QUESTION BANK- 2017 BUSINESS CONVERSIONS AND COMBINATIONSExercises and Probloms in Financial Accounting £20-1 trading as sole proprietors for some time, n of whom bave been Peter and Paul, both of wh oe ety wit bo a Maren To marge their business enterprises as from 1 July 20X6. The parinerehip to bo known ac P Squared. ‘They agree that the assets and liailtias of each sole proprietorship shall be taken over by the partnership at the values shown in the lists below, but subject to the folowing adjustments: 1. The fair value of the accounts receivable of Peter's and Paut's business enterprises amount to RIG 560 and R14 400 respeativaly. 2. Peter's motor vehicles are fo be taken over at R12 000 and Paul's at R22 000, 3. Peter and Paul are to bring in or withdraw sufficient cash to incvease or decrease their capital accounts as shown in the partnership accounting records to R280 000 and! F120 000 respectively. Polar Paul a R i Assets Land and buteéngs. 120.000 40 090 Furniture and figs 20.000 +6 000 Motor vahictos| 16000 28 000 trventory 40.000 20.009 Accounts receivable +18 400 16.009 Cash at bank 63 600 4.009 258.000 720,000 Liabities prrere Accounts payable 22.000 20.000 You are required to: Prepare the opening journal ontties in the accounting records of the partnership on 1 ly 20x66. 352Questions, Exercises and Problems in Financial Aecounting You are required 10: 1) Prepare the realisation account, the bank account, tho partners! capital accounts (i aera far), 28 wel a he accounts for Aioy (ry) Lid and Shares in Aley (Pry) Ud. ) Prepare the jour entves inthe accounting records of Bey (PV) Ltd to record the ewes acquired and the settlement to Park and Station. P20-2 “tabu, Meinijes and Chwor erin partnership tracing a8 Going Up, They shave profits and osses in the ratio of 3:2:1 Cchver has ciscussed his intention 10 aie with Jabu and Mints, and October SoxG is sot as bis retirement date. Jabu and Meinties ave not able to conkows Of their ram and therefore approach Taba to form a close corporation to be Krewe at Going Up Tao CC. The formation of Going Up Two OG is to fake place immeciately alter the issolution of Going Up. ‘The rat statement of financial position of Going UP at St October 20%8, before the ratirernant of Cluver, is as follows: GOING UP STATEMENT OF FINANCIAL POSITION AT 31 OCTOBER 20%6 ASSETS Non-current assets Land and bulktings at cost Vehicles at carnying amount Equipment at carrying amount Investment - sharos in Gon UG Current assets Inventory ‘Accounts receabie EQUITY AND LIABILITIES Capital Cagitel accounts 300 000 “Jabu 150.000 eines 100.000 Cwer 50.000 Current accounis 41470 abe 13000) Meintjes @ 500) Chuver 6970. 356- Chapter 20 s and Conversions, EQUITY AND LIABILITIES Non-current liabilities Mortgage loan Current liabilities Accounts payable Bank overcratt ‘The accountants of Going Up met with Jabu, Meintjies and Cluver to discuss the terms ‘and conditions of Cluver's ratirement. They produced the fofowing report based on the discussions: Tick & Bash Chartered Accountants PO Box 105 Wits 2050 25 October 20X6 The Partners Going Up Killarney Towers Deer Sits, ‘We recommend the following plan forthe retiement of your Mir Chavers +The land and buildings are to be revalued at R160 000, + Cluver sto take over one ofthe three vehicles at its eas yiag am ther two vehicles are valued ata total of RAB 000, ‘The equipment is valued at R52 000. The shares in Don Lid should be sol, ‘The fair vale of goodwill has been determined to be R120 000, The inventory has « net reaisabl value of R38 360, ‘The expected cash flow fom accounts receivable is R65 531 ‘There are no errors in the accounts payable subsidiary ledger and the total agrees with the balance inthe wecounts payable control account in the general ledger, of R15 000. The Yours faithfully Tick & Bash Partners: !Tick & U Bash : eee ~ 357‘Questions, Exercises and Problems in Financial Accounting vs “The shares in Don Lid wore sold and a cheque for the net proceeds of R27 620 was rectived rom the stackbroker on St October 20X6. This cash, together with an increase in the bank overdraft, is to bo used to seit the amount owing to Clwver, Entrias have not been procescod to record the sale, and, as the financial statements have already been prepared, the partners wish for any further profits or losses to be transferred directly 10 their capital accounts. (On 1 November 20X85, Going Up Two CC is formed, The association agreament has the following terms and concitions. Association agreement of Going Up Two CC: 4. The accounting ecards af Going Up Two CC are to be the samo as those used by the Going Up partnership. 