You are on page 1of 52

Solutions Manual

to accompany

Financial Accounting in Australia 7e


by

John Hoggett Lew Edwards John Medlin Matthew Tilling

John Wiley & Sons Australia, Ltd

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

CHAPTER 8 PARTNERSHIPS: FORMATION, OPERATION AND REPORTING


CONTENTS
Page DISCUSSION QUESTIONS SOLUTIONS EXERCISE SOLUTIONS: Exercise 8.1 Exercise 8.2 Exercise 8.3 Exercise 8.4 Exercise 8.5 Exercise 8.6 Exercise 8.7 Exercise 8.8 Exercise 8.9 Exercise 8.10 Exercise 8.11 Exercise 8.12 PROBLEM SOLUTIONS: Problem 8.1 Problem 8.2 Problem 8.3 Problem 8.4 Problem 8.5 Problem 8.6 Problem 8.7 Problem 8.8 Problem 8.9 Problem 8.10 Problem 8.11 Problem 8.12 CASE STUDY SOLUTIONS Decision Case Critical Thinking Case Communication/ Group Activity Ethical Issues Using the web Financial Reporting Case Partnership formation 8.2 8.6 8.8 8.9 8.10

Partnership formation Partnership formation

Partnership profit distribution fixed ratio Partnership profit distribution capital balances 8.11 Allocation of net profit 8.12 Interest on capital and drawings 8.14 Interest on capital and drawings 8.15 Allocation of profit 8.16 Allocation of profit average capital balances 8.17 Formation and allocation of partnership profits 8.18 Statement of changes in partners equity 8.19 Partnership formation Partnership formation Allocation of profit and loss Allocation of profits Formation and allocation of profit method 1 Formation and allocation of profit method 2 Allocation of profits method 2 Formation and allocation of profit method 2 Allocation of profits method 2 Allocation of profits method 1 Comprehensive problem Comprehensive problem A partnership without a partnership agreement Conflict resolution in a partnership Forming partnerships Partnership concerns Partnerships some taxing issues David Jones Ltd 8.20 8.22 8.24 8.26 8.27 8.29 8.31 8.33 8.36 8.39 8.42 8.44

8.46 8.47 8.48 8.49 8.50 8.51

John Wiley & Sons Australia, Ltd 2009

8.2

Chapter 8: Partnerships: formation, operation and reporting

CHAPTER 8 PARTNERSHIPS: FORMATION, OPERATION AND REPORTING

DISCUSSION QUESTIONS SOLUTIONS


Suggested topics for discussion are provided for each question. confined to the topics indicated. 1. Discussion need not be

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 interrelationships 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 John Wiley & Sons Australia, Ltd 2009 8.3

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al 4. 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 353

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 Liams 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 partners 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 partners 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 partners 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. John Wiley & Sons Australia, Ltd 2009 8.4

Chapter 8: Partnerships: formation, operation and reporting

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 caf. 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 caf 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. 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 Evanthias 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 John Wiley & Sons Australia, Ltd 2009 8.5

9.

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al Alternatively the extra cash could be treated as a withdrawal of Eduardos capital contribution. If this happens then Eduardos contribution of capital to the business could be less than Evanthias 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.

John Wiley & Sons Australia, Ltd 2009

8.6

Chapter 8: Partnerships: formation, operation and reporting

EXERCISE SOLUTIONS
Exercise 8 .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. 2009 July 1 Cash at Bank


Accounts Receivable Inventory Plant and Equipment Accounts Payable Sudjai, Capital Cash at Bank Accounts Receivable Inventory Plant and Equipment Accounts Payable H Hogart, Capital

$80 000 12 000 45 000 90 000 12 500 214 500 90 000 7 500 40 000 70 000 8 000 199 500

John Wiley & Sons Australia, Ltd 2009

8.7

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

B. 2009 July 1 Cash at Bank


Accounts Receivable Inventory Plant and Equipment Goodwill Accounts Payable L Lewin, Capital Cash at Bank Accounts Receivable Inventory Plant and Equipment Goodwill Accounts Payable H Hogart, Capital

$80 000 12 000 45 000 90 000 5 500 12 500 220 000 90 000 7 500 40 000 70 000 20 500 8 000 220 000

John Wiley & Sons Australia, Ltd 2009

8.8

Chapter 8: Partnerships: formation, operation and reporting

Exercise 8.2

Partnership formation

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 Accounts Receivable Inventory Equipment Accounts Payable Becker, Capital Cash at Bank Accounts Receivable Inventory Equipment Accounts Payable Dickson, Capital $6 200 12 800 21 500 48 000 13 400 75 100 5 800 11 400 18 300 32 000 12 800 54 700

John Wiley & Sons Australia, Ltd 2009

8.9

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Exercise 8.3

Partnership formation

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 Accounts Receivable Inventory Equipment Goodwill Accounts Payable Becker, Capital Cash at Bank Accounts Receivable Inventory Equipment Goodwill Accounts Payable Dickson, Capital $6 200 12 800 21 500 48 000 4 900 13 400 80 000 5 800 11 400 18 300 32 000 25 300 12 800 80 000

John Wiley & Sons Australia, Ltd 2009

8.10

Chapter 8: Partnerships: formation, operation and reporting

Exercise 8.4

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 partners 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 2010. A&B Gottsche Method 1 Variable capital balances Debit Credit $96 000 $96 000 96 000 57 600 38 400 Gutteridge Method 2 Fixed capital balances Debit Credit $96 000 $96 000 96 000 57 600 38 400

A.

