the Profit Distribution account under methods 1 and method 2.
B. Prepare the closing general journal entry to distribute the profit to Gottsche and
Gutteridge assuming they have agreed to share profits in proportion to each partner’s
initial capital balance under both method 1 and method 2.
C. Show how the partners’ equity accounts would appear in the balance sheet of the
partnership at 30 June 2013.
A&B
Gottsche Gutteridge
Method 1 Method 2
Variable capital Fixed capital
balances balances
Debit Credit Debit Credit
A. Profit and Loss Summary $96 000 $96 000
Profit Distribution $96 000 $96 000
Transfer profit to distribution a/c
B. Profit Distribution 96 000 96 000

Gottsche, Capital 57 600 -
Gutteridge, Capital 38 400 -
Gottsche, Retained Earnings - 57 600
Gutteridge, Retained Earnings - 38 400
C.
GOTTSCHE AND GUTTERIDGE
Balance Sheet
as at 30 June 2013
Method 1 Method 2
EQUITY
Gottsche, Capital, $147 600 $90 000
Gutteridge, Capital 98 400 246 000 60 000 150 000
Gottsche, Retained Earnings 57 600
Gutteride, Retained 38 400 96 000
Earnings
TOTAL EQUITY $246 000 $246 000

Exercise 15 .5 Partnership profit distribution – capital balances
LEUNG AND LIM
Required:
A. Prepare the closing entry to transfer the profit disclosed in the Profit and Loss Summary
account to the Profit Distribution account under method 1 and method 2.
B. Prepare the closing general journal entry to distribute the profit to Leung and Lim,
assuming they have agreed to share profits in the ratio of 3:2.
C. Show how the partners’ equity accounts would appear in the balance sheet of the
partnership at 30 June 2013.
A. & B.
Leung Lim
Method 1 Method 2
balances balances
A. Profit and Loss Summary $160 000 $160 000
B. Profit Distribution 160 000 160 000

Leung, Capital 96 000 -
Lim, Capital 64 000 -
Leung, Retained Earnings - 96 000
Lim, Retained Earnings - 44 000
C.
LEUNG AND LIM
Balance Sheet
as at 30 June 2013
Method 1 Method 2
EQUITY
Leung, Capital, $276 000 $180 000
Lim, Capital 184 000 460 000 120 000 300 000
Leung, Retained 96 000
Earnings
Lim, Retained Earnings 64 000 160 000
TOTAL EQUITY $460 000 $460 000

Exercise 15.6 Allocation of net profit
LAING AND LOWRY
Required:
A. Prepare the journal entries to record the allocation of net profit under each of the following
assumptions, using method 1 procedures:
1. Laing and Lowry agree to a 55:45 sharing of profits.
2. The partners agree to share profits in the ratio of their original capital investments.
3. The partners agree to recognise $12 000 per year salary allowance to Laing and a
$4500 per year salary allowance to Lowry. Each partner is entitled to 6% interest on his
original investment, and any remaining profit is be shared equally.
B. Repeat requirement A3 above assuming the partnership has a net profit of $27 000
for the first year.
A. 1 2 3
Profit & Loss Summary $40 500 $40 500 $40 500
Profit Distribution $40 500 $40 500 $40 500
Profit Distribution 40 500 40 500 40 500

Laing, Capital 22 275 23 143 16 600
Lowry, Capital 18 225 17 357 10 400
1. $40 500 x 0.55 = $22 275

$40 500 x 0.45 = $18 225
2. Laing $120 000 (4/7) x $40 500 = $23 143

Lowry $ 90 000 (3/7) x $40 500 = $17 357
$210 000 $40 500
3. Laing Lowry Total

Salary Allowance $12 000 $4 500 $16 500
Interest on Capitals (6%) 7 200 5 400 12 600
19 200 9 900 29 100
Remainder 5 700 5 700 11 400
Total $24 900 $15 600 $40 500

B. Profit and Loss Summary $27 000

Profit Distribution $27 000
Profit Distribution 27 000

Laing, Capital 18 150*
Lowry, Capital 8 850*
Laing Lowry Total

19 200 9 900 29 100
Excess allocation (loss) (1 050) (1 050) (2 100)
*Total $18 150 $8 850 $27 000

Exercise 15.7 Allocation of profit
MILLER AND MONTEROSA
Required:
A. Prepare the journal entries to record the allocation of profit under each of the following
assumptions, using method 1 procedures:
1. Miller and Monterosa agree to a 60:40 sharing of profits.
2. The partners agree to share profits in the ratio of their original capital investments.
3. The partners agree to recognise a $12 000 per year salary allowance to Miller and a
$8000 per year salary allowance to Monterosa. Each partner is entitled to 8%
interest on her original investment, and any remaining profit is to be shared equally.
B. Repeat requirement A3 above assuming the partnership has a profit of $30 000 for the
first year.
A.
1 2 3
Profit & Loss Summary $72 000 $72 000 $72 000
Profit Distribution $72 000 $72 000 $72 000
Profit Distribution 72 000 72 000 72 000

Miller, Capital 43 200 39 600 38 800*
Monterosa, Capital 28 800 32 400 33 200*
1. $72 000 x 0.6 = $43 200

$72 000 x 0.4 = $28 800
2. Miller $110 000 110/200 x $72 000 =$39 600

Monterosa $ 90 000 90/200 x $72 000 =$32 400
$200 000 $72 000
3. Miller Monterosa Total

20 800 15 200 36 000
Remainder 18 000 18 000 36 000
$38 800 $33 200 $72 000
*Total profit (including salary,
interest)

B. Profit and Loss Summary $30 000

Profit Distribution $30 000
Profit Distribution 30 000

Miller, Capital 17 800*
Monterosa, Capital 12 200*
Miller Monterosa Total

20 800 15 200 36 000
Excess allocation (loss) (3 000) (3 000) (6 000)
*Total profit (inc. salary, interest) $17 800 $12 200 $30 000

