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- 20 Marks
Question
a) When two or more individuals come together to form a Partnership, it is advisable to have a correctly drafted Partnership Agreement carefully detailing the terms of the business relationship. A partnership agreement is a contract between partners in a partnership that sets out the terms and conditions of the relationship between the partners.
Required:
Identify and explain FIVE key issues that should be covered in a partnership agreement when setting up a partnership. (10 marks)
b) Ashiyie Ltd is a telecommunication company that prepares accounts in accordance with International Financial Reporting Standards (IFRS). A meeting of the Directors of Ashiyie Ltd is scheduled for 5 December 2017 to discuss the following matters with a view to finalizing the accounts for the year ending 30 October 2017:
i) A fire occurred in one of the warehouses of Ashiyie Ltd on 3 November 2017, destroying inventory that had a cost price of GH¢100,000 and a net realizable value of GH¢150,000.
ii) On 9 November 2017, Ashiyie Ltd received information that one of their largest customers had gone bankrupt. At 30 October 2017, this customer owed Ashiyie Ltd GH¢235,000. It is anticipated that Ashiyie Ltd can only receive 10 pesewas for every GH¢1 they were owed.
iii) In November 2017, Ashiyie Ltd sold inventory that had been in one of their warehouses for the past two years for GH¢75,000. This had been included in the financial statements, for the year ended 30 October 2017, at its cost price of GH¢105,000.
iv) On 30 October 2017, an employee of Ashiyie Ltd fell and injured her arm at work. This employee has commenced legal action. The Solicitors for Ashiyie Ltd informed the company on 10 August 2017 that it is probable they will be found liable and have to pay this employee GH¢33,000. The employee has worked for Ashiyie Ltd for the past four years.
Required:
Advise the board on the accounting treatment of these issues. Your answer should give a detailed reason for the accounting treatment that you have chosen. (10 marks)
Answer
a) Key Issues in a Partnership Agreement:
- Capital Contributions:
The partnership agreement should state how much each partner is contributing in terms of capital and whether any additional capital contributions are expected in the future. - Profit-Sharing Ratio:
The agreement should clearly define how profits and losses will be shared among the partners. This could be in proportion to their capital contributions or any other agreed ratio. - Partners’ Salaries and Drawings:
If partners are entitled to salaries or regular withdrawals (drawings) from the business, the agreement should specify the amounts and frequency. It should also state how these drawings will be treated concerning profit-sharing. - Interest on Capital and Drawings:
The agreement should specify if any interest will be paid on the capital invested by the partners and if interest will be charged on drawings made by the partners. - Decision-Making and Dispute Resolution:
The agreement should outline the decision-making process, including how decisions will be made (e.g., majority vote) and how disputes will be resolved (e.g., arbitration or mediation). - Admission of New Partners and Exit of Existing Partners:
The agreement should include provisions for admitting new partners and the process for a partner to exit the partnership. It should also address the valuation of the partner’s share in the business. - Dissolution of the Partnership:
The agreement should outline the circumstances under which the partnership may be dissolved and the process for winding up the partnership’s affairs.
(Any 5 points, 2 marks each = 10 marks)
b) Accounting Treatment of Subsequent Events:
i) Fire in Warehouse (Non-adjusting Event):
- The fire occurred after the reporting period (3 November 2017), so it is a non-adjusting event. The inventory loss should not be reflected in the financial statements for the year ending 30 October 2017. However, if the amount is material, it should be disclosed in the notes to the financial statements to inform users of the financial statements of the event and its potential impact.
ii) Bankruptcy of a Customer (Adjusting Event):
- The bankruptcy of the customer provides evidence of conditions that existed at the reporting date (30 October 2017). As a result, Ashiyie Ltd should recognize an impairment loss in the financial statements. The receivable of GH¢235,000 should be written down to its recoverable amount of GH¢23,500 (10% of GH¢235,000), with a loss of GH¢211,500 recognized in the income statement.
iii) Sale of Old Inventory (Adjusting Event):
- The sale of the old inventory after the reporting period provides evidence about the net realizable value of the inventory at the reporting date. The inventory should be written down to its net realizable value of GH¢75,000, with a loss of GH¢30,000 (GH¢105,000 – GH¢75,000) recognized in the financial statements.
iv) Employee Injury Claim (Adjusting Event):
- The injury occurred before the reporting date, and it is probable that Ashiyie Ltd will be found liable. Therefore, Ashiyie Ltd should recognize a provision of GH¢33,000 in the financial statements for the year ending 30 October 2017. This provision should be recognized as an expense in the income statement, with a corresponding liability in the statement of financial position.
(2.5 marks each for 10 marks)
- Tags: Accounting Treatment, IFRS, Partnership Agreement, Subsequent Events
- Level: Level 1
- Uploader: Kwame Aikins