CH-8 Partnerships: Formation, Operation and Reporting – Accounting : Book Guide

Chapter 8: Partnerships: Formation, Operation and Reporting Please note: GST versions of the end-of chapter questions are not appropriate for this chapter. Discussion questions Suggested topics for discussion are provided for each question. Discussion need not be confined to the topics indicated. 1. ‘The big disadvantage of a sole trader business is that the personal liability of the owner is unlimited — the owner could lose everything. I think I will take on a partner and convert my business to a partnership. That way I will certainly reduce the chances of losing my personal assets if the business fails.’ Discuss. The principle of unlimited liability exists for partners of a partnership as for a sole trader. Admitting a new partner does not remove the liability to contribute personal assets to pay creditors of the firm on the part of the old partners or any incoming partner. Whether the amount of the liability of the old partner is reduced will depend on the circumstances, such as the state of the partnership assets and liabilities at the time of insolvency of the firm, and the state of the personal financial affairs of the partners. Consider the case where the incoming partner is insolvent when the partnership debts are to be paid – the old partner would have to cover all the partnership debts! 2. ‘There is really no need for a partnership agreement since all issues likely to arise among partners are adequately covered in the appropriate Partnership Act.’ Discuss. The Partnership act is designed to cater for partnership and partner inter-relationships generally: e.g. profits are shared equally, the percentage appropriate for interest on partner advances, etc. Normally, the relationship and arrangements among partners is specific to each particular partnership. Partners usually prefer to specify rights, duties, and interests as amongst themselves in a particular business relationship, e.g. managerial rights, profit-sharing rights, drawing rights, arrangements for interest on capital and drawings, managerial responsibilities, etc. Since each partnership is generally unique, a written partnership agreement should be drawn up to cover those items of concern to individual partners. The Partnership Act then need only be relied upon for those items not specifically addressed in the partnership agreement. 3. Which is likely to last longer and why: a partnership or a company? • A company is likely to last longer than a partnership. • A partnership is dissolved for a number of reasons. • A partnership is dissolved on the death of a partner, the bankruptcy of the partnership or an individual partner etc. 4. Liam sold his partnership interest to Jason even though his other partners were unaware that Liam intended to do so. Does Jason have the right to be a partner? Does Jason have the right to take over Liam’s position as manager of the business? Would Jason be entitled to share in the partnership profits and, if so, how much? Yes, Jason is entitled to be a partner in the firm. No, because Jason does not have the right to participate in the management of the firm unless he is accepted by all partners. Old partners, and only they, may decide to allow Jason to assume a managerial role. Yes, Jason is entitled to a share in the profits which Liam would have received. 5. ‘The accounting treatment of a partner’s drawings differs when separate Retained Earnings accounts are kept for each partner as opposed to not having Retained Earnings accounts. Choice of method is immaterial.’ Discuss. If each partner’s capital account is used to reflect his or her share of profits or losses, and no retained earnings account is kept (Method 1 as in the book), any withdrawals are recorded by debiting the drawings account of the partner concerned and crediting cash at bank . The drawings account is then closed to capital at the end of the period. Under Method 2 (as in the book), which consists of capital accounts with fixed balances and retained earnings accounts, after the initial capital contribution very few entries are made to the fixed capital account. Withdrawals in anticipation of profits are debited to the drawings account which is eventually closed off to the retained earnings account. Only withdrawals of capital are debited to the capital account. Method 2 closely follows company accounting procedures and is in line with relevant accounting standards. The choice of accounting treatment is influenced by how partners want equity and changes in equity recorded and disclosed and, particularly, whether they wish to maintain ‘fixed’ capital accounts which only reflect capital invested unaffected by profit share, interest on capital, drawings, and salary arrangements for partners. However, although there is greater disclosure under Method 2, the total of each partner’s equity interest is ultimately the same under either method. 6. A student of accounting was heard to remark: ‘You really do not need a Profit Distribution account when accounting for profit distribution in a partnership. Everything can be done through the Profit or Loss Summary account.’ Discuss. The statement is correct from a strictly accounting viewpoint. If no Distribution account is used, the Profit or Loss Summary account contains income/revenues, expenses, and capital adjustments as amongst the partners such as drawings, interest on capital and drawings, and other arrangements such as salary adjustments. Use of a Distribution account clearly separates items of operating income and expenses which appear in the Profit or Loss Summary from items which constitute capital adjustments and profit sharing. The Distribution account clearly shows how profits are shared, and provides a summary of adjustments to partners’ equity. Discussion could concentrate on whether this arrangement is useful or not. 7. ‘Partners’ advances and capital both represent money contributed to the partnership by the partners. Therefore the accounting treatment for interest paid on advances and capital should be the same.’ Discuss. The distinction lies in the extent of the partner providing the resources to the firm. Capital contributions represent an investment and a commitment to finance the firm for the long term. A loan or advance, on the other hand, represents the provision of funds for use in the partnership on a normal commercial basis in return for interest. A partner who provides loan funds via an advance, will expect the partnership to treat such an advance as a normal commercial loan and account for it as such. Interest on an advance will be treated as an operating expense, while interest on capital constitutes an adjustment among the partners for differing amounts of capital invested by the partners. Differences in accounting treatment appear to be justified. 