Profit and Loss Summary Profit Distribution Transfer profit to distribution a/c Profit Distribution Gottsche, Capital Gutteridge, Capital Gottsche, Retained Earnings Gutteridge, Retained Earnings

B.

C. GOTTSCHE AND GUTTERIDGE Balance Sheet as at 30 June 2010 Method 1 Method 2 EQUITY Gottsche, Capital, $147 600 Gutteridge, Capital 98 400 Gottsche, Retained Earnings Gutteride, Retained Earnings TOTAL EQUITY 246 000 $90 000 60 000 57 600 38 400 150 000 96 000 $246 000

$246 000

John Wiley & Sons Australia, Ltd 2009

8.11

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Exercise 8.5

Partnership profit distribution capital balances

LEE AND LIU 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 Lee and Liu, 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 2010. A. & B. Lee Liu Method 1 Method 2 Variable capital Fixed capital balances balances Debit Credit Debit Credit $110 000 $110 000 $110 000 $110 000 110 000 66 000 44 000 110 000 66 000 44 000

A.

Profit and Loss Summary Profit Distribution Transfer profit to distribution a/c Profit Distribution Lee, Capital Liu, Capital Lee, Retained Earnings Liu, Retained Earnings

B.

C. LEE AND LIU Balance Sheet as at 30 June 2010 Method 1 EQUITY Lee, Capital, Liu, Capital Lee, Retained Earnings Liu, Retained Earnings TOTAL EQUITY $186 000 144 000 330 000 $330 000

Method 2 $120 000 100 000 66 000 44 000 220 000 110 000 $330 000

John Wiley & Sons Australia, Ltd 2009

8.12

Chapter 8: Partnerships: formation, operation and reporting

Exercise 8.6

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 Profit & Loss Summary Profit Distribution Profit Distribution Miller, Capital Monterosa, Capital $72 000 $72 000 72 000 43 200 28 800 72 000 39 600 32 400 $72 000 $72 000 72 000 38 800* 33 200* 2 3 $72 000 $72 000

1. $72 000 x 0.6 $72 000 x 0.4 2. Miller Monterosa 3.

= =

$43 200 $28 800 110/200 x $72 000 90/200 x $72 000 Miller $12 000 8 800 20 800 18 000 $38 800 =$39 600 =$32 400 $72 000 Monterosa $8 000 7 200 15 200 18 000 $33 200 Total $24 000 16 000 36 000 36 000 $72 000

$110 000 $ 90 000 $200 000

Salary Allowance Interest on Capitals (8%) Remainder *Total profit (including salary, interest)

John Wiley & Sons Australia, Ltd 2009

8.13

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

B.

Profit and Loss Summary Profit Distribution Profit Distribution Miller, Capital Monterosa, Capital

$30 000 $30 000 30 000 17 800* 12 200*

Salary Allowance Interest on Capitals (8%) Excess allocation (loss) *Total profit (inc. salary, interest)

Miller $12 000 8 800 20 800 (3 000) $17 800

Monterosa $8 000 7 200 15 200 (3 000) $12 200

Total $24 000 16 000 36 000 (6 000) $30 000

John Wiley & Sons Australia, Ltd 2009

8.14

Chapter 8: Partnerships: formation, operation and reporting

Exercise 8.7

Interest on capital and drawings

ZOLLO AND ZOUMBOULIS

Required
Prepare the journal entries for the above transactions for the year ended 30 June 2011 using both method 1 and method 2. Zollo Method 1 Variable capital balances Debit Credit 12 000 12 000 8 000 8 000 15 000 15 000 15 000 15 000 Zoumboulis Method 2 Fixed capital balances Debit Credit 12 000 12 000 8 000 8 000

2010 Nov 30

Zollo, Drawings Cash at Bank (Cash drawings by Zollo) Zoumboulis, Drawings Cash at Bank (Cash drawings by Zoumboulis) Zoumboulis, Drawings Zoumboulis, Capital Cash at Bank

Dec 20 2011 Mar 31

John Wiley & Sons Australia, Ltd 2009

8.15

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Exercise 8.8

Interest on capital and drawings

DARSHIL AND DALE 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. Darshil Method 1 Variable capital balances Debit Credit $32 000 $32 000 10 560 5 760 4 800 2 160 1 920 2 160 1 920 4 080 25 520 12 760 12 760 18 000 16 000 18 000 16 000 18 000 16 000 18 000 16 000 25 520 12 760 12 760 4 080 Dale Method 2 Fixed capital balances Debit Credit $32 000 $32 000 10 560 5 760 4 800

Profit and Loss Summary Profit Distribution Transfer profit to distribution a/c Profit Distribution Darshil, Capital Dale, Capital Darshil, Retained Earnings Dale, Retained Earnings Interest on capital Darshil, Capital Dale, Capital Darshil, Retained Earnings Dale, Retained Earnings Profit Distribution Interest on drawings Profit distribution Darshil, Capital Dale, Capital Darshil, Retained Earnings Dale, Retained Earnings Darshil, Capital Dale, Capital Darshil, Retained Earnings Dale, Retained Earnings Darshil, Drawings Dale, Drawings Close entry for drawings.

