Accounting 9706 A Level

Question 1

Ben and Josie have been in partnership for a number of years sharing profits and losses in the ratio
2: 1 respectively.
Their balance sheet at 30 April 2006 was as follows:

$ $
Non-current assets
Premises 60 000
Equipment 20 000
Vehicle 18 000
98 000
Current assets
Inventory 6 000
Trade Receivable 4 000
Bank 2 000
12 000
Trade Payables 7 000 5 000
103 000
Partner’s 6 % loan – Josie 25 000
78 000
Capital accounts Ben 40 000
Josie 35 000 75 000
Current accounts Ben (1 000)
Josie 4 000 3 000
78 000

On 1 May 2006 they admitted Melvyn to the partnership. Melvyn introduced $30 000 cash as his
capital. The partners agreed the following asset revaluations:
$
Premises 100 000
Equipment 15 000
Vehicle 10 000
Goodwill 21 000

It was further agreed that goodwill would not appear in the new partnership’s books of account.
Any adjustments were to be made through the partners’ capital accounts.

The partners would in future share profits and losses in the ratio Ben 3, Josie 2 and Melvyn 2.
Required:
(a) Prepare capital accounts at 1 May 2006 immediately after Melvyn’s entry to the partnership.
[10]

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Accounting 9706 A Level

Since Melvyn’s entry into the partnership business has declined. Property prices have also gone
down.

On 31 October 2006 Ben decided to reduce his involvement in the business due to ill health. The
partners drew up the following new partnership agreement which would take effect from
1 November 2006.
1. Melvyn is to be credited with a partnership salary of $8000 per annum.
2. Interest on capital account balances is to be credited at 8 % per annum.
3. Residual profits are to be shared in the ratio of Ben 1, Josie 3 and Melvyn 2.
4. The following asset values were agreed by the partners:

$
Premises 75 000
Equipment 12 600
Vehicle 8 000
Goodwill 15 000

It was further agreed that any adjustments were to be made through the partners’ capital
accounts.

It was agreed by the partners that the total capital of the business should not change but that the
capital account balances should reflect the new profit sharing ratios. Partners were to introduce
or withdraw capital to achieve this.

REQUIRED
(b) Prepare capital accounts at 31 October 2006 after the restructuring of the partnership. [14]

The partnership net profit for the year ended 30 April 2007, before loan interest, was $42 500. 70 %
of profits were earned in the period 1 May 2006 to 31 October 2006. The partners’ drawings for the
year were:
$
Ben 18 000
Josie 17 000
Melvyn 16 000

REQUIRED
(c) Prepare partnership current accounts for the year ended 30 April [16]
November 07 Q. 1 [Total: 40]

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Accounting 9706 A Level

Question 2

Ahmed, Bola and Chaudhry have been in partnership for a number of years. The final accounts for
the year ended 31 March 2008 had been prepared by their new finance manager appointed in late
January 2008.

The profit and loss appropriation account showed that:

Ahmed had been credited with a partnership salary 14 000
Interest on capital had been credited at 8 % per annum: Ahmed 6 000
$
Bola 4 800
Chaudhry 5 040
Interest on drawings 1 340
Each partner’s share of residual profits was 38 500

Although the final accounts were numerically accurate the finance manager had not taken
into account the following:
1 A new partnership agreement was drawn up and took effect from 1 October
2007.
The new partnership agreement provided that:
Ahmed and Bola would be credited with an annual salary of $10 000 and $6000
respectively.
Interest on fixed capitals would be credited at 6 % per annum. Residual profits would be
shared in the ratio 3: 2: 1 respectively.
2 At 30 September 2007 the partners agreed that some assets be revalued at $8000 more than
their net book value whilst others were revalued at $2000 less than their net book value.
It was further agreed that goodwill would have a value of $72 000, but that goodwill
would not be shown in the accounts, but dealt with by adjustments through the partners’
capital accounts.

Additional information
At 31 March 2008 the partners’ current accounts showed:

Balances Drawings for Interest charged on drawings

at 1 April the year April 2007 to October 2007
September 2007 to March 2008
Ahmed 13020 cr 46 000 185 499
Bola 305 dr 44 000 210 294
Chaudhry 13785 cr 31 000 105 47

5 5
Five twelfths 12 of the profits had accrued in the 6 months ended 30 September 2007 seven
7
7
twelfth 12 of the profits had accrued between 1 October 2007 and 31 March 2008.

REQUIRED
(a) Prepare detailed capital accounts at 31 March 2008. [11]
(b) Prepare a corrected profit and loss appropriation account for the year ended 31 March 2008.
[18]
(c) Prepare detailed current accounts at 31 March 2008. [11]
June 2008 Q. 1 [Total: 40]

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Accounting 9706 A Level

Question 3

Yip and Sim have been in partnership for many years sharing profits and losses in the ratio 2: 1
respectively. The partners do not take an active part in running the business. Instead, Danny has
managed the business for them for the past few years.