8. Hannah and Jeremy set up a partnership to run a café. At the time of establishing the business, Hannah was in a better financial position than Jeremy and so contributed 60% of the capital required. Jeremy believes that he contributes as much effort to running the café as Hannah and therefore assumes that any profit made will be distributed evenly between Hannah and him. Is Jeremy correct, and what factors might determine how much profit each of the partners will receive? Jeremy is correct that in the absence of an agreement or if the partners are unable to reach an agreement, the Partnership Act provides that profits are to be divided equally, regardless of the amount invested by the partners. Factors that might determine how much profit each partner will receive include: • return for the personal services performed by the partners • return on the capital provided by the partners • return for the business risks assumed by the partners. The profit and loss agreement should reward each partner for resources and services contributed to the business As the partners contribute the same effort but Hannah contributed more capital it would be fair for Hannah to get more than half of the share of the profits. 9. Eduardo and Evanthia run a craft shop as a partnership. During the year Eduardo incurred an unusual amount of personal expenses in relation to his family and felt that his share of the partnership profit for the year would not cover these costs. Eduardo approached Evanthia to see if he can get any extra cash out of the business just for the current year to cover the shortfall in his personal finances. What options are there for Eduardo to receive extra cash and what are some of the future implications of this? Eduardo can receive extra cash from the partnership with Evanthia’s agreement. The extra cash could be treated as a withdrawal of future profits so that in future periods Eduardo gets less of the share of the profits. Alternatively the extra cash could be treated as a withdrawal of Eduardo’s capital contribution. If this happens then Eduardo’s contribution of capital to the business could be less than Evanthia’s and this may leave him entitled to a lower proportion of future profits. The partnership agreement may also require that Eduardo pay interest on any drawings or capital that he withdraws from the partnership. 10. Ethan and Amy, who have been friends for a long time, decide to go into partnership selling a range of pet accessories. They seek advice from an accountant regarding the best system, the generally accepted accounting principles to be used in the accounting records, and the format and contents of the financial statements. The accountant replies that since the partnership will be a non-reporting entity, they can account any way they like, and include whatever they like in the reports to suit their own requirements. The partners point out that they have other business interests and would like to have some comparability in accounting and statements. As the accountant, how would you advise the partners? Since the partnership and, presumably, the other businesses referred to, are non-reporting entities, the accountant is correct — special purpose reports are prepared. These reports do not have to comply with accounting standards. There is probably a need to ascertain how and on what basis reports for the other business interests of the partners are prepared, and the degree of compliance with some or all of the accounting standards. It will obviously be of some benefit to the partners if there is consistency in the preparation of the various reports from the different businesses for interpretation purposes. If any of the other businesses are reporting entities, it may be useful to prepare general purpose financial reports for the partnership. The accountant could seek input from the partners on how best to employ ‘their’ particular accounting concepts and principles to enable him/her to produce reports which are the most useful. Exercises Exercise 8.1 Partnership formation Thomas and James, who were operating separate competing businesses, decided on 1 July 2018 to form a partnership by contributing cash, assets and liabilities of their respective businesses. At that date the fair values of the assets and liabilities were as set out below. Required (a) Assuming that Thomas and James agree that their capitals should be equal to the fair value of the net assets contributed, prepare general journal entries to record the formation of the partnership. (b) If Thomas and James agree that their respective capitals should be $230 000, show the general journal entries to establish the partnership. (LO5) (a) 2018 July 1 Cash at Bank $90 000 Accounts Receivable 12 000 Inventory 45 000 Plant and Equipment 90 000 Accounts Payable $ 12 500 Thomas, Capital 224 500 Cash at Bank 100 000 Accounts Receivable 7 500 Inventory 40 000 Plant and Equipment 70 000 Accounts Payable 8 000 James, Capital 209 500 (b) 2018 July 1 Cash at Bank $90 000 Accounts Receivable 12 000 Inventory 45 000 Plant and Equipment 90 000 Goodwill 5 500 Accounts Payable $ 12 500 Thomas, Capital 230 000 Cash at Bank 100 000 Accounts Receivable 7 500 Inventory 40 000 Plant and Equipment 70 000 Goodwill 20 500 Accounts Payable 8 000 James, Capital 230 000 Exercise 8.2 Partnership formation Tammie Pike and Gail Smith agree to combine their businesses and form a partnership. The fair value and the carrying amount of the assets contributed by each partner and the liabilities assumed by the partnership are shown below. Required (a) Prepare separate journal entries to record the initial investment of each partner, assuming assets are recorded by the business to reflect their purchase price, and the arrangement is GST-free. (LO5) (a) Cash at Bank $ 6 200 Accounts Receivable 12 800 Inventory 21 500 Equipment 48 000 Accounts Payable $13 400 Pike, Capital 75 100 Cash at Bank 5 800 Accounts Receivable 11 400 Inventory 18 300 Equipment 32 000 Accounts Payable 12 800 Smith, Capital 54 700 Exercise 8.3 Partnership formation Refer to the data presented in exercise 8.2. Assume further that Pike and Smith agree that their opening capital balances in the new partnership should be the same and set the amount at $90 000. Required (a) Prepare separate journal entries to record the