2, Each member is to have a third interest in the close corporation. 3, The membership contribution of Jabu, Meintjes and Tsaba is R100 each, ‘Teaba is to introduce a vehicle valued at R25 000, inventory valued at R12 600, cash of F125 000 andl accounts payable valued at RB 000. The excess over his member’ contribution ig to be treated as a long-term member's loan. 6. ‘The balances on the capital accounts of Jabs and Mointjies in the Going Up parinership (after providing for their membership contribution) are to be treated as Jong-term members’ loans of Going Up Two OC. 6. ‘The balances on the current accounts of Jabu and Meinijies in the Going Up partnership are to bo treated as short-term members" loans of Going Up Two CC. You are required to: a) Prepare the revaluation account end the partners’ capital accounts {in columnar form) in the ledger of the Going Up partnership, taking into account all the recommendations of the plan relating to Cluver's retirement. ) Prepare tho journal entries to effect the conversion of the partnership to the close corporation, 6) Prepare the statement of financial position of Going Up Two CC at 1 November 20K6. P20-3 Chester was trading as a sole trader known as Backs, while Francois was trading as solo tader called Forwards. Chester and Francois decided to combine their businesses with effect fram 1 October 20X5 by forming a close corporation, Amatioko CC. “The trial balances of the two businesses at 30 September 20X5 were as follows: 358 vs solo esc sellin‘ereises and Problems in Financial Accounting Questions, 4. Allof the assets and fabilties of Forwards were taken over at their carrying amounts, except for the folowing assets which were rovalved before the combination and taken over at the revalued amounts: R Land and buildings 187 500 lvantory +87 500 5, The purchase consideration of R435 500 for Forwards was settlad by alocating a member's contribution to Francois in the new clase corporation ecual to the amount of the purchase consideration. You are required to: Show al the entes in the journal of Forwards and Amaboko GC to record the formation Of the close corporation P20-4 Double Take Cis invowedin the fastfood industry. An exact of tho tal balanes ofthe lose corporation at 31 December 20X1 is shown below. DOUBLE TAKE cc (EXTRACT FROM) TRIAL BALANCE AT 31 DECEMBER 20x1 or cr Acoumviated deprecation on equipment 0.000 Bank 15000 Members! contibutions 203.000 Unetawn prott 210.000 Members" loans 115000 On 1 January 20X2 al the assots and liabilities, excluding the bank account, of Double Take CC were taken over by Van Damme (Ply) Ltd. The purchase consideration of F600 000 was seltled by the issue of ordinary shares and a payment of 100 000 in cash, ‘The shares vere used to settle the balances on the members’ contributions account, the realisation surplus account and the undavn profit account. The members’ ‘oan accounts were sottlod in cash Yan Damme (Pty) Ltd considered the land and buikings 10 be worth an additional R30 000 anc! R2 000 of the accounts receivable to be recoverable. All other assets were agreed to be fairly valved. ‘The comparative statements of financial position of Van Damme (Pty) Ltd at 31 December 20K1 (the day before the takeover) and at 1 January 20X2 (the day after the takeover) are as follows: 360 ianChapler 20 Entity Combinations and Conversions. VAN DAMME (PTY) LTD {EXTRACT FROM) STATEMENT OF FINANCIAL POSITION AT 1 Jan 202. 81 Dec 20x1 ASSETS Non-currant assets Land and butings 2 450.000 2 000 000 Equiament — cost 480 000 409 009 ~ accumsiatad depreciation 2 (200 000) Goodwit 2 i Current assots Inventory 120.000 100.000 Accounts recente 105.000 80 000 ‘Alowance for doubt debts (10 000) (6.000) Bank 160.000 260.000 EQUITY AND LIABILITIES ‘Share capital and reserves (rcinary share capital 2 200.000 + 700.000 Retainod earings 2 7 ‘Current labilties Accounts payable #80000 420.000 Roceiver of Revenue 60.009 60.000 ‘Shareholders for divider! 470.000 170.000 You are required to: 8) Propare the realisation account, bank account and the account for the shares in Van Damme (Pty) Lid in the accounting records of Double Take CC at the date of the takeover, ') Prepare the journal entries in the accounting records of Van Damme (Ply) Ltd to record the acquisition. P20-5 Jacko and Myles have been trading togethor in partnership for some time, sharing profits ‘and losses in the ratio of 4:1. They are approached by Saki to sell the business, He intends to form a close corporation to be known as Busy Bee CC, The trial balance of the partnership at 30 September 20%3 is presented below: - - 361