Exercise 15.8 Interest on capital and drawings
ZOLLO AND ZOUMBOULIS
Required
Prepare the journal entries for the above transactions for the year ended 30 June 2014 using
both method 1 and method 2.
Zollo Zoumboulis
Method 1 Method 2
balances balances
2013 Debit Credit Debit Credit
Nov 30 Zollo, Drawings 12 000 12 000
Cash at Bank 12 000 12 000
(Cash drawings by Zollo)
Dec 20 Zoumboulis, Drawings 8 000 8 000

Cash at Bank 8 000 8 000
(Cash drawings by Zoumboulis)
2014
Mar 31 Zoumboulis, Drawings 15 000
Zoumboulis, Capital 15 000
Cash at Bank 15 000 15 000

Exercise 15.9 Interest on capital and drawings
PETER AND PAULA
Required:
Prepare journal entries to account for interest on capital and on drawings, and any
necessary closing entries using:
1. method 1 – variable capital balances
2. method 2 – fixed capital balances.
Peter Paula
Method 1 Method 2
balances balances
Profit and Loss Summary $144 000 $144 000
Profit Distribution 16 320 16 320

Peter, Capital 7 680 -
Paula, Capital 8 640 -
Peter, Retained Earnings - 7 680
Paula, Retained Earnings - 8 640
Interest on capital

Peter, Retained Earnings 2 400
Paula, Retained Earnings 3 000
Profit Distribution 5 400 5 400
Interest on drawings
Profit distribution 133 080 133 080

Peter, Retained Earnings - 66 540
Paula, Retained Earnings - 66 540
Peter, Capital 24 000

Paula, Capital 30 000
Peter, Retained Earnings 24 000
Paula, Retained Earnings 30 000
Peter, Drawings 24 000 24 000
Paula, Drawings 30 000 30 000
Close entry for drawings.

RICHARDS AND ROGERS
Required:
Prepare the Profit Distribution accounts and partners’ Retained Earnings accounts for the
year ended 30 June 2013.
Profit Distribution
2013 2013
30/6 Salary – Richards $30 000 30/6 Partnership Profits $68 000
30/6 Interest on Capital:
Richards 6 400
Rogers 9 600
30/6 Residual Profit:
Richards (1/3) $7 333
Rogers (2/3) $14 667 22 000
$68 000 $68 000
Richards, Retained Earnings

2013 2012
1/7 Balance $25 000
30/6 Drawings $12 000 30/6 Interest on Capital 6 400

30/6 Salary 30 000
30/6 Balance 56 733 30/6 Share of Profits 7 333
$68 733 $68 733
30/6 Balance 56 733
Rogers, Retained Earnings

2013 2012
1/7 Balance $32 000
2007
$56 267 $56 267
30/6 Balance 39 267

MATTHEW AND MARK
Required:
Prepare the Profit Distribution accounts and partners’ Retained Earnings accounts for the
year ended 30 June 20143.
Profit Distribution
2014 2014
30/6 Salary – Mark $80 000 30/6 Partnership Profits $460 000
30/6 Interest on Capital:
Matthew 64 800
Rogers 55 200
30/6 Residual Profit:
Matthew (60%) $156 000
Mark (40%) $104 000 260 000
$460 000 $460 000
Matthew, Retained Earnings

2014 2013
1/7 Balance $160 000

$380 800 $380 800
30/6 Balance 356 800
Mark, Retained Earnings

2014 2013
1/7 Balance $130 000
2007
30/6 Salary 80 000
$369 200 $369 200
30/6 Balance 357 200

Exercise 15.12 Allocation of profit – average capital balances
TREVOR, TAMMY and TAN
Required:
Prepare a schedule showing how profit will be divided among the three partners if the profit
for the year before the adjustments is $320 000.
Allocation of $320 000 profit

Trevor Tammy Tan Total
Interest on average capital $20 000 $12 000 $7 200 $39 200
Salary allowance 50 000 40 000 40 000 130 000
Bonus to Trevor
[25% of ($320 000 - $39 200 - $130 000 –
90 000)] 15 200 - - 15 200
Total interest, salary and bonus 85 200 52 000 47 200 184 400
Residual: Trevor (1/2) 67 800

Tammy (1/3) 45 200
Tan (1/6) 22 600 135 600
Total allocations $153 000 $97 200 $69 800 $320 000

Exercise 15.13 Formation and allocation of profits of partnership
WING, WEN AND WINNIE
Required:
A. Prepare the journal entries necessary to open the records of the partnership. (Ignore
GST.)
B. Assuming in the first year that the partnership makes a profit of $65 000, show how this
profit would be allocated to partners. (Round amounts to nearest $1 – 50c is rounded
down.)
A. Cash at Bank $7 000

Computers 8 000
Debtors 12 000
Wing, Capital 27 000
Lease of Premises 12 500

Computers 10 000
Cash at Bank 5 000
Wen, Capital 27 500
Computers 13 750
Winnie, Capital 13 750
B.
Wing Wen Winnie Total
Salary - - $20 000 $20 000
Interest on capital $2 160 $2 200 1 100 5 460
Total salary and interest 2 160 2 200 21 100 25 460
Residual Profit:
Wing (27000/68250) 15 642
Wen (27500/68250) 15 932
Winnie (13750/68250) 7 966 39 540
$17 802 $18 132 $29 066 $65 000

Exercise 15.14 Statement of changes in partners’ equity
JONATHON AND DANIEL
Required
Prepare Statement of Changes in Partner’s Equity for the year ended 30 June 2013 using
both method 1 and method 2.
JONATHON AND DANIEL PARTNERSHIP