initial investment of each partner, assuming assets are recorded by the business to reflect their purchase price, and the arrangement is GST-free. (LO5) (a) Cash at Bank $ 6 200 Accounts Receivable 12 800 Inventory 21 500 Equipment 48 000 Goodwill 14 900 Accounts Payable $13 400 Pike, Capital 90 000 Cash at Bank 5 800 Accounts Receivable 11 400 Inventory 18 300 Equipment 32 000 Goodwill 35 300 Accounts Payable 12 800 Smith, Capital 90 000 Exercise 8.4 Partnership profit distribution — fixed ratio Godfrey and Taylor formed a partnership on 1 July 2018 with initial capital balances of $90 000 and $60 000 respectively. For the year ended 30 June 2019, the Profit or Loss Summary account disclosed a final credit balance of $96 000. Required (a) Prepare the closing entry to transfer the profit disclosed in the Profit or Loss Summary account to the Profit Distribution account under method 1 and method 2. (b) Prepare the closing general journal entry to distribute the profit to Godfrey and Taylor assuming they have agreed to share profits in proportion to each partner’s initial capital balance under both method 1 and method 2. (c) Show how the partners’ equity accounts would appear in the balance sheet of the partnership at 30 June 2019. (LO6 and LO8) (a) and (b) Godfrey Taylor Method 1 Variable capital balances Method 2 Fixed capital balances Debit Credit Debit Credit (a) Profit or Loss Summary $96 000 $96 000 Profit Distribution $96 000 $96 000 Transfer profit to distribution a/c (b) Profit Distribution 96 000 96 000 Godfrey, Capital 57 600 — Taylor, Capital 38 400 — Godfrey, Retained Earnings — 57 600 Taylor, Retained Earnings — 38 400 (c) GODFREY AND TAYLOR Balance Sheet as at 30 June 2019 Method 1 Method 2 EQUITY Godfrey, Capital $147 600 $90 000 Taylor, Capital 98 400 246 000 60 000 150 000 Godfrey, Retained Earnings 57 600 Taylor, Retained Earnings 38 400 96 000 TOTAL EQUITY $246 000 $246 000 Exercise 8.5 Partnership profit distribution — capital balances Penny and Lane formed a partnership on 1 July 2018 with initial capital balances of $200 000 and $220 000 respectively. For the year ended 30 June 2019, the Profit or Loss Summary account dis¬closed a final credit balance of $180 000. Required (a) Prepare the closing entry to transfer the profit disclosed in the Profit or Loss Summary account to the Profit Distribution account under method 1 and method 2. (b) Prepare the closing general journal entry to distribute the profit to Penny and Lane, assuming they have agreed to share profits in the ratio of 3:2. (c) Show how the partners’ equity accounts would appear in the balance sheet of the partnership at 30 June 2019. (LO6 and LO8) (a) and (b) Method 1 Variable capital balances Method 2 Fixed capital balances Debit Credit Debit Credit (a) Profit or Loss Summary $160 000 $160 000 Profit Distribution $160 000 $160 000 Transfer profit to distribution a/c (b) Profit Distribution 160 000 160 000 Penny, Capital 96 000 — Lane, Capital 64 000 — Penny, Retained Earnings — 96 000 Lane, Retained Earnings — 44 000 (c) PENNY AND LANE Balance Sheet as at 30 June 2019 Method 1 Method 2 EQUITY Penny, Capital $276 000 $180 000 Lane, Capital 184 000 460 000 120 000 300 000 Penny, Retained Earnings 96 000 Lane, Retained Earnings 64 000 160 000 TOTAL EQUITY $460 000 $460 000 Exercise 8.6 Allocation of profit Warren and Winston’s partnership had a final profit for the year of $40 500. When the partnership was formed at the beginning of the year Warren invested $150 000 and Winston invested $100 000. Required (a) Prepare the journal entries to record the allocation of profit under each of the following assumptions, using method 1 procedures: i. Warren and Winston agree to a 55:45 sharing of profits. ii. The partners agree to share profits in the ratio of their original capital investments. iii. The partners agree to recognise $12 000 per year salary allowance to Warren and a $4500 per year salary allowance to Winston. Each partner is entitled to 6% interest on his original investment, and any remaining profit is to be shared equally. (b) Repeat requirement (a)iii. above assuming the partnership has a profit of $27 000 for the first year. (LO6 and LO7) (a) 1 2 3 Profit or Loss Summary $40 500 $40 500 $40 500 Profit Distribution $40 500 $40 500 $40 500 Profit Distribution 40 500 40 500 40 500 Waren, Capital 22 275 24 300 25 500 Winston, Capital 18 225 16 200 15 000 i. $40 500  0.55 = $22 275 $40 500  0.45 = $18 225 ii. Warren $150 000 (60%)  $40 500 = $24 300 Winston $100 000 (40%)  $40 500 = $16 200 $250 000 $40 500 iii. Warren Winston Total Salary Allowance $12 000 $4 500 $16 500 Interest on Capital (6%) 9 000 6 000 15 000 21 000 10 500 31 500 Remainder 4 500 4 500 9 000 Total $25 500 $15 000 $40 500 (b) Profit or Loss Summary $27 000 Profit Distribution $27 000 Profit Distribution 27 000 Warren, Capital 18 750* Winston, Capital 8 250* Warren Winston Total Salary Allowance $12 000 $4 500 $16 500 Interest on Capital (6%) 9 000 6 000 15 000 21 000 10 500 31 500 Excess allocation (loss) (2 250) (2 250) (4 500) *Total $18 750 $8 250 $27 000 Exercise 8.7 Allocation of profit Thomson and Turner formed a partnership by investing $110 000 and $90 000 respectively. The partnership had a final profit of $72 000 in the first year. Required (a) Prepare the journal entries to record the allocation of profit under each of the following assumptions, using method 1 procedures: i. Thomson and Turner agree to a 60:40 sharing of profits. ii. The partners agree to share profits in the ratio of their original capital investments. iii. The partners agree to recognise a $10 000 per year salary allowance to Thomson and a $8000 per year salary allowance to Turner. Each partner is entitled to 8% interest on her original investment, and any remaining profit is to be shared equally. (b) Repeat requirement A.3 above assuming the partnership has a profit of $30 000 for the first year. (LO6 and LO7) (a) 1 2 3 Profit or Loss Summary $72 000 $72 000 $72 000 Profit Distribution $72 000 $72 000 $72 000 Profit Distribution 72 000 72 000 72 000 Thomson, Capital 43 200 39 600 38 800* Turner, Capital 28 800 32 400 33 200* i. $72 000  0.6 = $43 200 $72 000  0.4 = $28 800 ii. Thomson $110 000 110/200  $72 000 = $39 600 Turner $ 90 000 90/200  $72 000 = $32 400 $200 000 $72 000 iii. Thomson Turner Total Salary Allowance $10 000 $8 000 $ 18 000 Interest on Capital (8%) 8 800 7 200 16 000 18 800 15 200 34 000 Remainder 19 000 19 000 38 000 $37 800 $34 200 $72 000 *Total profit (including salary, interest) (b) Profit or Loss Summary $30 000 Profit Distribution $30 000 Profit Distribution 30 000 Thomson, Capital 17 800* Turner, Capital 12 200* Thomson Turner Total Salary Allowance $10 000 $8 000 $18 000 Interest on Capital (8%) 8 800 7 200 16 000 18 800 15 200 34 000 Excess allocation (loss) (2 000) (2 000) (4 000) *Total profit (inc. salary, interest) $16 800 $13 200 $30 000 Exercise 8.8 Interest on capital and drawings Barrett and Pickering run a market stall together as a partnership. On 30 November 2019, Barrett withdrew $12 000 cash. Pickering withdrew $8000 on 20 December 2019. On 31 March 2020 Pickering withdrew $15 000 of her capital investment in cash to meet unexpected medical expenses for her son. Required (a) Prepare the journal entries for the above transactions for the year ended 30 June 2020 using both method 1 and method 2. (LO7) (a) Barrett Pickering Method 1 Variable capital balances Method 2 Fixed capital balances 2019 Debit Credit Debit Credit Nov. 30 Barrett, Drawings 12 000 12 000 Cash at Bank 12 000 12 000 (Cash drawings by Barrett) Dec. 20 Pickering, Drawings 8 000 8 000 Cash at Bank 8 000 8 000 (Cash drawings by Pickering) 2020 Mar. 31 Pickering, Drawings 15 000 Pickering, Capital 15 000 Cash at Bank 15 000 15 000 Exercise 8.9 Interest on capital and drawings Meagan and Jenny are in partnership, sharing profits equally. Provision exists in the partner¬ship agreement for charging interest on capital at the rate of 8% p.a. and interest on drawings at 10% p.a. Capital and Drawings account balances are as follows. Profit before allowing for interest was $150 000. All drawings were made in expectation of profits. Required (a) Prepare journal entries to account for interest on capital and on drawings, and any necessary closing entries using: i. method 1 — variable capital balances ii. method 2 — fixed capital balances. (LO7) (a) Method 1 Variable capital Balances Method 2 Fixed capital balances Debit Credit Debit Credit Profit or Loss Summary $150 000 $150 000 Profit Distribution $150 000 $150 000 Transfer profit to distribution a/c Profit Distribution 16 320 16 320 Meagan, Capital 7 680 Jenny, Capital 8 640 Meagan, Retained Earnings 7 680 Jenny, Retained Earnings 8 640 Interest on capital Meagan, Capital 2 500 Jenny, Capital 3 200 Meagan, Retained Earnings 2 500 Jenny, Retained Earnings 3 200 Profit Distribution 5 700 5 700 Interest on drawings Profit distribution 139 380 139 380 Meagan, Capital 69 690 Jenny, Capital 69 690 Meagan, Retained Earnings 69 690 Jenny, Retained Earnings 69 690 Close entry for profit distribution a/c Meagan, Capital 25 000 Jenny, Capital 32 000 Meagan, Retained Earnings 25 000 Jenny, Retained Earnings 30 000 Meagan, Drawings 25 000 25 000 Jenny, Drawings 32 000 32 000 Close entry for drawings. Exercise 8.10 Allocation of profit Terry and Craig share profits in the proportion of one-third and two-thirds respectively. On 1 July 2018, the equity accounts stood as follows. Partners were entitled to 8% interest on capital, and Terry, as manager, was entitled to a salary of $30 000 p.a. During the year, Terry withdrew $12 000 in cash and Craig withdrew $17 000. The profits for the year ended 30 June 2019 were $68 000 before providing for interest on capital bal¬ances and for Terry’s salary. Required (a) Prepare the Profit Distribution accounts and partners’ Retained Earnings accounts for the year ended 30 June 2019. (LO6) (a) Profit Distribution 2019 2019 30/6 Salary – Terry $30 000 30/6 Partnership Profits $68 000 30/6 Interest on Capital: Terry 6 400 Craig 9 600 30/6 Residual Profit: Terry (1/3) $7 333 Craig (2/3) $14 667 22 000 $68 000 $68 000 Terry, Retained Earnings 2019 2018 1/7 Balance $25 000 2019 30/6 Drawings $12 000 30/6 Interest on Capital 6 400 30/6 Salary 30 000 30/6 Balance 56 733 30/6 Share of Profits 7 333 $68 733 $68 733 30/6 Balance 56 733 Craig, Retained Earnings 2019 2018 1/7 Balance $32 000 2019 30/6 Drawings $17 000 30/6 Interest on Capital 9 600 30/6 Balance 39 267 30/6 Share of Profits 14 667 $56 267 $56 267 30/6 Balance 39 267 Exercise 8.11 Allocation of profit Martin and Brett share profits on a 60:40 basis respectively. On 1 July 2019 the equity accounts were as follows. The partners were entitled to 12% interest on capital. Brett ran the business and received a salary of $80 000. During the year Martin withdrew $48 000 in cash and Brett withdrew $12 000. The profits for the year ended 30 June 2020 were $500 000 before providing for interest on capital balances and Brett’s salary. Required (a) Prepare the Profit Distribution accounts and partners’ Retained Earnings accounts for the year ended 30 June 2020. (LO6) (a) Profit Distribution 2020 2020 30/6 Salary – Brett $80 000 30/6 Partnership Profits $500 000 30/6 Interest on Capital: Martin 64 800 Brett 55 200 30/6 Residual Profit: Martin (60%) $180 000 Brett (40%) $120 000 300 000 $500 000 $500 000 Martin, Retained Earnings 2020 2019 1/7 Balance $160 000 30/6 Drawings $48 000 30/6 Interest on Capital 64 800 30/6 Balance 356 800 30/6 Share of Profits 180 000 $404 800 $404 800 1/7 Balance 356 800 Brett, Retained Earnings 2020 2019 1/7 Balance $130 000 2020 30/6 Drawings $12 000 30/6 Interest on Capital 55 200 30/6 Salary 80 000 30/6 Balance 373 200 30/6 Share of Profits 120 000 $385 200 $385 200 1/7 Balance 373 200 Exercise 8.12 Allocation of profit — average capital balances Greg, Graham and Gordon are partners. The partnership agreement provides that partners will receive interest of 8% of their average capital balance and a salary allowance as follows: Greg, who manages the business, will receive a bonus of 25% of the profit in excess of $90 000 after partners’ interest and salary allowances. Residual profits will be divided: During the current year their average capital balances were as follows: Required (a) Prepare a schedule showing how profit will be divided among the three partners if the profit for the year before the adjustments is $320 000. (LO6) (a) Allocation of $320 000 profit Greg Graham Gordon Total Interest on average capital $20 000 $12 000 $7 200 $39 200 Salary allowance 50 000 40 000 40 000 130 000 Bonus to Greg [25% of ($320 000 – $39 200 – $130 000 – 90 000)] 15 200 — — 15 200 Total interest, salary and bonus 85 200 52 000 47 200 184 400 Residual: Greg (1/2) 67 800 Graham (1/3) 45 200 Gordon (1/6) 22 600 135 600 Total allocations $153 000 $97 200 $69 800 $320 000 Exercise 8.13 Formation and allocation of profits of partnership Wendy, William and Wanda are independent website developers who had been trading in active opposition to one another for some years. They decide to form a partnership, WWW Web Devel¬opers, as from 1 January 2018. The agreement set out the following basic arrangements. 