Question Tag: Capital Accounts

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  • 20 Marks

FA – May 2024 – L1 – SB – Q6 – Partnership Accounts

Admission of a new partner, accounting for goodwill and the partnership's capital accounts.

BIN Partnership is an existing partnership consisting of two partners, Bode and Igere, sharing profits and losses equally. On January 1, 2023, they decided to admit Ngor as a new partner into the partnership.

Additional Information: (i) The existing partnership’s statement of financial position before Ngor’s admission is as follows:

Capital: Property, plant, and equipment ₦2,400,000
Bode: ₦1,750,000 Inventory ₦700,000
Igere: ₦1,750,000 Accounts Receivable ₦900,000
Loan Notes: ₦1,000,000 Cash ₦800,000
Accounts Payable: ₦300,000
Total Liabilities: ₦4,800,000 Total Assets: ₦4,800,000

(ii) Goodwill of the partnership is valued at ₦200,000.
(iii) Ngor invests ₦1,500,000 in cash and acquires a 30% share in the partnership’s profits and losses.
(iv) ₦600,000 from the cash contributed by Ngor will be used to reduce the existing partnership’s long-term liabilities.
(v) The partnership follows a policy of not recording goodwill on its financial statements.

Required: a. In the books of BIN partnership, prepare the following to give effect to the admission of Ngor:

  • i. Goodwill account (2 Marks)
  • ii. Partners’ capital accounts (4 Marks)
  • iii. Statement of financial position after the admission of Ngor (10 Marks)

b. Discuss two methods of goodwill valuation in a partnership. (4 Marks)

(Total 20 Marks)

i. Goodwill Account:

Particulars Debit (₦) Credit (₦)
Goodwill 200,000
Capital – Bode 100,000
Capital – Igere 100,000
Total 200,000 200,000

ii. Partners’ Capital Account:

Particulars Bode (₦) Igere (₦) Ngor (₦)
Goodwill 100,000 100,000
Cash 1,500,000
Balance b/d 1,750,000 1,750,000
Loan Repayment (600,000)
Balance c/d 1,780,000 1,780,000 1,440,000

iii. Statement of Financial Position after Admission of Ngor:

Assets ₦ Liabilities and Equity ₦
Property, plant, and equipment 2,400,000 Capital: Bode 1,780,000
Inventory 700,000 Capital: Igere 1,780,000
Accounts receivable 900,000 Capital: Ngor 1,440,000
Cash 1,700,000 Loan Notes 400,000
Accounts payable 300,000
Total Assets 5,700,000 Total Liabilities & Equity 5,700,000

b. Methods of Goodwill Valuation in a Partnership:

i. Average Profit Method:
This method involves calculating the average profit of the firm over a specific number of years and multiplying it by a number of years’ purchase to determine the value of goodwill.

ii. Super Profit Method:
Goodwill is calculated by determining the firm’s super-profits, which is the excess of actual profits over normal profits, and then multiplying this by a number of years’ purchase.

  • 15 Marks

FR – Nov 2018 – L2 – Q5a – Preparation of Financial Statements

Preparation of partners' capital accounts and statement of financial position after changes in a partnership.

Alex, Dennis, and Francis have been in partnership business for several years, sharing profits in the ratio 6:5:3, respectively. The statement of financial position of the partnership as at 31 March 2018 showed the following position:

Statement of Financial Position as at 31 March 2018 GH¢ GH¢
Capital Accounts:
Alex 50,000
Dennis 36,000
Francis 17,400
Sundry Payables 135,200
Total 238,600
Tangible Non-current Assets 44,800
Goodwill 25,900
Sundry Receivables 147,000
Bank Balance 20,900
Total 238,600

Additional Information:
On 31 March 2018, Alex retired from the partnership, and the remaining partners agreed to admit George as a partner under the following terms:

  • Goodwill in the old partnership was to be revalued to two years’ purchase of the average profits over the last three years. The profits for the last three years were GH¢24,800, GH¢27,200, and GH¢28,010. Goodwill was to be written off in the new partnership.
  • Alex was to take his car out of the partnership assets at an agreed value of GH¢2,000. The car had been included in the accounts as of 31 March 2018 at a written-down value of GH¢1,188.
  • The new partnership, comprising Dennis, Francis, and George, was to share profits in the ratio 5:3:2, respectively, with an initial capital of GH¢50,000 subscribed in the profit-sharing ratio.
  • Dennis, Francis, and George were each to pay Alex GH¢10,000 out of their personal resources in part repayment of his share of the partnership.
  • Alex was to lend George any amount required to make up his capital in the firm from the monies due to him, and any further balance due to Alex was to be left in the new partnership as a loan, bearing interest at 20% per annum. Any adjustments required to the capital accounts of Dennis and Francis were to be paid into or withdrawn from the partnership bank account.

Required:
i. Prepare the partners’ capital accounts, in columnar form, reflecting the adjustments required on the change in partnership.
(5 marks)

ii. Prepare the statement of financial position on completion.
(5 marks)

iii. For registration of partnership to be effected, there shall be sent to the Registrar a copy of the partnership agreement and a statement on a prescribed form signed by all the partners. Outline the main contents of the statement on the prescribed form.
(2 marks)

iv. In accordance with the Incorporated Private Partnership Act 1962 (Act 152), state THREE (3) grounds upon which the Registrar General’s Department may refuse to register a partnership business.
(3 marks)

iii. Main contents of the statement to the Registrar General’s Department for registration of the new partnership:

  1. The firm name of the partnership.
  2. The general nature of the business.
  3. The address and Post Office Box number of:
    • The principal place of business of the partnership, and
    • All other places in Ghana at which the business is carried on.
  4. The names, any former names, residential addresses, and business occupation of the partners.
  5. The date of commencement of the partnership, unless it commenced more than 12 months prior to the date of the statement.
  6. Particulars of any charges requiring registration under section 25 of Act 152, or a statement that there are no such charges.

(Any 4 items x ½ mark = 2 marks)

iv. Grounds upon which the Registrar General’s Department may refuse to register a partnership business:

  1. The partnership is not registerable under Act 152, for example, if it has more than 20 persons.
  2. Any of the business the partnership has been carrying on or is to carry on is unlawful.
  3. The name of the firm is misleading or undesirable.
  4. Any of the partners is an infant or of unsound mind, or within the preceding 5 years has been guilty of fraud or dishonesty in connection with any trade or business, or is an undischarged bankrupt.
  5. The statement is incomplete, illegible, inaccurate, irregular, or not on durable paper suitable for registration.

(Any 3 items x 1 mark = 3 marks)

  • 10 Marks

FA – Mar 2024 – L1 – Q2b – Preparation of Partnership accounts

Prepare the capital accounts for Armah, Siameh, and Benya following the admission of a new partner.

Armah and Siameh were in partnership and shared profits and losses in the ratio of 3:2 respectively. The balances on the partners’ capital accounts at July 1, 2022, were: Armah GH¢187,500, Siameh GH¢300,000.

Due to expansion of their business, Benya was admitted as a partner on October 1, 2022, under the following arrangements:

i) The new profit-sharing ratio between Armah, Siameh, and Benya would be 35%, 35%, and 30% respectively.

ii) Benya was to introduce capital of GH¢375,000 but was unable to bring cash into the business immediately. Instead, he contributed his share of goodwill of GH¢180,000.

iii) Goodwill was valued at GH¢450,000 and was to be written off immediately after Benya’s admission. The existing partners agreed that goodwill should not be retained in the books of the partnership.

Required:

Prepare the partners’ capital accounts to reflect the admission of Benya into the partnership. (10 marks)

Partners’ Capital Accounts

Partners’ Capital accounts for the year to June 30, 2023

 

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