Statement of Changes in Partners’ Equity
for the year ended 30 June 2013
Method 1
Jonathon Daniel Total
Capital contributions 1/7/12 $320 000 $280 000 $600 000
Add: Additional investment 40 000 40 000
Profit allocation 80 000 80 000 160 000
400 000 400 000 800 000
Less: Capital withdrawal 20 000 20 000
Less: Drawings 25 000 20 000 45 000
CAPITAL BALANCES 30/6/13 $355 000 $380 000 $735 000
Method 2
Jonathon Daniel Total
CAPITAL
Add: Additional investment 40 000 40 000
Less: Capital withdrawal 20 000 . . 20 000
Capital balances 30/6/13 300 000 320 000 620 000
RETAINED EARNINGS
Balances at 1/7/12 - - -
Add: Profit allocation 80 000 80 000 160 000
Less: Drawings 25 000 20 000 45 000
Balances at 30/6/13 55 000 60 000 115 000
TOTAL EQUITY $355 000 $380 000 $735 000

Exercise 15.15 Statement of changes in partners’ equity
ANTHONY AND CLEOPATRA
Required
Prepare a statement of changes in partner’s equity using both method 1 and method
2.
JONATHON AND DANIEL PARTNERSHIP

Method 1
Anthony Cleopatra Total
Add: Additional investment 32 000 - 32 000
214 000 162 000 376 000
Less: Capital withdrawal 15 000 15 000
Less: Drawings 16 000 18 000 34 000
CAPITAL BALANCES 30/6/12 $198 000 $129 000 $327 000
Method 2
Anthony Cleopatra Total
CAPITAL
Less: Capital withdrawal - 15 000 15 000
Capital balances 30/6/12 152 000 85 000 337 000
RETAINED EARNINGS
Balances at 1/7/11 - - -
Add: Profit allocation 62 000 62 000 124 000
Less: Drawings 16 000 18 000 34 000
Balances at 30/6/12 46 000 44 000 90 000
TOTAL EQUITY $198 000 $129 000 $327 000

PROBLEM
SOLUTIONS
Problem 15.1 Partnership formation
HARTWIG AND WISDOM
Required:
A. Prepare the journal entries to record each partner’s initial investment.
B. Prepare the partnership’s balance sheet as at 1 July 2012.
C. Prepare a statement of changes in partners’ equity for the year ended 30 June 2013,
using method 2 for recording partners’ equity accounts.

Land 180 000
Hartwig, Capital 210 000
Cash at Bank 22 500

Inventory 23 800
Office Equipment 62 000
Bank Loan 18 000
Wisdom, Capital 91 600
B.
HARTWIG AND WISDOM

Balance Sheet
As at 1 July 2012
CURRENT ASSETS
Cash at Bank $ 52 500
Accounts receivable 12 800
Inventory 23 800
TOTAL CURRENT ASSETS $89 100
NON-CURRENT ASSETS
Land $180 000
Office Equipment 62 000
TOTAL NON-CURRENT ASSETS 242 000
TOTAL ASSETS $331 100
CURRENT LIABILITIES
Accounts payable $11 500
Bank Loan 18 000
TOTAL CURRENT LIABILITIES $29 500
TOTAL LIABILITIES $29 500
NET ASSETS $301 600
EQUITY
Capital, R Hartwig $210 000
Capital, A Wisdom 91 600
TOTAL EQUITY $301 600
C.
HARTWIG AND WISDOM
30 June 2013
Jones Jeffery Total
CAPITAL
Capital balances 1 July 2012 $210 000 $91 600 $301 600
Capital balances 30/6/2013 $222 000 $91 600 $313 600
RETAINED EARNINGS
Profit allocation $56 000 x 60% 33 600
$56 000 x 40% 22 400 56 000
Less: Drawings 8 000 16 000 24 000
Balances 30/6/2013 $25 600 $6 400 $32 000
TOTAL EQUITY $247 600 $98 000 $345 600

Problem 15.2 Partnership formation
CHAN AND PAPADOPOULOS
Required:
A. Prepare the journal entries to record each partner’s initial investment.
B. Prepare the partnership’s balance sheet as at 1 January 2012.
C. Prepare a statement of changes in partners’ equity for the year ended 31 December
2012, using method 1 for recording partners’ equity accounts.

Chan, Capital 200 000
Cash at Bank 12 600

Inventory 30 400
Buildings 480 000
Bank Loan 180 000
Papadopoulos, Capital 347 000
B.
CHAN AND PAPODOPOULOS

Balance Sheet
As at 1 January 2012
CURRENT ASSETS
Inventory 30 400
NON-CURRENT ASSETS
Plant and Equipment $120 000
Building 480 000
CURRENT LIABILITIES
Bank Loan 180 000
NET ASSETS $547 000
EQUITY
Capital, C Chan $200 000
Capital, P Papadopoulos 347 000
C.
CHAN AND PAPODOPOULOS
31 December 2012
Chan Papodopoulos Total
Capital balances 1 January 2012 $200 000 $347 000 $547 000
Profit allocation $96 000 x 50% 48 000 48 000 96 000
Less: Drawings (16 000) (18 000) (34 000)
Balances 31/12/2012 $256 000 $377 000 $633 000

Problem 15.3 Allocation of profit and loss
JONG AND JOY
Required:
A. Determine the division of the profit or loss assuming a profit of $120 000.
B. Determine the division of the profit or loss assuming a profit of $60 000.
C. Determine the division of the profit or loss assuming a loss of $6000.
A.
Jong Joy
Profit of $120 000
Plan (a) Ratio of 50:50 $60 000 $60 000
Plan (b) Salaries 20 000 30 000

Remainder 6:4 42 000 28 000
$62 000 $58 000
Plan (c) Salary - 25 000

Interest at 8% on original investment 7 200 4 800
Remainder equally 41 500 41 500
$48 700 $71 300
Plan (d) Ratio of initial investments (9 : 6) $72 000 $48 000

15 15
B.
Jong Joy
Profit of $60 000
Plan (a) Ratio of 50:50 $30 000 $30 000

Excess allocation 6:4 6 000 4 000
$26 000 $34 000

Total salary and interest 7 200 29 800
$18 700 $41 300
Plan (d) Ratio of initial investment (9 : 6) $36 000 $24 000

15 15
C.