1. Wendy to contribute $8000 in cash, computers valued at $10 000, and debtors of $12 000. 2. William to contribute a lease of premises used by him, such a lease to be regarded as having a capital value of $12 500, computers of $10 000 and $6000 in cash. 3. Wanda to contribute computers valued at $13 750 and to act as managing partner at a salary of $20 000 per year. 4. Interest for the period is to be allowed partners at the rate of 8% p.a. on beginning capital but is not charged on drawings. 5. Profits or losses to be shared in the same proportions as capital contributed. Required (a) Prepare the journal entries necessary to open the records of the partnership. (Ignore GST.) (b) Assuming in the first year that the partnership makes a profit of $65 000, show how this profit would be allocated to partners. (LO5 and LO6) (a) Cash at Bank $8 000 Computers 10 000 Debtors 12 000 Wendy, Capital 30000 Lease of Premises 12 500 Computers 10 000 Cash at Bank 6 000 William, Capital 28 500 Computers 13 750 Wanda, Capital 13 750 (b) Allocation of $65 000 profit Wendy William Wanda Total Salary — — $20 000 $20 000 Interest on capital $2400 $2 280 1 100 5780 Total salary and interest 2400 2 280 21 100 25780 Residual Profit: Wendy ($30 000/$72 250) 16285 William ($28 500/$72 250) 15471 Wanda ($13 750/$72 250) 7464 39220 $18685 $17751 $28564 $65 000 Exercise 8.14 Statement of changes in partners’ equity Paul and Justin began their partnership on 1 July 2018 by contributing $320 000 and $280 000 respectively. During the first year of business, Justin contributed another $40 000 and Paul with¬drew $20 000 of his capital investment. The profit for the year ended 30 June 2019 of $160 000 was divided evenly between the partners. During the year Paul withdrew $25 000 from profits and Justin withdrew $20 000 of his share of the profits. Required (a) Prepare a statement of changes in partner’s equity for the year ended 30 June 2019 using both method 1 and method 2. (LO8) (a) PAUL AND JUSTIN PARTNERSHIP Statement of Changes in Partners’ Equity for the year ended 30 June 2019 Method 1 Paul Justin Total Capital contributions 1 July 2018 $320 000 $280 000 $600 000 Add: Additional investment — 40 000 40 000 Profit allocation 80 000 80 000 160 000 400 000 400 000 800 000 Less: Capital withdrawal 20 000 — 20 000 Less: Drawings 25 000 20 000 45 000 CAPITAL BALANCES 30 June 2019 $355 000 $380 000 $735 000 Method 2 Paul Justin Total CAPITAL Capital contributions 1 July 2018 $320 000 $280 000 $600 000 Add: Additional investment — 40 000 40 000 Less: Capital withdrawal 20 000 — 20 000 Capital balances 30 June 2019 300 000 320 000 620 000 RETAINED EARNINGS Balances at 1 July 2018 — — — Add: Profit allocation 80 000 80 000 160 000 Less: Drawings 25 000 20 000 45 000 Balances at 30 June 2019 55 000 60 000 115 000 TOTAL EQUITY $355 000 $380 000 $735 000 Exercise 8.15 Statement of changes in partners’ equity Bonnie and Clyde have a partnership to run their human resource management services firm. Account balances related to their equity for the year ended 30 June 2019 are as follows: Profit of $124 000 for the year was distributed evenly between the partners. Required (a) Prepare a statement of changes in partner’s equity using both method 1 and method 2. (LO8) (a) BONNIE AND CLYDE PARTNERSHIP Statement of Changes in Partners’ Equity for the year ended 30 June 2019 Method 1 Bonnie Clyde Total Capital contributions 1 July 2018 $120 000 $100 000 $220 000 Add: Additional investment 32 000 — 32 000 Profit allocation 62 000 62 000 124 000 214 000 162 000 376 000 Less: Capital withdrawal 15 000 15 000 Less: Drawings 16 000 18 000 34 000 CAPITAL BALANCES 30 June 2019 $198 000 $129 000 $327 000 Method 2 Bonnie Clyde Total CAPITAL Capital contributions 1 July 2018 $120 000 $100 000 $220 000 Add: Additional investment 32 000 — 32 000 Less: Capital withdrawal — 15 000 15 000 Capital balances 30 June 16 152 000 85 000 337 000 RETAINED EARNINGS Balances at 1 July 2018 — — — Add: Profit allocation 62 000 62 000 124 000 Less: Drawings 16 000 18 000 34 000 Balances at 30 June 2019 46 000 44 000 90 000 TOTAL EQUITY $198 000 $129 000 $327 000 Problems Problem 8.16 Partnership formation John Landis and Raymond Oliver formed a partnership on 1 July 2018, agreeing to share profits and losses in the ratio of 2:1. John contributed $30 000 in cash and land with a fair value of $180 000. Assets contributed to and liabilities assumed by the partnership from Raymond’s busi¬ness at both carrying amount and fair value are shown below. During the first year, John contributed an additional $12 000 in cash. The partnership’s profit was $56 000. John withdrew $8000 and Raymond withdrew $16 000 in expectation of profits (ignore GST). Required (a) Prepare the journal entries to record each partner’s initial investment. (b) Prepare the partnership’s balance sheet as at 1 July 2018. (c) Prepare a statement of changes in partners’ equity for the year ended 30 June 2019, using method 2 for recording partners’ equity accounts. (LO5 and LO8) (a) Cash at Bank $30 000 Land 180 000 Landis, Capital 210 000 Cash at Bank 22 500 Accounts Receivable 12 800 Inventory 23 800 Office Equipment 62 000 Accounts Payable 11 500 Bank Loan 18 000 Oliver, Capital 91 600 (b) LANDIS AND OLIVER Balance Sheet as at 1 July 2018 CURRENT ASSETS Cash at bank $ 52 500 Accounts receivable 12 800 Inventory 23 800 TOTAL CURRENT ASSETS $89 100 NON-CURRENT ASSETS Land $180 000 Office equipment 62 000 TOTAL NON-CURRENT ASSETS 242 000 TOTAL ASSETS $331 100 CURRENT LIABILITIES Accounts payable $11 500 Bank loan 18 000 TOTAL CURRENT LIABILITIES $29 500 TOTAL LIABILITIES $29 500 NET ASSETS $301 600 EQUITY Capital, J. Landis $210 000 Capital, R. Oliver 91 600 TOTAL EQUITY $301 600 (c) LANDIS AND OLIVER Statement of Changes in Partners’ Equity for the year ended 30 June 2019 Landis Oliver Total CAPITAL Capital balances 1 July 2018 $210 000 $91 600 $301 600 Add: Additional investment 12 000 — 12 000 Capital balances 30 June 2019 $222 000 $91 600 $313 600 RETAINED EARNINGS Profit allocation $56 000  67% 37 520 $56 000  33% 18 480 56 000 Less: Drawings 8 000 16 000 24 000 Balances 30 June 2019 $29 520 $2 480 $32 000 TOTAL EQUITY $251 520 $94 080 $345 600 Problem 8.17 Partnership formation Anthony Chu and Adrian Tan formed a partnership on 1 January 2018, agreeing to share profits and losses equally. Anthony contributed $80 000 in cash and plant and equipment with a fair value of $120 000. Assets contributed to and liabilities assumed by the