BOOK KEEPING FORM FOUR – PARTNERSHIP ACCOUNT

ADMISSION OF A NEW PARTNER

New partner may be admitted and usually for one of two reasons:-
  I.  For the sake of increasing capital
       II. For the sake of management (supervision)

III. As an extra partner, either because the firm has growth or someone  needed  with  different skills.

IV.  To replace partners who are leaving the firm, this might because of retired or death of a partner

      V.  To avoid competition
In admitting a new partner two major problems arise:-

(i)  Treatment of premium of goodwill of the firm.

(ii) Revolution of Assets and liabilities of the old firm.

 Condition of new partner:
i. To bring capital
ii  To bring premium or goodwill

Example:

 YUSUPH   and   Christopher    began   to trade   in partnership   on Jan 1980 Yusuph   contributed Tshs   3000/=   and   Christopher   1000/=   in cash   they   agreed   as follows

 –        To share profit equally

 –        To allow   interest   on   capital   6%   p.a

 –        Christopher to get     salary   of   Tshs 400/=

 –        Drawings   Yusuph   Tshs 400/= on   1^st July and   Christopher   Tshs 200/= on 1^st April, 1^st July   and 1^st October

 –        To charge   interest   on drawings     6%   p.a   the net   profit  Tshs   2500/=

 Show:

 a)      Appropriation   account

 b)      Partners   capital

 c)      Partners current   account

 Workings:

 a)      Interest   drawings  

        Yusuph   6   x   400   x 6 = 12

                     100               12

    Christopher

 6 x   200 x 9 = 9

 100           12

1. 6 x 200 x 6 = 6

 

edu.uptymez.com

 100             12

1. 6 x 200 x 3 =   3

 

edu.uptymez.com

 100             12

 Therefore   total interest on drawings   from Christopher   is   9+ 6+ 3= 18

 b)      Interest on capital

      Yusuph   = 6 x   3000 = 180

                           100

        Christopher   6 x   1000=   60

                                100

 

EXERCISE 1

The   partnership agreement   between   A, B and C   contains     the following     agreement

 a)      The partnership   fixed   capital   shall be     A 10,000/= B   8000/= C   6000/=

 b)      A and B   are each   to n receive   a salary of   600/=   a year

 c)      Interest on capital   is to be   calculated   at   5%   per annum

 d)     A ,B , and C   are to   share   profit and losses   in the   ratio   of 3:2:1

 e)      No interest   to be allowed   on drawings or   current account

 On   1^st Jan 1978   the balance on   current   account were   A   credit balance   500/=   B credit   200/= credit 350/=

 During   the year   the drawing   were   A   4500/= B 3000   and   C 5000/=   the   profit   and   losses account   for   the   year   showed a net profit of 14500/=

    Before   charging   interest     on capital   and   partners   salaries

 Required

 a)       Capital   account   of A,B, and C

 b)      Partners   current account

 c)       Profit and loss appropriation     on   a/c

 EXERCISE 2

 Record   the following   facts   on the personal   account   of   A   and B.   two partners who are share profit and loss   in the   ratio of   5 to 3   and allow interest   on capital     at the rate   of   4 percent   per annum   no interest   is to be   allowed   or current   on charges or   drawings

 B.  is to be   credited   with a salary   of   300/=   for the year                  

                                                                                             A.             B.

 1^st   Jan   capital   account                                                  4000             3000

 30^th Jan   addition capital   brought                                     1000               –

 1^st Jan current account                                                      72 DR            100 CR

 1^st Jan – 31^st Dec   drawings                                              3650             3650/=

 The   partnership   total   divisible   for   the year   after   charging   the salary   was   7188/=

 Required

 a)       Partners   capital   account

 b)      Partners   current   account

 c)       Profit   and loss appropriation   account

TREATMENT OF PREMIUM OR GOODWILL

The new partner is required to pay some premium for goodwill as compensation to the old partners.

The amount in different to the amount paid in a business as a capital.

Premium for goodwill may be looked as a compensation paid by a new partner in a established business to the old performance to bring the business to its presents state.

There are five methods of dealing with questions of goodwill upon the admission of a new partner;-

(1)   When goodwill is raised:-

If the new partner may have no cash resources beyond the capital introduced, hence the old partner agrees to raise the goodwill A/C.

Accounting entries:-

(a)  When a new partner introduce capital

           DR; Bank / Cash A/c

                 CR:  New partner capital A/c

      (b)  When goodwill raised :

    DR:  Goodwill A/C
    CR:  Old partner capital A/C

EXAMPLE:-

Mill and Salum are in partnership sharing profit and loss in proportion to the capital invested.  Mill capital is 180,000 and Salum capital is 120,000.

They agreed to admit Nassor as a new partner but have no other sources a part from 60,000 he is contribute as capital.  It is as ranged that goodwill of 45,000 be raised and the capital A/C of the old partner be created in the proportion in which they share profits.  The profit on future is to be shared in the ration of 3:  2:  1 respectively.

Make journal entries to admit Nassor.

