Financial Accounting 1a (AFE 3691) Partnerships (Changes in ownership structures) 27 February 2020

GALAXY SPORTS PARTNERSHIP

Sara and Mary are in a partnership, GALAXY SPORTS, and share profit and losses in the ratio 3:2. The
following is the statement of financial position, before the admission of a new partner, Parker.
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20x7

ASSETS N$

Non- Current assets 650 000

Cost Accumulated Carrying
depreciation amount
Land and buildings 570 000 - 570 000

Machinery 100 000 20 000 80 000

Current assets 578 000

Inventory 70 000

Accounts receivable 154 000

Bank 354 000

TOTAL ASSETS 1 228 000

EQUITY AND LIABILITIES 1 003 000

Capital and reserve

Capital accounts: 605 000

Sara 280 000

Mary 325 000

Current accounts: 338 000

Sara 208 540
Mary 129 460

Reserve 60 000

Non-current liabilities
Borrowing- Mega Bank 80 000

Current liabilities
Account payable 141 000

Interest accrued 4 000

TOTAL EQUITY AND LIABILITIES 1 228 000

On 1 January 20X8 Sara and Mary agree to admit Parker into the partnership on the following
terms:
 The following values are placed on the assets and liabilities:
 Land and buildings N$ 700 000
 Machinery N$ 90 000
 Inventory N$ 65 000
 Accounts receivable N$ 144 000
All other assets and liabilities are considered to be fairly valued.
 Parker contributed N$440 000 to the partnership for a 1/3 share of the business

You are required to:

1) Calculate the new profit sharing ratios of the partners after the admission of Parker if:
a. The share that the new partner will acquire is relinquished by the existing partners
according to their existing ratio.
2) Prepare the journal entries to record the revaluation of the assets at admission
3) Calculate the amount of goodwill recognised when the new partner was admitted and
prepare the journal entry to this effect.
4) Prepare the journal entry to record the new partner’s contribution to equity of the
partnership
5) Prepare the journal entry required to redistribute the reserve so that the equity of the
existing partners is adjusted to reflect their share of those profits
6) Prepare the current and capital accounts of the partners after the admission of Mark.
7) Prepare the statement of financial position of Galaxy Sports at 1 January 20X8,
immediately after the admission of Mark as well as the extracted statement of changes in
equity, partners ’capital and current accounts in columnar format.
Suggested solution:

Calculation of profit sharing

ratio

To relinquish:
Sara 3/5 x 1/3 = 1/5 or 20%
Mary 2/5 x 1/3 = 13/100 or 13%

Sara =⅗ x ⅔ = 6/15
Mary= 2/5 x ⅔ = 4/15

Sara 60% -20% = 40%

Mary 40% - 13% = 27 %
Parker = 20% + 13% = 33%
New profit sharing ratio=
40:27:33

Journal entries

Dr Cr
Land 130 000
Capital: Sara 78 000
Capital : Mary 52 000
(Revaluation of land and building at admission)

Machinery 10 000
Capital : Sara 6 000
Capital: Mary 4 000
(revaluation of machinery at
admission)

Capital : Sara 3 000

Capital: Mary 2 000
Inventory 5 000
(Revaluation of inventory at
admission)

Capital: Sara 6 000

Capital: Mary 4 000
Accounts receivable 10 000
(Revaluation of debtors at admission)

Dr Reserve 60 000
Cr Current Account: Sara 36 000
Cr Current Account: Mary 24 000
(Redistribution of the reserve)
Calculation of goodwill:
Total for
Mark (1/3) partnership
Purchase consideration A 440 000 1320 000
Fair value of identifiable net assets B 376 000 1 128 000
Owners equity per statement of
financial position at 31/12/x7 1 003 000
Adjustment to fair value of assets 125 000
Goodwill (A-B) 64 000 192 000

Contribution by new partner

Dr Bank 440 000

Cr Capital- Parker 440 000
(Capital contribution by parker)

Dr Goodwill 192 000

Cr Capital : Sara 115 200
Cr Capital: Mary 76 800
(Recognistion of goodwill)

dr Capital Account cr
Sara Mary Parker Sara Mary Parker
Revaluation: Inventory 3 000 2 000 Balance 280 000 325 000 -
Revaluation: Debtors 6 000 4 000 Revaluation: L&B 78 000 52 000
Balance 470 200 451 800 440 000 Revaluation: Machinery 6 000 4 000
Goodwill 115 200 76 800
Bank 440 000
479 200 457 800 440 000 479 200 457 800 440 000
Statement of Financial Position as at 01 January 20x8
N$
ASSETS
Non-current assets
Property, plant and equipment 790 000
Goodwill 192 000

Current assets
Inventory 65 000
Accounts receivable 144 000
Bank (354 000+ 440 000) 794 000

TOTAL ASSETS 1 985 000

EQUITY AND LIABILITIES

EQUITY
Capital: 1 760 000
Sara 470 200
Mary 451 800
Parker 440 000

Current accounts:
Sara 244 540
Mary 153 469
Parker -

Non-current liabilities:
Borrowing- Mega Bank 80 000

Current liabilities:
Accounts payable 141 000
Interest payable 4 000

TOTAL EQUITY AND

LIABILITIES 1 985 000
GALAXY SPORTS PARTNERSHIP

Statement of Changes in equity for the year ended 01 January 20x8

CAPITAL CURRENT ACCOUNTS

Sara Mary Parker Sara Mary Parker Appropriation Total

Balance 31/12/x7 280 000 325 000 - 208 540 129 460 1 003 000
Revaluation on
admission of partner 75 000 50 000 - - - - 125 000
Recognition of
Goodwill 115 200 76 800 192 000
Redistribution of the
reserve 36 000 24 000 - 60 000
Contribution to capital 440 000 440 000
Balance at 01/01/x8 470 200 451 800 440 000 244 540 153 460 - 1 760 000