partnership from Adrian’s busi¬ness at both carrying amount and fair value are shown below. During the first year, Anthony contributed an additional $24 000 in cash. The partnership’s profit was $96 000. Anthony withdrew $16 000 and Adrian withdrew $18 000 in expectation of profits (ignore GST). Required (a) Prepare the journal entries to record each partner’s initial investment. (b) Prepare the partnership’s balance sheet as at 1 January 2018. (c) Prepare a statement of changes in partners’ equity for the year ended 31 December 2018, using method 1 for recording partners’ equity accounts. (LO5 and LO8) (a) Cash at Bank $80 000 Plant and Equipment 120 000 Chu, Capital 200 000 Cash at Bank 12 600 Accounts Receivable 22 500 Inventory 30 400 Buildings 480 000 Accounts Payable 18 500 Bank Loan 180 000 Tan, Capital 347 000 (b) CHU AND TAN Balance Sheet as at 1 January 2018 CURRENT ASSETS Cash at bank $ 92 600 Accounts receivable 22 500 Inventory 30 400 TOTAL CURRENT ASSETS $145 500 NON-CURRENT ASSETS Plant and equipment $120 000 Building 480 000 TOTAL NON-CURRENT ASSETS 600 000 TOTAL ASSETS $745 500 CURRENT LIABILITIES Accounts payable $18 500 Bank loan 180 000 TOTAL CURRENT LIABILITIES $198 500 TOTAL LIABILITIES $198 500 NET ASSETS $547 000 EQUITY Capital, A. Chu $200 000 Capital, A. Tan 347 000 TOTAL EQUITY $547 000 (c) CHU AND TAN Statement of Changes in Partners’ Equity for the year ended 31 December 2018 Chu Tan Total Capital balances 1 January 2018 $200 000 $347 000 $547 000 Add: Additional investment 24 000 — 24 000 Profit allocation $96 000  50% 48 000 48 000 96 000 Less: Drawings (16 000) (18 000) (34 000) Balances 31 December 2018 $256 000 $377 000 $633 000 Problem 8.18 Allocation of profit or loss Philip and Lance have decided to form a partnership by investing $100 000 and $80 000 respec¬tively. The following plans for dividing profits and losses are under consideration. 1. Sharing profits equally 2. A $20 000 salary to Philip, a $30 000 salary to Lance, and the remainder in the ratio of 6:4 3. A $25 000 salary to Lance, 8% interest on their original investments, and the remainder equally 4. Sharing profits in the ratio of their original investments Required (a) Determine the division of the profit or loss assuming a profit of $120 000. (b) Determine the division of the profit or loss assuming a profit of $60 000. (c) Determine the division of the profit or loss assuming a loss of $6000. (LO6) (a) Philip Lance Profit of $120 000 Plan (a) Ratio of 50:50 $60 000 $60 000 Plan (b) Salaries 20 000 30 000 Remainder 6:4 42 000 28 000 $62 000 $58 000 Plan (c) Salary — 25 000 Interest at 8% on original investment 7 200 4 800 Remainder equally 41 500 41 500 $48 700 $71 300 Plan (d) Ratio of initial investments (9 : 6) $72 000 $48 000 15 15 (b) Philip Lance Profit of $60 000 Plan (a) Ratio of 50:50 $30 000 $30 000 Plan (b) Salaries 20 000 30 000 Excess allocation 6:4 6 000 4 000 $26 000 $34 000 Plan (c) Salary — 25 000 Interest at 8% on original investment 7 200 4 800 Total salary and interest 7 200 29 800 Remainder equally 11 500 11 500 $18 700 $41 300 Plan (d) Ratio of initial investment (9 : 6) $36 000 $24 000 15 15 (c) Philip Lance Loss of $6 000 Plan (a) Ratio of 50:50 $(3 000) $(3 000) Plan (b) Salaries 20 000 30 000 Excess allocation 6:4 (33 600) (22 400) $(13 600) $ 7 600 Plan (c) Salary — 25 000 Interest at 8% on original investment 7 200 4 800 Total salary and interest 7 200 29 800 Excess allocation equally (21 500) (21 500) $(14 300) $8 300 Plan (d) Ratio of initial investment (9 : 6) $(3 600) $(2 400) 15 15 Problem 8.19 Allocation of profit or loss A partnership is formed by Robert investing $150 000 and Linda investing $100 000. The partners are considering the following plans for dividing profits and losses. 1. According to the ratio of their original investment 2. Paying Robert a salary of $60 000 and Linda a salary of $50 000 and the balance on the basis of their original investment 3. A $60 000 salary to Robert, 12% interest on their original investments, and the balance equally 4. Share the profits equally Required (a) Determine the division of the profit or loss assuming a profit of $200 000. (b) Determine the division of the profit or loss assuming a profit of $150 000. (c) Determine the division of the profit or loss assuming a loss of $10 000. (LO6) (a) Robert Linda Profit of $200 000 Plan (a) Ratio or original investment 3:2 $120 000 $80 000 Plan (b) Salaries 60 000 50 000 Remainder 3:2 54 000 36 000 $114 000 $86 000 Plan (c) Salary 60 000 — Interest at 12% on original investment 18 000 12 000 Remainder equally 55 000 55 000 $133 000 $67 000 Plan (d) Share equally $100 000 $100 000 (b) Robert Linda Profit of $150 000 Plan (a) Ratio or original investment 3:2 $90 000 $60 000 Plan (b) Salaries 60 000 50 000 Remainder 3:2 24 000 16 000 $84 000 $66 000 Plan (c) Salary 60 000 — Interest at 12% on original investment 18 000 12 000 Remainder equally 30 000 30 000 $108 000 $42 000 Plan (d) Share equally $75 000 $75 000 (c) Robert Linda Profit of $100 000 Plan (a) Ratio or original investment 3:2 $60 000 $40 000 Plan (b) Salaries 60 000 50 000 Remainder 3:2 (6 000) (4 000) $54 000 $46 000 Plan (c) Salary 60 000 — Interest at 12% on original investment 18 000 12 000 Remainder equally 5 000 5 000 $83 000 $17 000 Plan (d) Share equally $50 000 $50 000 Problem 8.20 Allocation of profits The partnership deed of Dustin, Daniel and Dylan, partners trading as Triple D Traders, includes the following provisions. 1. Salaries are to be allowed: Dustin, $35 000; Daniel, $30 000; Dylan, $25 000. 2. Dylan is to receive a bonus of 20% of the profits after allowing for partners’ salaries and interest. 