John Wiley & Sons Australia, Ltd 2009

8.16

Chapter 8: Partnerships: formation, operation and reporting

Exercise 8.9

Allocation of profit

RICHARDS AND ROGERS Required: Prepare the Profit Distribution accounts and partners Retained Earnings accounts for the year ended 30 June 2010. Profit Distribution 2010 30/6 30/6 Salary Richards Interest on Capital: Richards Rogers Residual Profit: Richards (1/3) $7 333 Rogers (2/3) $14 667 2010 $30 000 30/6 6 400 9 600 Partnership Profits $68 000

30/6

22 000 $68 000 $68 000

Richards, Retained Earnings 2010 2009 1/7 2007 $12 000 30/6 30/6 56 733 30/6 $68 733 30/6 Balance Balance Interest on Capital Salary Share of Profits $25 000 6 400 30 000 7 333 $68 733 56 733

30/6 30/6

Drawings Balance

Rogers, Retained Earnings 2010 2009 1/7 2007 $17 000 30/6 39 267 30/6 $56 267 30/6 Balance Balance Interest on Capital Share of Profits $32 000 9 600 14 667 $56 267 39 267

30/6 30/6

Drawings Balance

Exercise 8.10

Allocation of profit average capital balances

John Wiley & Sons Australia, Ltd 2009

8.17

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

KRYSTLE, KIMBERLEY and KAREN Required: Prepare a schedule showing how profit will be divided among the three partners if the profit for the year before the adjustments is $169 000. Allocation of $169 000 profit Krystle Kimberley Karen Total $12 000 $7 200 $4 800 $24 000 25 000 20 000 20 000 65 000 24 000 61 000 28 000 18 667 $89 000 $45 867 9 333 $34 133 56 000 $169 000 27 200 24 800 24 000 113 000

Interest on average capital Salary allowance Bonus to Krystle [30% of ($169 000 - $24 000 - $65 000)] Total interest, salary and bonus Residual: Krystle (1/2) Kimberley (1/3) Karen (1/6) Total allocations

John Wiley & Sons Australia, Ltd 2009

8.18

Chapter 8: Partnerships: formation, operation and reporting

Exercise 8.11

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 Computers Debtors Wing, Capital Lease of Premises Computers Cash at Bank Wen, Capital Computers Winnie, Capital $7 000 8 000 12 000 27 000 12 500 10 000 5 000 27 500 13 750 13 750

B.
Salary Interest on capital Total salary and interest Residual Profit: Wing (27000/68250) Wen (27500/68250) Winnie (13750/68250) Allocation of $65 000 profit Wing Wen Winnie Total - $20 000 $20 000 $2 160 $2 200 1 100 5 460 2 160 2 200 21 100 25 460

15 642 15 932 $17 802 $18 132 7 966 $29 066 39 540 $65 000

John Wiley & Sons Australia, Ltd 2009

8.19

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Exercise 8.12

Statement of changes in partners equity

JOSHUA AND JAMES

Required
Prepare Statement of Changes in Partners Equity for the year ended 30 June 2010 using both method 1 and method 2. JOSHUA AND JAMES PARTNERSHIP Statement of Changes in Partners Equity for the year ended 30 June 2010 Method 1 Capital contributions 1/7/09 Add: Additional investment Profit allocation Less: Capital withdrawal Less: Drawings CAPITAL BALANCES 30/6/10 Method 2 Joshua CAPITAL Capital contributions 1/7/09 Add: Additional investment Less: Capital withdrawal Capital balances 30/6/10 RETAINED EARNINGS Balances at 1/7/09 Add: Profit allocation Less: Drawings Balances at 30/6/10 TOTAL EQUITY $120 000 10 000 110 000 39 000 8 000 31 000 $141 000 James $100 000 20 000 . . 120 000 39 000 12 000 27 000 $147 000 Total $220 000 20 000 10 000 230 000 78 000 20 000 58 000 $288 000 Joshua $120 000 39 000 159 000 10 000 8 000 $141 000 James $100 000 20 000 39 000 159 000 12 000 $147 000 Total $220 000 20 000 78 000 318 000 10 000 20 000 $288 000

John Wiley & Sons Australia, Ltd 2009

8.20

Chapter 8: Partnerships: formation, operation and reporting

PROBLEM SOLUTIONS Problem 8.1 Partnership formation

JONES AND JEFFERY Required: A. Prepare the journal entries to record each partners initial investment. B. Prepare the partnerships balance sheet as at 1 July 2009. C. Prepare a statement of changes in partners equity for the year ended 30 June 2010, using method 2 for recording partners equity accounts. A. Cash at Bank Land Jones, Capital Cash at Bank Accounts Receivable Inventory Office Equipment Accounts Payable Bank Loan Jeffery, Capital $30 000 180 000 $210 000 22 500 12 800 23 800 62 000 11 500 18 000 91 600

John Wiley & Sons Australia, Ltd 2009

8.21

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

B.
JONES AND JEFFERY Balance Sheet As at 1 July 2009 CURRENT ASSETS Cash at Bank Accounts receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Land Office Equipment TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Accounts payable Bank Loan TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Capital, J Jones Capital, J Jeffery TOTAL EQUITY $ 52 500 12 800 23 800 $89 100 $180 000 62 000 242 000 $331 100 $11 500 18 000 $29 500 $29 500 $301 600 $210 000 91 600 $301 600

