- 20 Marks
Question
Moon, Sun and Star are in partnership with an agreement to share profits and losses in the ratio
of 3:2:1.
They also agreed the following terms:
i) Interest on capital is agreed at 12% per annum.
ii) Star is to receive a salary of GH¢8,400 per annum.
iii) Interest is to be charged on drawings at the rate of 5% on balances at the end of the year.
iv) The interest on Moon loan is 5% per annum.
The Statement of Financial Position of the partnership as at 31 December 2015 revealed the following:
Capital accounts balances | GH¢’000 | GH¢’000 |
---|---|---|
Moon | 28,000 | |
Sun | 11,200 | |
Star | 8,400 | 47,600 |
Current Accounts balances | GH¢’000 | GH¢’000 |
Moon | 4,900 | |
Sun | (980) | |
Star | 2,520 | 6,440 |
Loan account (Moon) | 8,400 | |
Capital Employed | 62,440 |
Drawings made during the year to 31 December 2015 were as follows:
GH¢’000 | |
---|---|
Moon | 8,400 |
Sun | 5,600 |
Star | 9,800 |
The net profit for the year 31 December 2015 was GH¢34,342,000 before deducting loan
interest.
Required:
a) Prepare the partners appropriation account for the year ended 31 December 2015.
(5 marks)
b) Prepare partners’ capital accounts for the year ended 31 December 2015
c) Prepare partners’ current accounts for the year ended 31 December 2015. (5 marks)
d) i) State THREE advantages of a partnership business (3 marks)
ii) List TWO demerits of a partnership business.
Answer
a) MOON, SUN AND STAR
APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2015
b)
d)
i) Advantages of Partnership
Capital – Due to the nature of the business, the partners will fund the business
with start-up capital. This means that the more partners there are, the more money
they can put into the business, which will allow better flexibility and more
potential for growth. It also means more potential profit, which will be equally
shared between the partners.
Flexibility – A partnership is generally easier to form, manage and run. They are
less strictly regulated than companies, in terms of the laws governing the
formation and because the partners have the only say in the way the business is
run (without interference by shareholders) they are far more flexible in terms of
management, as long as all the partners can agree.
Shared Responsibility – Partners can share the responsibility of the running of
the business. This will allow them to make the most of their abilities. Rather than
splitting the management and taking an equal share of each business task, they
might well split the work according to their skills. So if one partner is good with
figures, they might deal with the book keeping and accounts, while the other
partner might have a flare for sales and therefore be the main sales person for the
business.
Decision Making – Partners share the decision making and can help each other
out when they need to. More partners means more brains that can be picked for
business ideas and for the solving of problems that the business encounters.
(Any 3 points for 3 marks)
ii) Disadvantages of Partnership
Disagreements – One of the most obvious disadvantages of partnership is the
danger of disagreements between the partners. Obviously people are likely to
have different ideas on how the business should be run, who should be doing what
and what the best interests of the business are. This can lead to disagreements and
disputes which might not only harm the business, but also the relationship of those
involved. This is why it is always advisable to draft a deed of partnership during
the formation period to ensure that everyone is aware of what procedures will be
in place in case of disagreement and what will happen if the partnership is
dissolved.
Agreement – Because the partnership is jointly run, it is necessary that all the
partners agree with things that are being done. This means that in some
circumstances there are less freedoms with regards to the management of the
business. Especially compared to sole traders. However, there is still more
flexibility than with limited companies where the directors must bow to the will
of the members (shareholders).
Liability – Ordinary Partnerships are subject to unlimited liability, which means
that each of the partners shares the liability and financial risks of the business.
Which can be off putting for some people. This can be countered by the formation
of a limited liability partnership, which benefits from the advantages of limited
liability granted to limited companies, while still taking advantage of the flexibility
of the partnership model.
Taxation – One of the major disadvantages of partnership, taxation laws mean that
partners must pay tax in the same way as sole traders, each submitting a SelfAssessment tax return each year. They are also required to register as selfemployed with HM Revenue & Customs. The current laws mean that if the
partnership (and the partners) bring in more than a certain level, then they are
subject to greater levels of personal taxation than they would be in a limited
company. This means that in most cases setting up a limited company would be
more beneficial as the taxation laws are more favourable
Profit Sharing – Partners share the profits equally. This can lead to inconsistency
where one or more partners aren’t putting a fair share of effort into the running or
management of the business, but still reaping the rewards.
(Any 2 points for 2 marks)
- Tags: Appropriation Account, Capital Accounts, Current Accounts, Partnership Accounts
- Level: Level 1
- Topic: Preparation of Partnership accounts
- Series: NOV 2017
- Uploader: Theophilus