Professional Documents
Culture Documents
Notes to teachers
1 If students already understand when and why a partnership’s goodwill needs to be valued, it is not
difficult for them to understand when and why a partnership’s assets and liabilities need to be revalued.
2 In reality, only assets are to be revalued because their fair values are more likely to change over time.
4 The revalued amounts are usually shown in the books, but sometimes not. Students should learn about
both situations and their accounting treatments.
5 The topic of revaluation of goodwill has been added. It will be very complicated if no goodwill account
has been or will be opened. Teachers should spend some time explaining the adjustments required in
capital accounts.
6 This topic is sometimes complicated by errors being made in the books, a new partner who pays an
additional amount for his share of goodwill when admitted, an old partner who leaves some of his capital
balance as a loan to the new partnership when withdrawing, some capital balances being adjusted to an
arbitrary amount and so on.
Q1 If revaluation is not done immediately, any increase or decrease in the value of the old partnership’s net
assets will belong to the new partnership. When these net assets are later sold by the new partnership,
any increase or decrease in the value of the old partnership’s net assets will be realised and then shared
among the new partners in the new profit and loss sharing ratio. As a result, some partners in the new
partnership will gain from the increase in the value of net assets of the old partnership without having to
pay for it, while others will lose without being compensated.
126
Capital: Yan
2011 $ 2011 $
Jan 1 Revaluation — Share of loss 2,000 Jan 1 Balance b/f 15,000
" 1 Balance c/d 13,000
15,000 15,000
General Ledger
Capital: Wendy
2011 $ 2011 $
Jan 1 Revaluation loss adjustment 1,000 Jan 1 Balance b/f 30,000
" 1 Balance c/d 29,000
30,000 30,000
127
128
Capital
Aaron Barry Cathy Aaron Barry Cathy
2009 $ $ $ 2009 $ $ $
Jan 1 Goodwill adjustment Jan 1 Goodwill adjustment
(W1) 2,667 2,667 — (W1) — — 5,334
2010 2010
Jan 1 Goodwill adjustment Jan 1 Goodwill adjustment
(W2) 6,000 6,000 — (W2) — — 12,000
129
130
Application Problems
1 (a) Buildings
$ $
Balance b/f 80,000 Balance c/d 175,000
Revaluation — Increase 95,000
175,000 175,000
Motor Vehicles
$ $
Balance b/f 35,500 Revaluation — Reduction 9,500
Balance c/d 26,000
35,500 35,500
Inventory
$ $
Balance b/f 20,400 Revaluation — Reduction 1,500
Balance c/d 18,900
20,400 20,400
Office Fittings
$ $
Balance b/f 13,100 Revaluation — Reduction 2,200
Balance c/d 10,900
13,100 13,100
Revaluation
$ $ $
Motor vehicles ($35,500 – $26,000) 9,500 Buildings ($175,000 – $80,000) 95,000
Inventory ($20,400 – $18,900) 1,500
Office fittings ($13,100 – $10,900) 2,200
5
Capital: Tai ( 10 ) 40,900
3
Suen ( 10 ) 24,540
2
Chung ( 10 ) 16,360 81,800
95,000 95,000
131
2 (a) Revaluation
$ $ $
Machinery ($39,800 − $37,000) 2,800 Premises ($300,000 − $115,600) 184,400
Motor vehicles ($68,100 − $64,000) 4,100 Goodwill 200,000
Fixtures ($15,400 − $12,000) 3,400
Inventory ($48,500 − $46,000) 2,500
Profit on revaluation —
4
Capital: Fung ( 10 ) 148,640
3
Kan ( 10 ) 111,480
3
Choi ( 10 ) 111,480 371,600
384,400 384,400
Capital
Fung Kan Choi Lee Fung Kan Choi Lee
$ $ $ $ $ $ $ $
Balances c/d 328,640 207,480 171,480 80,000 Balances b/f 180,000 96,000 60,000 —
Revaluation —
Share of profit 148,640 111,480 111,480 —
Bank — — — 80,000
328,640 207,480 171,480 80,000 328,640 207,480 171,480 80,000
132
(c) If no goodwill account was opened, the partners’ capital balances would be adjusted for goodwill as
follows:
Goodwill shared Goodwill shared Gain (loss) from
Partner Required adjustment
in old ratio in new ratio change in ratio
$ $ $ $
Fung 4 4 (13,333) Cr Capital: Fung 13,333
10
80,000 12
66,667
Kan 3 3 (10,000) Cr Capital: Kan 10,000
10
60,000 12
50,000
Choi 3 3 (10,000) Cr Capital: Choi 10,000
10
60,000 12
50,000
Lee 2 33,333 Dr Capital: Lee 33,333
— — 12
33,333
200,000 200,000
At the same time, the profit on revaluation would be $171,600, shared by partners as follows:
4
Fung $68,640 ($171,600 × 10 )
3
Kan $51,480 ($171,600 × 10 )
3
Choi $51,480 ($171,600 × 10 )
133
(iii) Capital
Au Bai Chan Au Bai Chan
$ $ $ $ $ $
Revaluation — Share of loss 11,160 7,440 — Balances b/f 40,000 30,000 —
Balances c/d 28,840 22,560 20,000 Bank — — 20,000
40,000 30,000 20,000 40,000 30,000 20,000
Current assets
Inventory 19,000
Accounts receivable 21,300
Bank ($20,000 + $900) 20,900
61,200
Less Current liabilities
Accounts payable (9,800)
Net current assets 51,400
71,400
Capital: Au 28,840
Bai 22,560
Chan 20,000
71,400
(c) If revaluation is not carried out upon the admission of a new partner, any increase or decrease in the
value of the old partnership’s net assets will belong to the new partnership. When these net assets
are later sold by the new partnership, any increase or decrease in the value of the old partnership’s
net assets will be realised and then shared among all the partners (including the new ones) in the
new profit and loss sharing ratio. As a result, some partners in the new partnership will gain from the
increase in the value of old partnership’s net assets without having to pay for it, while others will lose
without being compensated.