C. JONES AND JEFFERY Statement of Changes in Partners Equity 30 June 2010 Jones Jeffery CAPITAL Capital balances 1 July 2009 Add: Additional investment Capital balances 30/6/2010 RETAINED EARNINGS Profit allocation $56 000 x 60% $56 000 x 40% Less: Drawings Balances 30/6/2010 TOTAL EQUITY $210 000 12 000 $222 000 33 600 8 000 $25 600 $247 600 22 400 16 000 $6 400 $98 000 56 000 24 000 $32 000 $345 600 $91 600 $91 600

Total $301 600 12 000 $313 600

John Wiley & Sons Australia, Ltd 2009

8.22

Chapter 8: Partnerships: formation, operation and reporting

Problem 8.2

Partnership formation

CHAN AND PAPADOPOULOS Required: A. Prepare the journal entries to record each partners initial investment. B. Prepare the partnerships balance sheet as at 1 January 2009. C. Prepare a statement of changes in partners equity for the year ended 31 December 2009, using method 1 for recording partners equity accounts. A. Cash at Bank Plant and Equipment Chan, Capital Cash at Bank Accounts Receivable Inventory Buildings Accounts Payable Bank Loan Papadopoulos, Capital $60 000 120 000 $180 000 12 600 22 500 30 400 480 000 18 500 180 000 347 000

B.
CHAN AND PAPODOPOULOS Balance Sheet As at 1 January 2009 CURRENT ASSETS John Wiley & Sons Australia, Ltd 2009 8.23

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al Cash at Bank Accounts receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and Equipment Building TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Accounts payable Bank Loan TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Capital, C Chan Capital, P Papadopoulos TOTAL EQUITY $ 72 600 22 500 30 400 $125 500 $120 000 480 000 600 000 $725 500 $18 500 180 000 $198 500 $198 500 $527 000 $180 000 347 000 $527 000

C. CHAN AND PAPODOPOULOS Statement of Changes in Partners Equity 31 December 2009 Chan Papodopoulos Capital balances 1 January 2009 Add: Additional investment Profit allocation $82 000 x 50% Less: Drawings Balances 31/12/2009 $180 000 22 000 41 000 (18 000) $225 000 $347 000 41 000 (16 000) $372 000

Total $527 000 22 000 82 000 (34 000) $597 000

John Wiley & Sons Australia, Ltd 2009

8.24

Chapter 8: Partnerships: formation, operation and reporting

Problem 8.3

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 Profit of $120 000 Plan (a) Ratio of 50:50 Plan (b) Salaries Remainder 6:4 $60 000 20 000 42 000 $62 000 7 200 41 500 $48 700 $72 000 Joy $60 000 30 000 28 000 $58 000 25 000 4 800 41 500 $71 300 $48 000

Plan (c) Salary Interest at 8% on original investment Remainder equally

Plan (d) Ratio of initial investments (9 : 6) 15 15

B.
Jong Profit of $60 000 Plan (a) Ratio of 50:50 Plan (b) Salaries Excess allocation 6:4 $30 000 20 000 6 000 $26 000 7 200 7 200 11 500 $18 700 $36 000 Joy $30 000 30 000 4 000 $34 000 25 000 4 800 29 800 11 500 $41 300 $24 000

Plan (c) Salary Interest at 8% on original investment Total salary and interest Remainder equally

Plan (d) Ratio of initial investment (9 : 6) 15 15

C.
John Wiley & Sons Australia, Ltd 2009 8.25

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al Jong Loss of $6 000 Plan (a) Ratio of 50:50 Plan (b) Salaries Excess allocation 6:4 $(3 000) 20 000 (33 600) $(13 600) 7 200 7 200 (21 500) $(14 300) $(3 600) Joy $(3 000) 30 000 (22 400) $ 7 600 25 000 4 800 29 800 (21 500) $8 300 $(2 400)

Plan (c) Salary Interest at 8% on original investment Total salary and interest Excess allocation equally

Plan (d) Ratio of initial investment (9 : 6) 15 15

John Wiley & Sons Australia, Ltd 2009

8.26

Chapter 8: Partnerships: formation, operation and reporting

Problem 8.4

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 $179 040 profit* Molika Ming Mengyao Total $179 040

Total profit before interest on drawings Add: Interest on drawings: Molika ($12 600 x 10% x 4/12) Ming ($7 900 x 10% x ) Mengyao ($5 900 x 10% x 9/12) Less: Salaries Bonus to Mengyao [20% x ($180 298 - $38 000)] Residual profit for allocation Allocation of residual profit: Molika ($113 838 x 3/8) Ming, ($113 838 x 3/8) Mengyao, ($113 838 x 1/4)

420 395 443 20 000 18 000 28 460 1 258 180 298 38 000 28 460 $113 838

42 689 42 689 $62 269 $60 294 28 460 $56 477 113 838 $179 040

*Profit before interest on advances Less Interest on advances (loans) ($112 000 x 8%) Profit for distribution

$188 000 8 960 $179 040

John Wiley & Sons Australia, Ltd 2009

8.27

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Problem 8.5

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 2009. C. Prepare a statement of partners equity for the year ended 30 September 2010. A. 1/10/2009 Cash at Bank Marketable Securities Accounts Receivable Inventory Equipment Accounts Payable Lloyd, Capital Building Land Mortgage Payable Schulz, Capital $28 000 26 800 47 000 125 400 230 000 $36 000 421 200 820 000 350 000 456 000 714 000