                                   JOURNAL ENTRIES

                                                                                       DR.                  PARTNERS CAPITAL ACCOUNT                    CR

                         DR                        GOODWILL      A/C                    CR

2)  When goodwill paid and with drawn by the old partners:-

Accounting entries:-

(a)  When goodwill paid

DR:  Cash A/C

                 CR:  Goodwill A/C

(b) When goodwill shared by the old partner

                 DR:  Goods will A/C

CR:  Old partner capital A/C

(c)  When goodwill withdraw by the old partners

DR:  Partners   capital A/C

CR:  Cash A/C

EXAMPLE:

Hamis and Ally are in partnership sharing profit and losses in proportional to their capital which are Tshs. 150,000 and 90,000 respectively.

They admit Ponda as a partner on bringing into the business Tshs. 100,000 which was dully paid into the firms bank A/C.

If this sum Tshs. 60,000 represented Ponda’s capital and Tshs. 40,000 is the goodwill for the admission into business.

The goodwill is taken out by the old partner. They agreed new share ration should be 5:3:2 respectively.

-Show the necessary entries for the admission of Ponda:

   Solution                                                  

       DR                      JOURNAL ENTRIES                  CR

                                                                                         DR.                       PARTNERS CAPITAL       A/C                      CR

3)  When goodwill retained within a business:-

In this method the new partner paid a premium and the old partners decide to leave it in the business.

Account entries:-

When goodwill paid in cash

DR:   Cash A/C

          CR:  Old partner capital A/C

 EXAMPLE

 On   1^st Jan   Juma   and Hamis   are in the   partnership , each   with   capital   of   15000/=   and   sharing   profit   equally     decide   to   admit   Hamada   as a partner   on   condition   that   he   brings   in   shs   10,000/=   as   capital   and   pays   them   a premium   of   10,000/=

 The   profit   in future   are   to be   shares   as   follows   juma   ²/₅   hamis ²/₅     and   hamadi ¹/₅

 Record the above   transaction   showing   the   admission   of   hamadi   and   how   the premium   remains   in the   partnership   firms

X , y, and z are in partnership   sharing   profit   and losses   in the ratio of 3: 3: 2   their balance   sheet as at   1^st Jan 1980   was   as follows

EXAMPLE 2

 On the   above   data   they   agreed   to admit   P   into partnership   on condition   that   contributes Tshs 18,000/= as his   capital   for  a fourth   share in the   future   profit in addition     to that   he must   pay   Tshs 12000/=   has   goodwill which   remain in the   business

 Required   show   the necessary   entries   for P’s   admission   and   how   the goodwill   remains   in the business   or partnership

(4) When goodwill is raised and immediately written off:-

This is when new partner does not pay any cash into the business as a goodwill rather than capital and the old partner decided to write off.

Account entries:-

(i)  When goodwill is written off:-

DR:  All partner capital A/C
CR:  Goodwill A/C

(ii)    When goodwill is written off:-

  DR:  All partner capital A/C
  CR:  Goodwill A/C

Example:–

Tamim and Nuhu are in partnership with capital of 400,000 cash, sharing profit and loss equally they agreed to admit Ally as a third partner in condition that all pay 400,000 as capital since Ally cannot raise any more fund.  The partner decided that the goodwill of the business be valued at 150,000 and written off immediately.  The new profit sharing ratio be 1/3 for each partner.

-Show the entries for the above transactions:-

Solution

             DR                            PARTNERS CAPITAL        A/C                                    CR

EXERCISE 1

MAGE  and ANA   are in partnership   sharing   profit and   losses in   proportion   to their   capital   which   are   300,000/=   and Tshs   200,000/= respectively. They   agreed to admit   Chekundu   as a partner   on condition that  he pays   into   the firm   Tshs 250,000/= of which  Tshs 150,000/=   is to   be   DANIEL   capital contribution   and   Tshs 100,000/= the premium   for   his   admission   the   cash   is paid   into   the firm’s   banking account   and  the   premium   out   to   MAGE     and ANA . the profit   are   shared on   future   as follows   MAGE ³/₈   and   ANA  ¹/₄

   Required  

   Record   DANIEL ‘s   admission   to be firm   and   the   payment   out   of premium

 EXERCISE 2

Bwire   and   Wangaeli   are in partnership   sharing   profit and losses equally   interest   on capital   is allowed   at 5%   per annum

On 1^st Jan   1989   the   partners   Gichomi   on similar   making   the following arrangement

 a)       Gichomi   to pay   is   150,000/=   as capital

 b)      Gichomi   to pay     Tshs 5000/=   to the   credit   of current account

 c)      The money   drawn   immediately   to   repay   the mortgage loan

 d)     The   profit for the year   ended 31^st may   1990 amounted to Tshs 142500/=   the partners   drawing   were   as   follows

                                           Bwire   45,000/=

                                            Wangaeli   47000/=

                                            Gichomi   50,000/=

 Required  

Show   balance sheet of the new   partnership   on 1^st June   1989 Just   after   the admission   of Gichomi

1. Prepare   a profit   and loss appropriation   account   and   the current   account   of the   partners   for the year   ended   31^st   may 1990.

 

edu.uptymez.com