Jong Joy
Loss of $6 000
Plan (a) Ratio of 50:50 $(3 000) $(3 000)

Excess allocation 6:4 (33 600) (22 400)
$(13 600) $ 7 600

Total salary and interest 7 200 29 800
Excess allocation equally (21 500) (21 500)
$(14 300) $8 300
Plan (d) Ratio of initial investment (9 : 6) $(3 600) $(2 400)

15 15

Problem 15.4 Allocation of profit and loss
PETER AND WENDY
Required:
A. Determine the division of the profit or loss assuming a profit of $200 000.
B. Determine the division of the profit or loss assuming a profit of $150 000.
C. Determine the division of the profit or loss assuming a loss of $10 000.
A.
Jong Joy
Profit of $200 000
Plan (a) Ratio or original investment 3:2 $120 000 $80 000

Remainder 3:2 54 000 36 000
$114 000 $86 000
Plan (c) Salary 60 000 -

$133 000 $67 000
Plan (d) Share equally $100 000 $100 000
B.
Jong Joy
Profit of $150 000

Remainder 3:2 24 000 16 000
$84 000 $66 000

$108 000 $42 000

C.
Jong Joy
Profit of $100 000

Remainder 3:2 (6 000) (4 000)
$54 000 $46 000

$83 000 $17 000

Problem 15.5 Allocation of profits
TRIPLE M TRADERS
Required:
Prepare a schedule showing the distribution of profit to each partner (round to the nearest
dollar).
Allocation of $181 280 profit*

Molika Ming Mengyao Total
Total profit before interest on drawings $181 280
Add: Interest on drawings:

Molika ($12 600 x 8% x 4/12) 336
Ming ($7 900 x 8% x ½) 316
Mengyao ($5 900 x 8% x 9/12) 354 1 006
180 274
Less: Salaries 30 000 25 000 20 000 75 000
Bonus to Mengyao
[20% x ($180 274 - $75 000)] 21 055 21 055
Residual profit for allocation $84 219
Allocation of residual profit:

Molika ($84 219 x 3/8) 31 582
Ming, ($84 219 x 3/8) 31 582
Mengyao, ($84 219 x 1/4) 21 055 84 219
$61 918 $56 898 $62 464 $181 280
*Profit before interest on advances $188 000

Less Interest on advances (loans) ($112 000 x 6%) 6 720
Profit for distribution $181 280

Problem 15.6 Formation and allocation of profits – method 1
LLOYD AND SCHULZ
Required:
A. Prepare the journal entries to record the initial investments of both partners. (ignore
GST.)
B. Prepare a Balance Sheet as at 1 October 2012.
C. Prepare a statement of partners’ equity for the year ended 30 September 2013.
A. 1/10/2012 Cash at Bank $28 000

Marketable Securities 26 800
Inventory 125 400
Equipment 230 000
Accounts Payable $36 000
Lloyd, Capital 421 200
Building 820 000

Land 350 000
Mortgage Payable 456 000
Schulz, Capital 714 000

B.
LLOYD AND SCHULZ
Balance Sheet
as at 1 October 2012
CURRENT ASSETS
Cash at bank $28 000
Marketable securities 26 800
Inventory 125 400
NON-CURRENT ASSETS
Equipment 230 000
Building 820 000
Land 350 000
TOTAL NON-CURRENT ASSETS 1 400 000
$1 627 200
CURRENT LIABILITIES
Accounts payable 36 000
TOTAL CURRENT LIABILITIES 36 000
NON-CURRENT LIABILITIES
Mortgage payable 456 000
TOTAL NON-CURRENT LIABILITIES 456 000
NET ASSETS $1 135 200
PARTNERS’ EQUITY
Capital, Lloyd 421 200
Capital, Schulz 714 000
TOTAL PARTNER’S EQUITY $1 135 200
C.
LLOYD AND SCHULZ
Statement of Changes in Partners’ Equity (Method 1)
for the year ending 30 September 2013
Lloyd Schulz Total
Capital balances 1/10/12 $421 200 $714 000 $1 135 200
Add: Additional investment 60 000 115 200 175 200
534 276 864 584 1 398 860
Less: Drawings 45 000 17 200 62 200
Capital balances 30/9/13 $489 276 $847 384 $1 336 660

Problem 15.7 Formation and allocation of profits – method 1
SALMON AND DAVIS
Required:
A. Prepare the journal entries to record the initial investments of both partners. (ignore
GST.)
B. Prepare a Balance Sheet as at 1 July 2012.
C. Prepare a statement of partners’ equity for the year ended 30 June 2013.
A. 1/7/2012 Cash at Bank $62 000

Inventory 96 000
Equipment 360 000
Accounts Payable $24 000
Loan 80 000
Salmon, Capital 448 000
Commercial Property 460 000

Mortgage Payable 280 000
Davis, Capital 180 000

B.
SALMON AND DAVIS
Balance Sheet
as at 1 July 2012
CURRENT ASSETS
Inventory 96 000
NON-CURRENT ASSETS
Equipment 360 000
Commercial Property 460 000
$1 012 000
CURRENT LIABILITIES
Accounts payable 24 000
Loan 80 000
Mortgage payable 280 000
TOTAL NON-CURRENT LIABILITIES 360 000
TOTAL LIABILITIES $384000
NET ASSETS $628 000
PARTNERS’ EQUITY
Capital, Salmon 448 000
Capital, Davis 180 000
TOTAL PARTNER’S EQUITY $628 000
C.
SALMON AND DAVIS
for the year ending 30 June 2013
Salmon Davis Total
Add: Additional investment 80 000 82 000 162 000
594 400 328 400 922 800
Less: Drawings 20 000 24 000 44 000

Problem 15.8 Formation and allocation of profit – method 2
ARNOLD, OMOND AND EDWARDS
Required:
A. Prepare journal entries necessary to open the records of the partnership.
B. Prepare the Balance Sheet of the partnership immediately after formation.
C. Prepare a Profit Distribution account for the year ended 30 June 2013 using
method 2.
A. 2012
Inventory 42 500
Plant and Machinery 78 600
Arnold, Capital 153 800
Cash at Bank 37 500