John Wiley & Sons Australia, Ltd 2009

8.28

Chapter 8: Partnerships: formation, operation and reporting

B. LLOYD AND SCHULZ Balance Sheet as at 1 October 2009 CURRENT ASSETS Cash at bank Marketable securities Accounts receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Equipment Building Land TOTAL NON-CURRENT ASSETS CURRENT LIABILITIES Accounts payable TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Mortgage payable TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS PARTNERS EQUITY Capital, Lloyd Capital, Schulz TOTAL PARTNERS EQUITY $28 000 26 800 47 000 125 400 $227 200 230 000 820 000 350 000 1 400 000 $1 627 200 36 000 36 000 456 000 456 000 $492 000 $1 135 200 421 200 714 000 $1 135 200

C. LLOYD AND SCHULZ Statement of Changes in Partners Equity (Method 1) for the year ending 30 September 2010 Lloyd Schulz Capital balances 1/10/09 $421 200 $714 000 Add: Additional investment 60 000 115 200 Profit allocation 53 076 35 384 534 276 864 584 Less: Drawings 45 000 17 200 Capital balances 30/9/10 $489 276 $847 384

Total $1 135 200 175 200 88 460 1 398 860 62 200 $1 336 660

John Wiley & Sons Australia, Ltd 2009

8.29

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Problem 8.6

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 2010 using method 2. A. 2009 July 1

Cash at Bank Inventory Plant and Machinery Accounts Receivable Arnold, Capital Cash at Bank Omond, Capital Cash at Bank Land Premises Furniture and Fittings Motor Vehicles Mortgage Edwards, Capital

$20 000 42 500 78 600 12 700 153 800 37 500 37 500 16 500 120 000 240 000 40 500 31 500 180 000 268 500

John Wiley & Sons Australia, Ltd 2009

8.30

Chapter 8: Partnerships: formation, operation and reporting

B. ARNOLD, OMOND AND EDWARDS Balance Sheet as at 1 July 2009 CURRENT ASSETS Cash at bank Accounts receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and machinery Land Premises Furniture and fittings Motor vehicles TOTAL NON-CURRENT ASSETS TOTAL ASSETS NON-CURRENT LIABILITIES Mortgage TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Capital, Arnold Capital, Omond Capital, Edwards TOTAL EQUITY

$74 000 12 700 42 500 $129 200 78 600 120 000 240 000 40 500 31 500 510 600 $639 800

$180 000 $180 000 $180 000 $459 800 $153 800 37 500 268 500 $459 800

C. Profit Distribution 2010 30/6 30/6 Omond, salary Interest on capital: Retained Profit, Arnold (153 800 x 8%) Retained Profit, Omond (37 500 x 8%) Retained Profit, Edwards (268 500 x 8%) Residual profits: ($10 416) Retained Profit, Arnold (2/5) Retained Profit, Omond (2/5) Retained Profit, Edwards (1/5) 2010 $32 000 30/6 12 304 3 000 21 480 4 166 4 166 2 084 $79 200 $79 200 Profit ($120 800 - $43 000) Interest on drawings: Arnold (12 000 x 10% x 9/12) + (8 000 x 10% x 6/12) Omond (4 000 x 10% x 3/12) $77 800

1 300 100

30/6

Problem 8.7

Allocation of profits method 2


John Wiley & Sons Australia, Ltd 2009 8.31

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

GEORGE, MARCUS AND SAMUEL Required: A. Complete the Profit and Loss Summary account for the year ended 30 June 2010. B. Prepare the Profit Distribution account. C. Complete each partners Retained Earnings account after all adjustments. A. Profit and Loss Summary 2010 30/6 30/6 30/6 Interest on advance Interest on loan Profit for distribution 2010 $928 30/6 1 800 70 172 $72 900 Balance $72 900

$72 900

B. Profit Distribution 30/6 30/6 Cash - Salary, Marcus Interest on capital: George 6 904 Marcus 3 440 Samuel 2 296 Residual profits: George (3/6) 24 576 Marcus (2/6) 16 384 Samuel (1/6) 8 192 $13 000 30/6 30/6 Profit & loss summary Interest on drawings: George 2 030 Marcus 1 160 Samuel 1 430 $70 172

12 640

4 620

30/6

49 152 $74 792 $74 792

John Wiley & Sons Australia, Ltd 2009

8.32

Chapter 8: Partnerships: formation, operation and reporting

C. George, Retained Earnings 1/7 30/6 30/6 30/6 Balance Interest on drawings Drawings Balance $1 900 30/6 2 030 30/6 20 300 7 250 $31 480 30/6 Balance Interest on capital Residual profit $6 904 24 576

$31 480 $7 250

Marcus, Retained Earnings 30/6 30/6 30/6 Drawings Interest on drawings Balance $11 600 1/7 1 160 30/6 21 064 30/6 30/6 $33 824 30/6 Balance Balance Interest on capital Residual profit Salary $1 000 3 440 16 384 13 000 $33 824 $21 064

Samuel, Retained Earnings 30/6 30/6 Drawings Interest on drawings $14 300 1/7 1 430 30/6 30/6 30/6 $15 730 30/6 Balance $4 142 Balance Interest on capital Residual profit Balance $1 100 2 296 8 192 4 142 $15 730

John Wiley & Sons Australia, Ltd 2009

8.33

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Problem 8.8

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 partners equity as at 30 June 2010 showing each partners share of profit/loss for the year. C. Prepare the balance sheet of the partnership as at 30 June 2010. A. 2009 July 1

Accounts Receivable Inventory Furniture and Fittings Equipment Goodwill Accounts Payable Bank Overdraft Warner, Capital Warners net assets into the partnership Cash at Bank Accounts Receivable Inventory Goodwill Accounts Payable Ellis, Capital Elliss net assets into the partnership.