3. Interest is to be allowed on advances by partners at 6% p.a. 4. Interest on drawings to be charged at 8% p.a. 5. Residual profits are to be divided: Dustin, 3/8; Daniel, 3/8; Dylan, 1/4. Account balances at 30 June 2018 before any adjustment in respect of provisions (1) to (5) include the following. Required (a) Prepare a schedule showing the distribution of final profit to each partner. (LO6) (a) Allocation of $196 280 profit* Dustin Daniel Dylan Total Total profit before interest on drawings $196 280 Plus Interest on drawings: Dustin ($12 600  8%  4/12) 336 Daniel ($7 900  8%  ½) 316 Dylan ($5 900  8%  9/12) 354 1 006 197286 Less: Salaries 35 000 30 000 25 000 90 000 Bonus to Dylan [20%  ($197286 – $90 000)] 21 457 21 457 Residual profit for allocation $85829 Allocation of residual profit: Dustin ($85829  3/8) 32186 Daniel ($85829  3/8) 32186 Dylan ($85829  1/4) 21457 85829 $66 850 $61 870 $67 560 $196 280 *Profit before interest on advances $203 000 Less: Interest on advances (loans) ($112 000  6%) 6 720 Profit for distribution $196 280 Problem 8.21 Formation and allocation of profits — method 1 On 1 October 2018, Dallas Lucas and Suzanne Foreman formed a partnership. Some business assets and the liabilities of Lucas were assumed by the partnership, and these are listed below at both carrying amounts and fair value. Foreman contributed a building worth $820 000, land worth $350 000, and a $456 000 mort¬gage was taken over by the partnership. They agreed to share profits and losses in the ratio of 1:2. During the first year of the partnership, Lucas invested $60 000 in the business and withdrew $45 000. Foreman invested $115 200 and withdrew $17 200. The partnership had a profit of $88 460. Retained Earnings accounts are not used. Required (a) Prepare the journal entries to record the initial investments of both partners. (Ignore GST.) (b) Prepare a balance sheet as at 1 October 2018. (c) Prepare a statement of changes in partners’ equity for the year ended 30 September 2019. (LO5, LO7 and LO8) (a) 2018 Oct. 1 Cash at Bank $28 000 Marketable Securities 26 800 Accounts Receivable 47 000 Inventory 125 400 Equipment 230 000 Accounts Payable $36 000 Lucas, Capital 421 200 Building 820 000 Land 350 000 Mortgage Payable 456 000 Foreman, Capital 714 000 (b) LUCAS AND FOREMAN Balance Sheet as at 1 October 2018 CURRENT ASSETS Cash at bank $28 000 Marketable securities 26 800 Accounts receivable 47 000 Inventory 125 400 TOTAL CURRENT ASSETS $227 200 NON-CURRENT ASSETS Equipment 230 000 Building 820 000 Land 350 000 TOTAL NON-CURRENT ASSETS 1 400 000 $1 627 200 CURRENT LIABILITIES Accounts payable 36 000 TOTAL CURRENT LIABILITIES 36 000 NON-CURRENT LIABILITIES Mortgage payable 456 000 TOTAL NON-CURRENT LIABILITIES 456 000 TOTAL LIABILITIES $492 000 NET ASSETS $1 135 200 PARTNERS’ EQUITY Capital, Lucas 421 200 Capital, Foreman 714 000 TOTAL PARTNER’S EQUITY $1 135 200 (c) LUCAS AND FOREMAN Statement of Changes in Partners’ Equity (Method 1) for the year ended 30 September 2019 Lucas Foreman Total Capital balances 1 October 2018 $421 200 $714 000 $1 135 200 Add: Additional investment 60 000 115 200 175 200 Profit allocation 53 076 35 384 88 460 534 276 864 584 1 398 860 Less: Drawings 45 000 17 200 62 200 Capital balances 30 September 2019 $489 276 $847 384 $1 336 660 Problem 8.22 Formation and allocation of profits — method 1 Francine Steele and Shaun Dunn formed a partnership on 1 July 2018. Some of Steele’s business assets and liabilities were assumed by the partnership, and these are listed below at both carrying amounts and fair value. Dunn contributed a commercial property to the partnership that had a fair value of $670 000 which was financed by a mortgage of $220 000. They agreed to share profits and losses evenly. During the first year of the partnership, Steele invested $80 000 in the business and withdrew $20 000. Dunn invested $82 000 and withdrew $24 000. The partnership had a profit of $132 800. Retained Earnings accounts are not used. Required (a) Prepare the journal entries to record the initial investments of both partners. (Assume no GST.) (b) Prepare a balance sheet as at 1 July 2018. (c) Prepare a statement of changes in partners’ equity for the year ended 30 June 2019. (LO5 and LO8) (a) 2018 July 1 Cash at Bank $62 000 Accounts Receivable 34 000 Inventory 96 000 Equipment 360 000 Accounts Payable $24 000 Loan 80 000 Steele, Capital 448 000 Commercial Property 460 000 Mortgage Payable 280 000 Dunn, Capital 180 000 (b) STEELE AND DUNN Balance Sheet as at 1 July 2018 CURRENT ASSETS Cash at bank $62 000 Accounts receivable 34 000 Inventory 96 000 TOTAL CURRENT ASSETS $192 000 NON-CURRENT ASSETS Equipment 360 000 Commercial Property 460 000 TOTAL NON-CURRENT ASSETS 820 000 $1 012 000 CURRENT LIABILITIES Accounts payable 24 000 TOTAL CURRENT LIABILITIES 24 000 NON-CURRENT LIABILITIES Loan 80 000 Mortgage payable 280 000 TOTAL NON-CURRENT LIABILITIES 360 000 TOTAL LIABILITIES $384000 NET ASSETS $628 000 PARTNERS’ EQUITY Capital, Steele 448 000 Capital, Dunn 180 000 TOTAL PARTNER’S EQUITY $628 000 (c) STEELE AND DUNN Statement of Changes in Partners’ Equity (Method 1) for the year ended 30 June 2019 Steele Dunn Total Capital balances 1 July 2018 $448 000 $180 000 $628 000 Add: Additional investment 80 000 82 000 162 000 Profit allocation 66 400 66 400 132 800 594 400 328 400 922 800 Less: Drawings 20 000 24 000 44 000 Capital balances 30 June 2019 $574 400 $304 400 $878 800 Problem 8.23 Formation and allocation of profit — method 2 Richards, David and Andrews decided to enter into a partnership agreement as from 1 July 2018, some of the provisions of which were as follows. 1. Richards to contribute $20 000 cash, inventory the fair value of which was $42 500, plant and machinery $78 600, accounts receivable totalling $12 700. 2. David to contribute $37 500 cash and act as manager for the business at an annual salary of $32 000 to be allocated to him at the end of each year. 3. Andrews to contribute $16 500 cash, land $120 000, premises $240 000, furniture and fittings $40 500, motor vehicles $31 500. A mortgage of $180 000 secured over the premises was out¬standing and the partnership agreed to assume the mortgage. 4. Profits or losses of the firm to be divided between or borne by Richards, David and Andrews in the proportion of 2:1:3 respectively. 5. Interest to be allowed at 8% p.a. on the capital contribution by the partners. Interest at 10% p.a. to be charged on partners’ drawings. During the year ended 30 June 2019, the income of the partnership totalled $120 800, and the expenses (excluding interest on capital and drawings and David’s salary) amounted to $43 000. Richards withdrew $12 000 on 1 October 2018 and $8000 on 1 January 2019; David withdrew $4000 only on 1 April 2019; Andrews withdrew $10 000 on 30 June 2019. Required (a) Prepare journal entries necessary to open the records of the partnership. (b) Prepare the balance sheet of the partnership immediately after formation. (c) Prepare a Profit Distribution account for the year ended 30 June 2019 using method 2. (LO5, LO6 and LO8) (d) (a) 2018 July 1 Cash at Bank $20 000 Inventory 42 500 Plant and Machinery 78 600 Accounts Receivable 12 700 Richards, Capital $153 800 Cash at Bank 37 500 David, Capital 37 500 Cash at Bank 16 500 Land 120 000 Premises 240 000 Furniture and Fittings 40 500 Motor Vehicles 31 500 Mortgage 180 000 Andrews, Capital 268 500 (b) RICHARDS, DAVID AND ANDREWS Balance Sheet as at 1 July 2018 CURRENT ASSETS Cash at bank $74 000 Accounts receivable 12 700 Inventory 42 500 TOTAL CURRENT ASSETS $129 200 NON-CURRENT ASSETS Plant and machinery 78 600 Land 120 000 Premises 240 000 Furniture and fittings 40 500 Motor vehicles 31 500 TOTAL NON-CURRENT ASSETS 510 600 TOTAL ASSETS $639 800 NON-CURRENT LIABILITIES Mortgage $180 000 TOTAL NON-CURRENT LIABILITIES $180 000 TOTAL LIABILITIES $180 000 NET ASSETS $459 800 EQUITY Capital, Richards $153 800 Capital, David 37 500 Capital, Andrews 268 500 TOTAL EQUITY $459 800 (c) Problem 8.24 Allocation of profits — method 2 Selected accounts from the trial balance as at 30 June 2019 of the partnership of Amber, Ruby and Gemma are as follows. End-of-period adjustments for the financial year ended 30 June 2019 have yet to be made as follows. 