The partners provide the following balance sheet at 31 January 2009:

$ $
Fixed assets at cost 129 000
Depreciation to date 51 600 77 400
Current assets
Stock 38 700
Trade debtors 25 800
Bank balance 9 675
74 175
Current liabilities
Trade creditors 18 850 55 325
132725
Capital accounts
Yip 80 000
Sim 50 000
Current accounts
Yip 4 875
Sim (2 150)
132725
Profits shared by the partners for each of the past three years have been $39 000 after paying Danny
a manager’s salary of $27 000. It is believed that this level of profitability can be maintained in the
future.

Danny wishes to expand the business. This would involve expenditure on new fixed assets at a
cost of $250 000. The finance for the new fixed assets would be in the form of a loan at 8 % interest
per annum.

Yip, Sim and Danny all agree that the expansion should take place. This would increase the
operating profit by $50 000.
Yip and Sim are considering retirement from the
business. Yip and Sim offer Danny two options.

Option 1: Danny will be admitted to the business as a partner. He would introduce a total of
$60 000 cash for his capital and goodwill. He would be entitled to 75 % of profits and losses,
the remainder being shared by Yip and Sim in the same ratios as previously. Danny would
keep his salary as a manager. Yip, Sim and Danny agree that:

(i) the existing fixed assets of the business would be revalued at $100 000;
(ii) stock would be valued at $38 100;
(iii) a debt of $1000 would be written off as bad;
(iv) goodwill would be valued at $72 000 but would not be shown in the books of account;
the proposed expansion would take place immediately.

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Accounting 9706 A Level

Option 2: Danny would buy all the assets including cash and assume all the liabilities of the
business for a payment of $185 000. The expansion would also take place immediately.

Required:
a. Prepare the balance sheet of the partnership as it would appear immediately after option 1
was implemented. [20]
b. Prepare the balance sheet of Danny as it would appear immediately after option 2 was
implemented. [8]
c. Compare the annual profits to be gained by Danny from the implementation of each of the
options being considered. [7]
d. Advise Danny which option he should choose. Support your answer with financial data.
[5]
November 2009 V1 Q.1 [Total: 40]

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Accounting 9706 A Level

Question 4

Aneeqa and Emilita are two sole traders who decided to form a partnership combining their
businesses. At 31 March 2010 their balance sheets were as follows:

Balance sheets at 31 March 2010

Aneeqa Emilita
$ $ $ $ $
Non-current (fixed) assets
Premises – 86 000
Equipment 12 000 19 000
Fixtures 6 000 3 000
Motor vehicle 8 200 –
26 200 108 000
Current assets
Inventory (stock) 15 000 5 700
Trade receivables (debtors) 17 000 18 000
Cash and cash equivalents 9 050 –
(bank) 41 050 23 700
Current liabilities
Trade payables (creditors) 11 000 12 000
Cash and cash equivalents – 10 850
(bank) 22 850

Net current assets

30 050
56 250 108 850
85
0
Capital 56 250 108 850

The new partnership was formed on 1 April 2010 when their assets were valued at:

Aneeqa Emilita
$ $
Premises – 120 000
Equipment 16 000 20 000
Fixtures 6 500 2 800
Motor vehicle 12 100 –
Inventory (stock) 14 800 5 100
Goodwill 9 000 5 000
It was agreed that a provision for doubtful debts of 5% would be created, that the bank accounts
would be amalgamated and that goodwill would not be retained in the books.

From 1 April 2010:

Interest on capital was to be 10%.
Partners’ salaries were to be $10 000 each.
Profits were to be shared between Aneeqa and Emilita in the ratio 2:3 respectively.

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Accounting 9706 A Level

REQUIRED
(a) Prepare the balance sheet of the partnership at the start of business on 1 April 2010. [17]

As sole traders Aneeqa and Emilita had earned annual profits of $16 000 and $34 000
respectively. They expect the profits of the partnership to be 10% higher in the first year.