$61 280 48 380 26 260 24 894 49 086 41 470 18 430 150 000

July 1

59 900 46 080 73 720 25 600 55 300 150 000

John Wiley & Sons Australia, Ltd 2009

8.34

Chapter 8: Partnerships: formation, operation and reporting

B. WARNER AND ELLIS Statement of Changes in Partners Equity (Method 2) for the year ending 30 June 2010 Warner Ellis CAPITAL Capital balances 1/7/2009 Capital balances 31/3/2010 RETAINED EARNINGS Balances 1/7/09 Profit allocation Less: Drawings Balances 30/6/10 TOTAL EQUITY $150 000 $150 000 68 055 68 055 28 800 39 255 $189 255 $150 000 $150 000 68 055 68 055 36 240 31 815 $181 815

Total $300 000 $300 000 136 110 136 110 65 040 71 070 $371 070

Calculation of share of profits: Total partnership equity at 30 June 2009 (300 000 + 23 040 10 120 + 36 860 + 27 650 26 260*10% - 24 894*15%) Add back: Drawings ($28 800 + $36 240) Partnership equity before drawings Beginning partnership equity ($150 000 + $150 000) Profit for year Warners share (1/2) Elliss share (1/2) = =

$371 070 65 040 436 110 300 000 $136 110 $68 055 $68 055

John Wiley & Sons Australia, Ltd 2009

8.35

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

C. WARNER AND ELLIS Balance Sheet as at 30 June 2010 CURRENT ASSETS Cash at bank Accounts receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Furniture and fittings Accumulated depreciation Equipment Accumulated depreciation Goodwill TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Accounts payable TOTAL LIABILITIES NET ASSETS PARTNERS EQUITY Warner, Capital Ellis, Capital TOTAL EQUITY $64 510 97 240 158 960 $320 710 $26 260 2 626 24 894 3 734

23 634 21 160 74 686 119 480 $440 190 $69 120 $69 120 $371 070 189 255 181 815

371 070 $371 070

Calculations: Net assets at 30 June 2010:


Net cash at bank Net accounts receivable Inventory Furniture and Fittings Equipment Goodwill = = = = = = $59 900 - $18 430 + $23 040 $61 280 + $46 080 - $10 120 $48 380 + $73 720 + $36 860 $26 260 (10% x $26 260) $24 894 (15% x $24 894) $64 510 97 240 158 960 23 634 21 160 74 686 440 190 (69 120) $371 070

Less: Creditors ($41 470 + $55 300 - $27 650) Net Assets

John Wiley & Sons Australia, Ltd 2009

8.36

Chapter 8: Partnerships: formation, operation and reporting

Problem 8.9

Allocation of profit method 2

COPELAND AND HALL Required: Prepare: 1. the Profit Distribution account for 6 months ended 30 June 2010. 2. the Retained Earnings accounts for each partner at 30 June 2010. 3. a balance sheet as at 30 June 2010. A. Profit Distribution Interest on capital: Copeland, Retained Earnings Hall, Retained Earnings Partners salaries:** Copeland, Retained Earnings Hall, Retained Earnings Profit* $2 880 1 920 12 000 8 000 Residual loss: Copeland, Retained Earnings (2/3) Hall, Retained Earnings (1/3) $24 800 10 907 5 453 $24 800 $8 440

$8 440 = $9 400 less interest on advance $960

** Since partners salaries appear in the trial balance, the entry made to record these salaries would have been a debit to salaries accounts for Copeland and Hall 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

John Wiley & Sons Australia, Ltd 2009

8.37

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al B. Copeland, Retained Earnings Balance Copeland, Salary (clos. entry) Share of residual loss $1 800 6 000 10 907 Balance $18 707 Balance Balance Hall, Salary (clos. entry) Share of residual loss 3 827 Hall, Retained Earnings $5 400 4 000 5 453 $14 853 Balance $4 933 Salary Interest on capital Balance $8 000 1 920 4 933 $14 853 3 827 $18 707 Salary Interest on capital $12 000 2 880

John Wiley & Sons Australia, Ltd 2009

8.38

Chapter 8: Partnerships: formation, operation and reporting

C. COPELAND AND HALL Balance Sheet as at 30 June 2010 CURRENT ASSETS Cash at Bank Accounts Receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and Equipment Accumulated Depreciation TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES Accounts Payable Interest Payable on Advance Copeland, Advance TOTAL LIABILITIES NET ASSETS EQUITY Capital, Copeland Retained Earnings, Copeland Capital, Hall Retained Earnings, Hall TOTAL EQUITY

$ 3 200 8 400 15 400 $27 000 44 600 (3 200)

41 400 13 200 $68 400

4 200 960 12 000 $17 160 $51 240 36 000 (3 827) 24 000 (4 933)

32 173 19 067 $51 240

John Wiley & Sons Australia, Ltd 2009

8.39

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Problem 8.10

Allocation of profit method 1

DICKSON, DOENING AND DOLLING Required: Prepare: A. the Profit Distribution account for the year ended 30 June 2009. B. the Capital Accounts for each partner at 30 June 2009. C. the Balance Sheet as at 30 June 2009. A. Profit Distribution 2009 30/6 30/6 Salary: Dickson Doening Interest on capital: Dickson Doening Dolling Share of profit: ($33 480) Dickson Doening Dolling 2009 $92 000 30/6 56 000 30/6 9 600 19 200 38 400 P & L Summary (after (interest on advances of $25 600) Interest on drawings: Dickson Doening Dolling 246 400

*1 140 *1 140 -

11 160 11 160 11 160 $248 680 $248 680

* B.