Omond, Capital 37 500
Cash at Bank 16 500

Land 120 000
Premises 240 000
Furniture and Fittings 40 500
Motor Vehicles 31 500
Mortgage 180 000
Edwards, Capital 268 500

B.
ARNOLD, OMOND AND EDWARDS
Balance Sheet
as at 1 July 2012
CURRENT ASSETS
Inventory 42 500
NON-CURRENT ASSETS
Plant and machinery 78 600
Land 120 000
Premises 240 000
Furniture and fittings 40 500
Motor vehicles 31 500
Mortgage $180 000
TOTAL NON-CURRENT LIABILITIES $180 000
NET ASSETS $459 800
EQUITY
Capital, Arnold $153 800
Capital, Omond 37 500
Capital, Edwards 268 500
C.
Profit Distribution
2013 2013
30/6 Omond, salary $32 000 30/6 Profit ($120 800 - $43 000) $77 800
30/6 Interest on capital: Interest on drawings:
Retained Profit, Arnold (153 800 x 8%) 12 304 Arnold (12 000 x 10% x 9/12)
Retained Profit, Omond (37 500 x 8%) 3 000 + (8 000 x 10% x 6/12) 1 300
Retained Profit, Edwards (268 500 x 8%) 21 480 Omond (4 000 x 10% x 3/12) 100
30/6 Residual profits: ($10 416)
Retained Profit, Arnold (2/5) 4 166
Retained Profit, Omond (2/5) 4 166
Retained Profit, Edwards (1/5) 2 084
$79 200 $79 200

Problem 15.9 Allocation of profits –method 2
OSCAR, PATRICK AND BRUCE
Required:
A. Complete the Profit and Loss Summary account for the year ended 30 June 2013.
B. Prepare the Profit Distribution account.
C. Complete each partner’s Retained Earnings account after all adjustments.
A.
Profit and Loss Summary
2013 2013
30/6 Interest on advance $1 440 30/6 Balance $148 000
30/6 Interest on loan 1 800
30/6 Profit for distribution 144 760
$148 000 $148 000
B.
Profit Distribution
30/6 Cash - Salary, Bruce $32 000 30/6 Profit & loss summary $144 760
30/6 Interest on capital: 30/6 Interest on drawings:
Oscar 6 150 Oscar 3 200
Patrick 6 768 Patrick 2 800
Bruce 6 480 19 398 Bruce 500 6 500
30/6 Residual profits:
Oscar (2/5) 39 945
Patrick (2/5) 39 945
Bruce (1/5) 19 972 99 862
$151 260 $151 260

C.
Oscar, Retained Earnings
1/7 Balance 26 000
30/6 Interest on capital 6 150
30/6 Interest on drawings 3 200 30/6 Residual profit 39 945
30/6 Drawings 32 000
30/6 Balance 36 895
$72 095 $72 095
30/6 Balance $36 895
Patrick, Retained Earnings

30/6 Drawings $28 000 1/7 Balance $32 000
30/6 Interest on drawings 2 800 30/6 Interest on capital 6 768
30/6 Balance 47 913 30/6 Residual profit 39 945
$78 713 $78 713

30/6 Balance $47 913
Bruce, Retained Earnings

30/6 Interest on drawings 500 30/6 Interest on capital 6 480
30/6 Residual profit 19 972
Salary 32 000
30/6 Balance 77 452
$89 952 $82 952
30/6 Balance $77 452

Problem 15.10 Formation and allocation of profit – method 2
WARNER AND ELLIS
Required:
A. Prepare journal entries to record the formation of the partnership.
B. Prepare a statement of changes in partner’s equity as at 30 June 2013 showing each
partner’s share of profit/loss for the year.
C. Prepare the balance sheet of the partnership as at 30 June 2013.
A. 2012
July 1 Accounts Receivable $61 280
Inventory 48 380
Furniture and Fittings 26 260
Equipment 24 894
Goodwill 49 086
Bank Overdraft 18 430
Warner, Capital 150 000
Warner’s net assets into the partnership
July 1 Cash at Bank 59 900

Inventory 73 720
Goodwill 25 600
Ellis, Capital 150 000
Ellis’s net assets into the partnership.

B.
WARNER AND ELLIS
Warner Ellis Total
CAPITAL
RETAINED EARNINGS
Balances 1/7/12 - - -
68 055 68 055 136 110
Less: Drawings 28 800 36 240 65 040
Balances 30/6/13 39 255 31 815 71 070
TOTAL EQUITY $189 255 $181 815 $371 070
Calculation of share of profits:

Total partnership equity at 30 June 2012 $371 070
(300 000 + 23 040 – 10 120 + 36 860 + 27 650 –
26 260*10% - 24 894*15%)
Add back: Drawings ($28 800 + $36 240) 65 040
Partnership equity before drawings 436 110
Beginning partnership equity ($150 000 + $150 000)
300 000
Profit for year $136 110
Warner’s share (1/2) = $68 055

Ellis’s share (1/2) = $68 055

C.
WARNER AND ELLIS
Balance Sheet
as at 30 June 2013
CURRENT ASSETS
Inventory 158 960
NON-CURRENT ASSETS
Furniture and fittings $26 260
Accumulated depreciation 2 626 23 634
Equipment 24 894
Accumulated depreciation 3 734 21 160
Goodwill 74 686
CURRENT LIABILITIES
NET ASSETS $371 070
PARTNERS’ EQUITY
Warner, Capital 189 255
Ellis, Capital 181 815 371 070
Calculations:
Net assets at 30 June 2013:
Net cash at bank = $59 900 - $18 430 + $23 040 $64 510
Net accounts receivable = $61 280 + $46 080 - $10 120 97 240
Inventory = $48 380 + $73 720 + $36 860 158 960
Furniture and Fittings = $26 260 – (10% x $26 260) 23 634
Equipment = $24 894 – (15% x $24 894) 21 160
Goodwill = 74 686
440 190
Less: Creditors ($41 470 + $55 300 - $27 650) (69 120)
Net Assets $371 070