REQUIRED

(b) Calculate the amount of income each partner has gained or lost by the creation of the
partnership. State which partner has benefitted in terms of income? [9]

(c) Aneeqa and Emilita’s future incomes are dependent on their businesses being going
concerns.
State which partner has benefitted in terms of job security by the creation of the partnership?
Illustrate your answer with two ratios and give reasons for your answer. [10]
(d) Calculate the percentage change in profit which would cause Emilita’s income to remain
unchanged. [4]
June 2010 V1, V2 Q.1 [Total: 40]

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Accounting 9706 A Level

Question 5

Deeti and Neel have been in partnership for some years sharing profits and losses equally. Interest
on capital has been at 5%. Depreciation on equipment has been provided monthly at a rate of 10%
per annum on the straight line basis.
On 1 January 2009 their balance sheet was as follows:

$ $ $
Non-current (fixed) assets
Equipment 50000
Accumulated depreciation 40000 10000

Current assets
Inventory (stock) 22000
Trade receivables (debtors) 17000
Cash and cash equivalents (bank) 6000
45000
Current liabilities
Trade payables (creditors) 9000
Accrued rent 500 9500
Net current assets (working capital) 35500
45500
Capital accounts
Deeti 24000
Neel 18000 42000
Current accounts
Deeti 7000
Neel (3500) 3500 45500

Deeti and Neel wished to expand their business and on 1 July 2009 they admitted Armand into
the partnership.

Armand owned premises which he transferred to the partnership on that date at an agreed
valuation of $100 000. This comprised $65 000 for the land and $35 000 for the buildings.

The partnership ceased to rent premises on 30 June 2009 and sold all the existing equipment on
that date.

The partnership bought new equipment on 1 July 2009 for its new building, taking out a 6% bank
loan of $40 000 on that date to finance the purchase in part.
It was agreed from 1 July 2009 that
1. The three partners would share profits equally.
2. Armand would have an annual salary of $16 000.
3. The rate of interest on capital would increase to 8%.
4. Buildings would be depreciated monthly at a rate of 2% per annum.
5. The rate of depreciation on equipment would remain unchanged.
6. Goodwill at 1 July 2009 was valued at $18 000 but was not to be retained in the books.

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Accounting 9706 A Level

A summary of the cash book for the year showed the following:

6 months to 6 months to
30 June 2009 31 December 2009
$ $
Receipts from customers 191 000 237 000
Payments to suppliers 102 000 119 000
Rent paid 3 500 –
Other costs 51 000 57 000
Proceeds of sale of equipment 6 500 –
Purchase of equipment – 62 000
Drawings:
Deeti 11 000 12 000
Neel 15 000 14 000
Armand – 18 000

Other information was as follows:

At 30 June 2009 At 31 December 2009
Inventory (stock) 21 000 28 000
Trade receivables (debtors) 14 000 24 000
Trade payables (creditors) 12 000 20 000

During April 2009 a bad debt of $1000 was written off.

REQUIRED
a. Prepare the partners’ capital accounts in columnar 31 December 2009. Format for the year
ended [7]
b. Prepare income statements (trading and profit and loss accounts) and appropriation
accounts for each of the 6 month periods ended 30 June 2009 and 31 December 2009 [19]
c. Prepare the partners’ current accounts in columnar format for the year ended 31 December
2009. [10]
d. Using the figures given, state one advantage and one disadvantage arising from Deeti and
Neel’s decision to expand by admitting Armand into the partnership. [4]
June 2010 V3 Q. 1 [Total: 40]

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Accounting 9706 A Level

Question 6

Poppy and Rose have been in partnership for some years and have a financial year end of
31 December. On 31 December 2009 their balance sheet showed the following:
$
Capital accounts Poppy 150 000
Rose 90 000
Current accounts Poppy 8 500
Rose (2 100)

Poppy and Rose shared profits equally and received annual salaries of $10 000 and $4000
respectively until 30 June 2010. Interest on capital was calculated at 10%.
On 1 July 2010 a new partnership agreement came into force which stated that:

Poppy and Rose would share profits in the ratio 3:2

receive annual salaries of $24 000 and $18 000 respectively
the rate of interest on capital to remain unchanged
goodwill had a value of $25 000 but it was not to be retained in the books the premises
should be revalued upwards by $70 000.

At the end of the year a trainee accountant produced their year end accounts. He forgot to take into
account that the partnership agreement had been changed. He produced a draft set of accounts
which showed that on 31 December 2010 the current account balances for Poppy and Rose were $26
350 and $6550 (both credit).

Drawings during the year had been:

Poppy Rose
$ $
6 months ended 30 June 9 000 7 500
6 months ended 31 December 12 000 11 000

Interest on drawings for the year was calculated as:

Poppy Rose
$ $
6 months ended 30 June 820 720
6 months ended 31 December 1 700 1 500

Profits are assumed to accrue evenly across the year.

REQUIRED
(a) Prepare partners’ capital accounts for the year ended 31 December 2010. [6]
(b) Calculate the profit for the year ended 31 December 2010. [4]
(c) Prepare appropriation accounts for the 6 month periods ended 30 June 2010
and 31 December 2010. [17]
(d) Calculate the correct balances on each of the partners’ current accounts at 31 December
2010. [11]
(e) Suggest one reason why Poppy and Rose might have decided to change the
partnership agreement. [2]
June 2011 V3 Q.2 [Total: 40]

Class Practice P a g e | 10 Partnership Changes