($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 Dickson, Capital

30/6 30/6 30/6

Interest on Drawings Drawings Balance

$1 140 1/7 60 000 30/6 211 620 30/6 30/6 $272 760 30/6

Balance Salary Interest on Capital Share of Profit Balance

$160 000 92 000 9 600 11 160 $272 760 $211 620

John Wiley & Sons Australia, Ltd 2009

8.40

Chapter 8: Partnerships: formation, operation and reporting

Doening, Capital 30/6 30/6 30/6 Interest on Drawings Drawings Balance $1 140 1/7 60 000 30/6 345 220 30/6 30/6 $406 360 30/6 Balance Balance Salary Interest on Capital Share of Profit $320 000 56 000 19 200 11 160 $406 360 $345 220

Dolling, Capital 30/6 30/6 Drawings Balance $20 000 1/7 669 560 30/6 30/6 $689 560 30/6 Balance Balance Interest on Capital Share of Profit $640 000 38 400 11 160 $689 560 $669 560

John Wiley & Sons Australia, Ltd 2009

8.41

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al C. DICKSON, DOENING AND DOLLING Balance Sheet as at 30 June 2009 CURRENT ASSETS Cash at Bank Accounts Receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Equipment Accumulated Depreciation Goodwill TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Accounts Payable Interest Payable on Advance Advance Dolling TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Capital, Dickson Capital, Doening Capital, Dolling TOTAL EQUITY $162 500 248 620 178 460 $589 580

$1 430 800 (462 600) 968 200 360 000 1 328 200 $1 917 780

345 780 25 600 $320 000 $691 380 $691 380 $1 226 400

$211 620 345 220 669 560 $1 226 400

John Wiley & Sons Australia, Ltd 2009

8.42

Chapter 8: Partnerships: formation, operation and reporting

Problem 8.11

Comprehensive problem
CLARKE AND ASSOCIATES

Required: A. Prepare the income statement for the year ended 31 March 2010. B. Prepare a statement of changes in partners equity for the year ended 31 March 2010. C. Prepare the balance sheet as at 31 March 2010. A. CLARKE AND ASSOCIATES Income Statement for the year ended 31 March 2010 INCOME: Professional fees revenue EXPENSES Salaries expense Rent expense Office expenses* Library maintenance expense Insurance expense Depreciation of furniture PROFIT *Office expenses $15 690 - $12 400 + $15 000 = 18 290 $365 160 75 750 14 880 18 290 7 530 5 250 8 145

129 845 $235 315

Workings:
Allocation of $235 315 profit Clarke 78 439 Cooper 78 438 Cornish 78 438 Total 235 315

John Wiley & Sons Australia, Ltd 2009

8.43

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al B. CLARKE AND ASSOCISATES Statement of Changes in Partners Equity for the year ending 31 March 2010 CAPITAL Capital balances 1/4/09 Capital balances 31 /3/10 RETAINED EARNINGS Balances 1/4/09 Profit allocation Less: Drawings Balances 31/3/10 TOTAL EQUITY Clarke $42 000 42 000 24 120 78 439 102 559 96 000 6 559 $48 559 Cooper $42 000 42 000 20 800 78 438 99 238 72 900 26 338 $68 338 Cornish $36 000 36 000 18 600 78 438 97 038 36 300 60 738 $96 738 Total $120 000 120 000 63 520 235 315 298 835 205 200 93 635 $213 635

C. CLARKE AND ASSOCIATES Balance Sheet as at 31 March 2010 CURRENT ASSETS Cash at Bank Accounts Receivable Advances on account of clients TOTAL CURRENT ASSETS NON-CURRENT ASSETS Office Furniture Accumulated Depreciation Professional library TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Accounts Payable TOTAL CURRENT LIABILITIES NET ASSETS EQUITY Partners Capitals Partners Retained Earnings TOTAL EQUITY $96 530 46 080 3 070 $145 680 54 300 (8 145) 46 155 36 800 82 955 $228 635 15 000 15 000 $213 635 120 000 93 635 $213 635

Workings: Cash at Bank Accounts receivable Advances made to clients

$50 600 + $402 930 - $357 000 = 96 530 $48 600 + $365 160 - $367 680 = 46 080 $5 620 + $32 700 - $35 250 = 3 070

John Wiley & Sons Australia, Ltd 2009

8.44

Chapter 8: Partnerships: formation, operation and reporting

Problem 8.12

Comprehensive problem
PPP PARTNERS

Required: A. Prepare the income statement for the year ended 30 June 2010. B. Prepare a statement of changes in partners equity for the year ended 30 June 2010. C. Prepare the balance sheet as at 30 June 2010. A. PPP PARTNERS Income Statement for the year ended 30 June 2010 INCOME: Professional fees revenue Less: Cost of Sales Opening Inventory Add: Purchases Less: Closing Inventory GROSS PROFIT EXPENSES Salaries expense Office expenses Operating expenses Depreciation of furniture PROFIT $472 600 46 700 260 600 307 300 45 000

262 300 210 300

62 900 24 500 43 300 12 270

142 970 $67 330

Assume opening Accounts Payable relates to purchases. Closing Accounts payable is assumed to be nil as it is not listed.