Problem 15.11 Allocation of profit –method 2
MCGOWAN AND WHAIT
Required:
Prepare:
1. the Profit Distribution account for 6 months ended 30 June 2013.
2. the Retained Earnings accounts for each partner at 30 June 2013.
3. a balance sheet as at 30 June 2010.
A.
Profit Distribution
Interest on capital: Profit* $44 080
McGowan, Retained Earnings $5 760
Whait, Retained Earnings 3 840
Partners’ salaries:**
McGowan, Retained Earnings 60 000
Whait, Retained Earnings 50 000
Residual loss:
McGowan, Retained Earnings 45 312
(60%)
Whait, Retained Earnings (40%) 30 208
$119 600 $119 600
* $44 080 = $46 000 less interest on advance $1920
** Since partners’ salaries appear in the trial balance, the entry made to record these
salaries would have been a debit to salaries accounts for McGowan and Whait
and a credit to cash. The normal entry for partners’ salaries as an allocation of
profits is followed here, and hence the salaries accounts shown in the trial
balance are closed off to the retained earnings accounts of the partners. The
balance of the net credit to the partners’ salaries account is the portion of the
salary not paid in cash.
*** There is no interest on drawings as neither partners’ drawings exceeded their

salary

B.
McGowan, Retained Earnings

Balance $22 000 Salary $60 000
McGowan, Salary (clos. 30 000 Interest on capital 5 760
entry)
Share of residual loss 45 312
Balance 31 552
$97 312 $97 312
Balance 31 552
Whait, Retained Earnings
Balance $16 000 Salary $50 000
Whait, Salary (clos. entry) 25 000 Interest on capital 3 840
Share of residual loss 30 208
Balance 17 368
$71 208 $71 208
Balance $17 368

C.
MCGOWAN AND WHAIT
Balance Sheet
as at 30 June 2013
CURRENT ASSETS
Inventory 32 000
NON-CURRENT ASSETS
Accumulated Depreciation (47 800) 58 200
LIABILITIES
Interest Payable on Advance 1 920
McGowan, Advance 24 000
NET ASSETS $71 080
EQUITY
Capital, McGowan 72 000
Retained Earnings, McGowan (31 552) 40 448
Capital, Whait 48 000
Retained Earnings, Whait (17 368) 30 632

Problem 15.12 Allocation of profit –method 1
BEDFORD, BELLING AND BROADBENT
Required:
Prepare:
A. the Profit Distribution account for the year ended 30 June 2012.
B. the Capital Accounts for each partner at 30 June 2012.
C. the Balance Sheet as at 30 June 2012.
A.
Profit Distribution
2012 2012
30/6 Salary: Bedford $92 000 30/6 P & L Summary (after 246 400
Belling 56 000 (interest on advances of $25 600)
30/6 Interest on capital: 30/6 Interest on drawings:
Bedford 9 600 Bedford *1 140
Belling 19 200 Belling *1 140
Broadbent 38 400 Broadbent -
Share of profit:
($33 480)
Bedford 11 160
Belling 11 160
Broadbent 11 160
$248 680 $248 680
* ($12 000 x 8% x 9/12) + ($8 000 x 8% x 6/12) + ($5 000 x 8% x 3/12)

= 720 + 320 + $100
= $1 140
B.
Bedford, Capital
30/6 Interest on Drawings $1 140 1/7 Balance $160 000
30/6 Drawings 60 000 30/6 Salary 92 000
30/6 Balance 211 620 30/6 Interest on Capital 9 600
30/6 Share of Profit 11 160
$272 760 $272 760
30/6 Balance $211 620

Belling, Capital
30/6 Interest on Drawings $1 140 1/7 Balance $320 000
30/6 Drawings 60 000 30/6 Salary 56 000
$406 360 $406 360
30/6 Balance $345 220
Broadbent, Capital
$689 560 $689 560
30/6 Balance $669 560

C.
BEDFORD, BELLING AND BROADBENT
Balance Sheet
as at 30 June 2012
CURRENT ASSETS
Cash at Bank $162 500
Inventory 178 460
NON-CURRENT ASSETS
Equipment $1 430 800
Accumulated Depreciation (462 600)
968 200
Goodwill 360 000
TOTAL NON-CURRENT ASSETS 1 328 200
TOTAL ASSETS $1 917 780
CURRENT LIABILITIES
Interest Payable on Advance 25 600
Advance – Broadbent $320 000
NET ASSETS $1 226 400
EQUITY
Capital, Bedford $211 620
Capital, Belling 345 220
Capital, Broadbent 669 560
TOTAL EQUITY $1 226 400

Problem 15.13 Comprehensive problem
CLARKE AND ASSOCIATES
Required:
A. Prepare the income statement for the year ended 31 March 2013.
B. Prepare a statement of changes in partners’ equity for the year ended 31 March 2013.
C. Prepare the balance sheet as at 31 March 2013.
A.
Income Statement
for the year ended 31 March 2013
INCOME:
Professional fees revenue $450 000
EXPENSES
Salaries expense 92 800
Rent expense 18 000
Office expenses* 19 300
Library maintenance expense 9 200
Insurance expense 6 500
Depreciation of furniture 9 975 155 775
PROFIT $294 225
*Office expenses $19 500 - $15 200 + $15 000 = 19 300
Workings:

Clarke Cooper Cornish Total
98 075 98 075 98 075 294 225

B.
CLARKE AND ASSOCISATES
for the year ending 31 March 2013
CAPITAL
Clarke Cooper Cornish Total
Capital balances 1/4/12 $51 450 $51 450 $44 100 $147 000
Capital balances 31 /3/13 51 450 51 450 44 100 147 000
RETAINED EARNINGS
Balances 1/4/12 29 500 25 500 22 660 77 660
Profit allocation 98 075 98 075 98 075 294 225
127 575 123 575 120 735 371 885
Less: Drawings 96 000 72 900 36 300 205 200
Balances 31/3/13 31 575 50 675 84 435 166 685
TOTAL EQUITY $83 025 $102 125 $128 535 $313 685
C.
Balance Sheet
as at 31 March 2013
CURRENT ASSETS
Advances on account of clients 11 880
NON-CURRENT ASSETS
Office Furniture 66 500
Accumulated Depreciation (9 975)
56 525
Professional library 45 000
CURRENT LIABILITIES
NET ASSETS $323 685
EQUITY
Partners’ Capitals 147 000
Partners’ Retained Earnings 166 685
Workings:
Cash at Bank $61 980 + $497 000 - $391 200 = 167 780
Accounts receivable $59 500+ $450 000 - $452 000 = 57 500
Advances made to clients $6 880 + $45 000 - $40 000 = 11 880