4X (a) Revaluation
$ $ $
Inventory ($39,000 – $36,400) 2,600 Fixtures ($110,000 – $98,600) 11,400
Allowance for doubtful accounts 1,500 Goodwill (W1) 56,000
Profit on revaluation —
Capital: Au ( 35 ) 37,980
Tong ( 25 ) 25,320 63,300
67,400 67,400
134
Workings:
(W1) Goodwill
$ $
Balance b/f 194,000 Capital: Au ( 35 ) 150,000
Revaluation 56,000 Tong ( 25 ) 100,000
250,000 250,000
(b) Revaluation
$ $ $
Motor vehicles ($210,000 − $190,000) 20,000 Premises ($500,000 − $430,000) 70,000
Inventory ($110,000 − $95,000) 15,000
Profit on revaluation —
Capital: Chin ( 25 ) 14,000
Woo ( 35 ) 21,000 35,000
70,000 70,000
135
Current
Chin Woo Ho Chin Woo Ho
$ $ $ $ $ $
Balance b/f 11,150 — — Balance b/f — 8,700 —
Drawings — 3,500 — Share of profit 10,640 15,960 —
Balance c/d — 21,160 — Capital 510 — —
11,150 24,660 — 11,150 24,660 —
136
(ii) Capital
Mak Yeung Wong Mak Yeung Wong
$ $ $ $ $ $
Revaluation — Balances b/f 400,000 300,000 280,000
Share of loss 44,000 44,000 44,000 Loss on revaluation
Current — — 7,400 reversed 95,550 31,850 —
Goodwill adjustment Goodwill adjustment
(Workings) 38,750 — — (Workings) — 7,750 31,000
Bank — — 51,920
Loan from Wong — — 207,680
Balances c/d 412,800 295,600 —
495,550 339,600 311,000 495,550 339,600 311,000
137
(c) This is probably because the partners want to follow the historical cost principle in the valuation of
assets. Valuation of inventories at the lower of cost and net realisable value is a common practice.
Refer to the prudence concept and its applications in Chapter 17 of Frank Wood’s Financial
Accounting 2.
7 (a)
The Journal
Date Details Dr Cr
2009 $ $
May 1 Store premises 60,000
Inventory 9,000
Capital: Au ($51,000 × 35 ) 30,600
But ($51,000 × 25 ) 20,400
Profit on revaluation credited to old partners’ capital accounts
in old profit and loss ratio.
" 1 Capital: Chak 6,000
Capital: Au 4,400
But 1,600
Adjustment for goodwill (see Workings).
" 1 Bank 24,000
Capital: Chak 24,000
Capital introduced by Chak.
138
Workings:
4
(W1) $84,800
Chak’s salary for 4 months (Jan
Apr) as store manager $10,000 ($30,000 × 12 )
= $74,800
8
(W2) Partner’s salary: Chak (May
Dec) $30,000 × 12 = $20,000
4
(W3) Au: Interest before change ($60,000 × 10% × 12 ) + Interest after change [($64,400 + Profit on
8
revaluation $30,600) × 10% × 12 ] = $2,000 + $6,333 = $8,333
4
But: Interest before change ($36,000 × 10% × 12 ) + Interest after change [($37,600 + Profit on
8
revaluation $20,400) × 10% × 12 ] = $1,200 + $3,867 = $5,067
8
Chak: $18,000 × 10% × 12 = $1,200
8X (a) Revaluation
2010 $ $ 2010 $
Apr 1 Plant and machinery Apr 1 Land and buildings
($26,600 – $23,800) 2,800 ($98,000 – $87,500) 10,500
" 1 Fixtures and fittings " 1 Goodwill ($30,800 – $14,000) 16,800
($8,400 – $7,000) 1,400
" 1 Inventory
($8,750 – $8,330) 420
" 1 Profit on revaluation —
Capital: Joseph ( 45 ) 18,144
Raymond ( 15 ) 4,536 22,680
27,300 27,300
139
(c) Capital
Joseph Raymond Joseph Raymond
2010 $ $ 2010 $ $
Apr 1 Balances c/d 130,144 67,536 Apr 1 Balances b/f 112,000 63,000
" 1 Revaluation —
Share of profit 18,144 4,536
130,144 67,536 130,144 67,536
Financed by:
Capital
Joseph 130,144
Raymond 67,536 197,680
Current
Joseph 700
Raymond 1,400 2,100
199,780
140
141
Current assets
Inventory 360
Trade debtors ($120,000 – $6,000) 114
Bank ($150,000 + $2,000,000) 2,150
2,624
Less Current liabilities
Trade creditors (630)
Net current assets 1,994
6,524
Financed by:
Capital account: Mr Lo 2,222
Mr Tse 2,222
Mr Hung 2,080
6,524
142