Workings:
Allocation of $67 330 profit Pearson 22 443 Pelham 22 443 Perrin 22 444 Total $67 330

John Wiley & Sons Australia, Ltd 2009

8.45

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al B. PPP PARTNERS Statement of Changes in Partners Equity for the year ending 30 June 2010 CAPITAL Capital balances 1/7/09 Capital balances 30 /6/10 RETAINED EARNINGS Balances 1/7/09 Profit allocation Less: Drawings Balances 30/6/10 TOTAL EQUITY Pearson $62 000 62 000 16 200 22 443 38 643 12 000 26 643 88 643 Pelham $62 000 62 000 12 800 22 443 35 243 12 500 22 743 84 743 Perrin $42 000 42 000 14 600 22 444 31 044 11 800 25 244 67 244 Total $166 000 166 000 43 600 67 330 110 930 36 300 74 630 240 630

C. PPP PARTNERS Balance Sheet as at 30 June 2010 CURRENT ASSETS Cash at Bank Accounts Receivable Inventory TOTAL CURRENT ASSETS NON-CURRENT ASSETS Plant and Equipment Accumulated Depreciation Office Furniture Accumulated Depreciation TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES TOTAL CURRENT LIABILITIES NET ASSETS EQUITY Partners Capitals Partners Retained Earnings TOTAL EQUITY $54 800 30 400 45 000 $130 200 88 400 (8 840) 34 300 (3 430)

79 560 30 870 110 430 $240 630 $240 630 166 000 74 630 $240 630

Workings: Cash at Bank Accounts receivable

$30 200 + $474 800 - $450 200 = 54 800 $32 600 + $472 600 - $474 800 = 30 400

John Wiley & Sons Australia, Ltd 2009

8.46

Chapter 8: Partnerships: formation, operation and reporting

CASE STUDY SOLUTIONS


Decision Case A partnership without a partnership agreement

OMALLEY AND OREILLY Required: A. Calculate the amount of profit distribution to each partner under each scenario. Which scenario is most favourable to OMalley? to OReilly? 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) OMalley OReilly OMalley OReilly 50% 50%
400 000 $120 000 = x 760 000 1 360 000 $120 000 = x 760 000 1

$60 000 $60 000 $120 000 $63 158 $56 842 $120 000

(b)

(c)

OMalley Salary 5% interest on ending capital ($400 000 + 40 000) Residual loss 50% OReilly Salary 5% interest on ending capital ($360 000) Residual loss 50% Scenario (b) is the most favourable to OMalley Scenario (c) is the most favourable to OReilly.

$40 000 22 000 (10 000) $60 000 18 000 (10 000) $68 000 $120 000 $52 000

B. C.

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

John Wiley & Sons Australia, Ltd 2009

8.47

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Critical Thinking Case

Conflict resolution in a partnership

Required: A. What are some issues that the Hush partnership could face because it does not have a formal contract that outlines how disputes will be dealt with?. B. Why does Paul Brennan believe not having an agreement is a risky approach and what suggestions does he make? C. In the absence of a partnership agreement how would the Partnership Act settle the problems discussed in requirement B? A. Some issues that the Hush partnership could face because it does not have a formal contract that outlines how disputes will be dealt with include: lack of rules and certainty if the partnership ends for business or personal reasons arguments about how to split profits family or associates interfering with the partners

the important points that typically should be included listed on page 622 of the chapter without an agreement in a dispute the Partnership Act may resolve a disagreement in a manner with which the partners are not happy.

B.

Paul Brennan believes not having an agreement is a risky approach as it can lead to argument and frustration. It may lead to fights or their family may interfere with the partnership. Refer to page 354 of the chapter.

C.

John Wiley & Sons Australia, Ltd 2009

8.48

Chapter 8: Partnerships: formation, operation and reporting

Communication / Group Activity


1.

Forming partnerships

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. 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. 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. Refer to the list in the chapter under the heading Partnership Agreement.

2.

3.

4.

John Wiley & Sons Australia, Ltd 2009

8.49

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

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 Craigs actions. 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. The major ethical issue here is that Craig appears to be taking advantage of Michelles lack of confidence with numbers and accounting and the trust that she has put in him.

B.

C.

John Wiley & Sons Australia, Ltd 2009

8.50

Chapter 8: Partnerships: formation, operation and reporting

Using the web

Partnerships some taxing issues

Students should document their experiences in negotiating the web sites and the finding of their research, including such issues as the ease of finding the information and the usefulness of the information.

John Wiley & Sons Australia, Ltd 2009

8.51

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

Financial Reporting Case

David Jones Ltd

Required: 1. The David Jones 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 David Jones Ltd? Explain the reasons for any differences. 3. Refer to the balance sheet of David Jones Ltd. How does the equity segment differ from that of a typical partnership? Explain. 4. David Jones 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. 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. 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 partners 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.

2.

3.

John Wiley & Sons Australia, Ltd 2009

8.52