PPP PARTNERS
Required:
A. Prepare the income statement for the year ended 30 June 2013.
B. Prepare a statement of changes in partners’ equity for the year ended 30 June 2013.
C. Prepare the balance sheet as at 30 June 2013.
A.
PPP PARTNERS
Income Statement
INCOME:
Less: Cost of Sales
Opening Inventory 46 700
Add: Purchases 260 600
307 300
Less: Closing Inventory 45 000 262 300
GROSS PROFIT 210 300
EXPENSES
Office expenses 24 500
Operating expenses 43 300
PROFIT $67 330
Assume opening Accounts Payable relates to purchases. Closing Accounts payable is

assumed to be nil as it is not listed.
Workings:

Pearson Pelham Perrin Total
22 443 22 443 22 444 $67 330

B.
PPP PARTNERS
CAPITAL
RETAINED EARNINGS
Balances 1/7/12 16 200 12 800 14 600 43 600
38 643 35 243 31 044 110 930
Less: Drawings 12 000 12 500 11 800 36 300
Balances 30/6/13 26 643 22 743 25 244 74 630
TOTAL EQUITY 88 643 84 743 67 244 240 630
C.
PPP PARTNERS
Balance Sheet
as at 30 June 2013
CURRENT ASSETS
Inventory 45 000
NON-CURRENT ASSETS
CURRENT LIABILITIES
-
TOTAL CURRENT LIABILITIES -
NET ASSETS $240 630
EQUITY
Workings:
Cash at Bank $30 200 + $474 800 - $450 200 = 54 800
Accounts receivable $32 600 + $472 600 - $474 800 = 30 400

TRIPLE E PARTNERS
Required:
A. Prepare the income statement for the year ended 30 June 2013.
B. Prepare a statement of changes in partners’ equity for the year ended 30 June 2013.
C. Prepare the balance sheet as at 30 June 2013.
A.
TRIPLE E PARTNERS
Income Statement
INCOME:
Less: Cost of Sales
Opening Inventory 40 000
Add: Purchases 218 500
258 500
Less: Closing Inventory 38 700 219 800
GROSS PROFIT 148 800
EXPENSES
Office expenses 19 100
Operating expenses 34 000
PROFIT $35 100
Purchases = 220 000 – 19 500 + 18 000 = 218 500
Workings:

11 700 11 700 11 700 $35 100

B.
TRIPLE E PARTNERS
CAPITAL
RETAINED EARNINGS
Balances 1/7/12 8 200 8 200 8 000 24 400
19 900 19 900 19 700 59 500
Less: Drawings 9 360 9 750 9 200 28 310
Balances 30/6/13 10 540 10 150 10 500 31 190
TOTAL EQUITY 64 540 60 150 62 500 187 190
C.
TRIPLE E PARTNERS
Balance Sheet
as at 30 June 2013
CURRENT ASSETS
Inventory 38 700
NON-CURRENT ASSETS
CURRENT LIABILITIES
NET ASSETS $187 190
EQUITY
Workings:
Cash at Bank $25 900 + 370 300 – 351 410 = 44 790
Accounts receivable $28 000 + 368 600 – 370 300 = 26 300

CASE STUDY
SOLUTIONS
Decision Case A partnership without a partnership agreement
O’MALLEY AND O’REILLY
Required:
A. Calculate the amount of profit distribution to each partner under each scenario. Which
scenario is most favourable to O’Malley? to O’Reilly?
B. Given the capital commitments and expertise of each partner, decide which scenario is
the most appropriate for the partnership agreement.
C. What recommendations would you make for any proposed partnership agreement in the
event that the partnership incurs a loss for the year?
A. If there are no suggested arrangements to distribute the profit then the provisions of
the partnership act apply, i.e. that the profit be divided between the partners equally.
(a) O’Malley 50% $60 000

O’Reilly 50% $60 000
$120 000
(b) O’Malley 400 000 $120 000 = $63 158

x
760 000 1
O’Reilly 360 000 $120 000 = $56 842
x
760 000 1
$120 000
(c) O’Malley
Salary $40 000
5% interest on ending 22 000
capital ($400 000 + 40 000)
Residual loss 50% (10 000) $52 000
O’Reilly
Salary $60 000
5% interest on ending 18 000
capital ($360 000)
Residual loss 50% (10 000) $68 000
$120 000
Scenario (b) is the most favourable to O’Malley

Scenario (c) is the most favourable to O’Reilly.
B. As scenario (c) takes into account the capital commitments and expertise of both
parties, it is the most appropriate to recommend.
C. Losses should be shared in the same manner as profits.

Communication / Forming partnerships

Group Activity
1. The senior partner could be determined on the basis of who had the most experience,
who was the most highly qualified, who had contributed the most capital and some
combination of these factors. If all the partners contributed the same capital, had the
same level of qualifications and similar levels of experience, then they may choose
not to have a senior partner.
2. The profit could be shared equally. Interest could be paid to partners based on their
capital contributions if they were different and then the balance of the profit shared
equally. Alternatively, the whole profit could be distributed based on the capital
contributed by each of the partners. This should be determined up front, before a
profit is made, and included in a partnership agreement to avoid disputes later on.
3. This is really up to the group to determine. As most partners would want their level
of qualifications, experience, and ability to generate business for the partnership
rewarded in some way, this should be discussed at the outset and included in the
partnership agreement.
4. Refer to the list in the chapter under the heading “Partnership Agreement”.

