Question

Benny, Sammy and Jenny

Partnership appropriation account for the year ended 31 January 2022
01.02.2021 01.09.2021
to to
31.08.2021 31.01.2022
£ £
Pro%it for the year (W1) 58 625 41 875

Less
Salary: Sammy (W2) 14 350 10 250


Interest on capital (W3) (W4)
Benny 1 575 1 310
Sammy 2 940 1 490
Jenny 125

--------- ---------
ProBit available for distribution 39 760 28 700

Share of ProBits (W5)
Benny 19 880 10 045
Sammy 19 880 11 480
Jenny 7 175



Workings:
W1
Pro$it for the year as at 31.08.2021 = £100 500 x 7/12 = £58 625
Pro$it for the year as at 31.31.2022 = £100 500 x 5/12 = £41 875

W2
Salary – Sammy as at 31.08.2021 = £24 600 x 7/12 = £14 350
Salary – Sammy as at 31.01.2022 = £24 600 x 5/12 = £10 250

W3
Interest on capital: Benny, Sammy
Benny £45 000 x 6% x 7/12 = £1 575
Sammy £84 000 x 6% x 7/12 = £2 040

W4
Interest on capital: Benny, Sammy, Jenny
Benny £45 000 + £25 500 + (£27 000 - £18 900) = £78 600
£78 600 x 4% X 5/12 = £ 733

Sammy £84 000 + (£27 000 - £21 600) = £89 400
£89 400 x 4% x 5/12 = £1 490

Jenny (£21 000 - £13 500) x 4% x 5/12 = £125

W5
Share of proJits: Benny and Sammy
Benny £39 760 x 50% = £19 880
Sammy £39 760 x 50% = £19 880

Share of proJits: Benny, Sammy and Jenny
Benny £28 700 x 35% = £10 045
Sammy £28 700 x 40% = £11 480
Jenny £28 700 x 20% = £7 175


(a) (i) Goodwill is in intangible asset that represent the reputation built up by
the business., equalling to the difference between the sale price of the
business and the net value of the assets less liabilities.

(ii) Examples of goodwill include location, quality products,
skilled/experienced staff, brand, reputation, loyal customers

(iii) Reasons include: it is dif1icult to value or to estimate of cost; the value of
goodwill can 1luctuate; it also goes against prudence concept as assets
may be overstated until it is realised.

(iv) Pro$it/loss for the year: no effect (goodwill is asset)
Bank overdraft: no effect

(c) Regarding Jenny’s proposal to combine the capital and current account in this
partnership, it is preferred to reject such as idea due to the following reasons:

• if capital injections and share of pro$its are kept separate, it enables more accurate
calculation for the appropriation account.

• Capital account is preferred to be kept $ixed – for easier calculation of interest on
capital

• If current account is kept $luctuating, it is easier for the partners to know what
their annual earnings were for the $inancial year

• Some partners may wish to show the excess/surplus for their share of pro$it which
has not been withdrawn.

• Also, with a $ixed capital account and $luctuated current account, it is easier to tell
that Jenny has withdrawn more than she is entitled to, and it is a fact that can be
hidden from other partners if both accounts are combined. It is illustrated below:
Drawings Share of proJits*
£ £
Benny 26 000 32 810
Sammy 35 000 60 390
Jenny 10 000 7 300

As shown above, it is quicker to $ind the information for the $inancial statement
which should include the amount invested in the partnership by each partner if
the capital and current accounts are separated.