Ethical Issues Partnership concerns
FRASER AND MASON
Required:
A. Who are the stakeholders in this situation?
B. Does Craig appear to be doing anything wrong? Explain your response.
C. Are there any ethical issues involved here? If so, identify them.
A. The major stakeholder is Michelle, who appears to be disadvantaged both personally

in terms of her relative contribution to the affairs of the partnership, in her return
from the partnership, and in terms of the threat that the partnership could decline to
the point where it may have to be dissolved. Craig is also a stakeholder, as would be
the creditors of the firm if it were to cease to operate because of Craig’s actions.
B. While Craig may not be doing anything legally wrong, he would be fully aware that
his capital contribution has been reduced from $60 000 to $20 000 compared to
Michelle maintaining her capital contribution at $50 000. Yet according to the
partnership agreement Craig is still receiving more of the profit than Michelle. Both
contribute equally to the partnership and are rewarded by receiving the same salary. It
would be reasonable that they would both share in the profit equally and that interest
be paid on the remaining capital balance of the partners.
C. The major ethical issue here is that Craig appears to be taking advantage of
Michelle’s lack of confidence with numbers and accounting and the trust that she has
put in him.

Financial Reporting JB Hi-Fi Ltd

Case
Required:
1. The JB Hi-Fi Ltd income statement shows a deduction for income tax expense. Would
this expense item be seen in the income statement of a partnership? Explain your
answer.
2. In the statement of changes in equity regarding retained earnings, how is the total profit
available appropriated? How does the allocation of the total profit available for
appropriation in a partnership differ from that shown for JB Hi-Fi Ltd? Explain the
reasons for any differences.
3. Refer to the balance sheet of JB Hi-Fi Ltd. How does the ‘equity’ segment differ from
that of a typical partnership? Explain.
4. JB Hi-Fi Ltd is required to produce a cash flow statement and include this in its annual
financial report. Would the typical partnership be required to prepare such a
statement? Why or why not? Would a typical partnership prepare such a statement?
Explain.
1. No. Partnerships are not legal entities and therefore are not taxed. Partnership
profits are taxed via the partners who include their share of partnership profits in their
personal income tax return.
2. Operating profit is either paid out in dividends, or transferred to reserves. Any

balance remaining is left in retained earnings. In a partnership, all the profits for a
year are allocated in an agreed ratio to each of the partners.
3. For the company, Equity consists of Share Capital and Reserves. For a partnership,
Partners’ Equity consists of partners’ capital balances together with Retained
Earnings balances if Method 2 is used. If Method 1 is used, only the Capital
balances are shown for each partner, and these reflect the position after drawings
accounts are closed off to the partners’ capital accounts.
Since the reserves are profit distributions, these reserves would be included in the
retained profits and/or partner’s capital accounts balances depending on the method f
accounting for equity used.
4. No, since the partnership would most likely to be a non-reporting entity and not
required to comply with accounting standards. In this situation, whether a cash flow
statement would be prepared would be at the discretion of the partners. Such a
statement could be prepared as a special purpose report if required by a prospective
lender, for example. If the partnership is a reporting entity, it would be required to
prepare a cash flow statement as it is required to comply with Australian accounting
standards.

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John Hoggett, John Medlin, Lew Edwards,

John Wiley & Sons Australia, Ltd 2012

© John Wiley & Sons Australia, Ltd 2012 15.1

3. Which is likely to last longer and why, a partnership or a company?

 a company is likely to last longer than a partnership

5. ‘The accounting treatment of a partner’s drawings differs when separate Retained

 If no Distribution account is used, the Profit and Loss Summary account

© John Wiley & Sons Australia, Ltd 2012 15.4

© John Wiley & Sons Australia, Ltd 2012 15.5

Exercise 15 .1 Partnership formation

SUDJAI AND SUTRIN

Cash at Bank 90 000

© John Wiley & Sons Australia, Ltd 2012 15.6

Cash at Bank 90 000

© John Wiley & Sons Australia, Ltd 2012 15.7

Exercise 15 .2 Partnership formation

BECKER AND DICKSON

Cash at Bank $6 200

Cash at Bank 5 800

© John Wiley & Sons Australia, Ltd 2012 15.8

Exercise 15 .3 Partnership formation

BECKER AND DICKSON

Cash at Bank $6 200

Cash at Bank 5 800

© John Wiley & Sons Australia, Ltd 2012 15.9

Exercise 15 .4 Partnership profit distribution – fixed ratio

GOTTSCHE AND GUTTERIDGE

B. Profit Distribution 96 000 96 000

© John Wiley & Sons Australia, Ltd 2012 15.10

Exercise 15 .5 Partnership profit distribution – capital balances

LEUNG AND LIM

B. Profit Distribution 160 000 160 000

© John Wiley & Sons Australia, Ltd 2012 15.11

Exercise 15.6 Allocation of net profit

LAING AND LOWRY

Profit Distribution 40 500 40 500 40 500

1. $40 500 x 0.55 = $22 275

2. Laing $120 000 (4/7) x $40 500 = $23 143

3. Laing Lowry Total

© John Wiley & Sons Australia, Ltd 2012 15.12

B. Profit and Loss Summary $27 000

Profit Distribution 27 000

Laing Lowry Total

© John Wiley & Sons Australia, Ltd 2012 15.13

Exercise 15.7 Allocation of profit

MILLER AND MONTEROSA

Profit Distribution 72 000 72 000 72 000

1. $72 000 x 0.6 = $43 200

2. Miller $110 000 110/200 x $72 000 =$39 600

3. Miller Monterosa Total

© John Wiley & Sons Australia, Ltd 2012 15.14

B. Profit and Loss Summary $30 000

Profit Distribution 30 000

Miller Monterosa Total

© John Wiley & Sons Australia, Ltd 2012 15.15

Exercise 15.8 Interest on capital and drawings

ZOLLO AND ZOUMBOULIS

Dec 20 Zoumboulis, Drawings 8 000 8 000