1. The partnership accountant has duly paid cash for Gemma’s agreed salary as part-time manager ($32 000 p.a.) but was uncertain how to charge it. 2. Interest accrued to ABC Bank Ltd — $1800. 3. Partners have agreed to the following arrangements. i. 6% p.a. interest on fixed capitals. ii. 10% interest on total drawings for the year, which were as follows. iii. 8% p.a. interest on advance from Amber. iv. Profits/losses to be shared 2:2:1 by Amber, Ruby and Gemma respectively. Required (a) Complete the Profit or Loss Summary account for the year ended 30 June 2019. (b) Prepare the Profit Distribution account. (c) Complete each partner’s Retained Earnings account after all adjustments. (LO6, LO7 and LO8) (a) Profit or Loss Summary 2019 2019 30/6 Interest on advance $1 440 30/6 Balance $148 000 30/6 Interest on loan 1 800 30/6 Profit for distribution 144 760 $148 000 $148 000 (b) Profit Distribution 30/6 Cash – Salary, Gemma $32 000 30/6 Profit or loss summary $144 760 30/6 Interest on capital: 30/6 Interest on drawings: Amber 6 150 Amber 3 200 Ruby 6 768 Ruby 2 800 Gemma 6 480 19 398 Gemma 500 6 500 30/6 Residual profits: Amber (2/5) 39 945 Ruby (2/5) 39 945 Gemma (1/5) 19 972 99 862 $151 260 $151 260 (c) Amber, Retained Earnings 30/6 Balance 26 000 30/6 Interest on capital 6 150 30/6 Interest on drawings 3 200 30/6 Residual profit 39 945 30/6 Drawings 32 000 30/6 Balance 36 895 $72 095 $72 095 1/7 Balance $36 895 Ruby, Retained Earnings 30/6 Drawings $28 000 30/6 Balance $32 000 30/6 Interest on drawings 2 800 30/6 Interest on capital 6 768 30/6 Balance 47 913 30/6 Residual profit 39 945 $78 713 $78 713 1/7 Balance $47 913 Gemma, Retained Earnings 30/6 Drawings $5 000 30/6 Balance $24 500 30/6 Interest on drawings 500 30/6 Interest on capital 6 480 30/6 Residual profit 19 972 30/6 Salary 32 000 30/6 Balance 77 452 $82 952 $82 952 1/7 Balance $77 452 Problem 8.25 Formation and allocation of profit — method 2 On 1 July 2018, McGregor and Roberts decided to amalgamate their businesses and to share profits equally. Financial information at that date was as follows. At 1 July 2018, McGregor’s accounts receivable and inventory had fair values of $61 280 and $48 380 respectively, and Roberts’s accounts receivable and inventory had fair values respectively of $46 080 and $73 720. McGregor’s equipment was written down by 10%. McGregor and Roberts negotiated to have equal capital balances of $150 000. After 1 year, the following were the only changes to the assets and liabilities, as compared with the position at the time of forming the partnership. Depreciation still has to be charged on the furniture and fittings and on equipment at the rates of 10% and 15% respectively for the year. Cash drawings for the year were: McGregor, $28 800; Roberts, $36 240. Required (a) Prepare journal entries to record the formation of the partnership. (b) Prepare a statement of changes in partner’s equity as at 30 June 2019 showing each partner’s share of profit/loss for the year. (c) Prepare the balance sheet of the partnership as at 30 June 2019. (LO5 and LO8) (a) 2018 July 1 Accounts Receivable $61 280 Inventory 48 380 Furniture and Fittings 26 260 Equipment 24 894 Goodwill 49 086 Accounts Payable 41 470 Bank Overdraft 18 430 McGregor, Capital 150 000 (McGregor’s net assets into the partnership.) July 1 Cash at Bank 59 900 Accounts Receivable 46 080 Inventory 73 720 Goodwill 25 600 Accounts Payable 55 300 Roberts, Capital 150 000 (Roberts’s net assets into the partnership.) (b) MCGREGOR AND ROBERTS Statement of Changes in Partners’ Equity (Method 2) for the year ending 30 June 2019 McGregor Roberts Total CAPITAL Capital balances 1 July 2018 $150 000 $150 000 $300 000 Capital balances 30 June 2019 $150 000 $150 000 $300 000 RETAINED EARNINGS Balances 1 July 2018 — — — Profit allocation 68 055 68 055 136 110 68 055 68 055 136 110 Less: Drawings 28 800 36 240 65 040 Balances 30 June 2019 39 255 31 815 71 070 TOTAL EQUITY $189 255 $181 815 $371 070 Calculation of share of profits: Total partnership equity at 30 June 2018 $371 070 ($300 000 + $23 040 – $10 120 + $36 860 + $27 650 – $26 260  10% – $24 894  15%) Add back: Drawings ($28 800 + $36 240) 65 040 Partnership equity before drawings 436 110 Beginning partnership equity ($150 000 + $150 000) 300 000 Profit for year $136 110 McGregor’s share (1/2) = $68 055 Roberts’s share (1/2) = $68 055 (c) MCGREGOR AND ROBERTS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $64 510 Accounts receivable 97 240 Inventory 158 960 TOTAL CURRENT ASSETS $320 710 NON-CURRENT ASSETS Furniture and fittings $26 260 Accumulated depreciation 2 626 23 634 Equipment 24 894 Accumulated depreciation 3 734 21 160 Goodwill 74 686 TOTAL NON-CURRENT ASSETS 119 480 TOTAL ASSETS $440 190 CURRENT LIABILITIES Accounts payable $69 120 TOTAL LIABILITIES $69 120 NET ASSETS $371 070 PARTNERS’ EQUITY McGregor, Capital 189 255 Roberts, Capital 181 815 371 070 TOTAL EQUITY $371 070 Calculations: Net assets at 30 June 2019: Net cash at bank = $59 900 – $18 430 + $23 040 $64 510 Net accounts receivable = $61 280 + $46 080 – $10 120 97 240 Inventory = $48 380 + $73 720 + $36 860 158 960 Furniture and fittings = $26 260 – (10%  $26 260) 23 634 Equipment = $24 894 – (15%  $24 894) 21 160 Goodwill = 74 686 440 190 Less: Creditors ($41 470 + $55 300 – $27 650) (69 120) Net assets $371 070 Problem 8.26 Allocation of profit — method 2 Gregory and Simpson share profits in a proportion of 60:40. Gregory is entitled to a salary allow¬ance of $60 000 p.a., and Simpson is entitled to $50 000 p.a. Capitals are fixed at Gregory $72 000 and Simpson $48 000. Interest is to be calculated on partners’ capital, advances, and drawings in excess of salary at 8% p.a. The trial balance after the determination of profit for the 6-month period is shown below. Gregory had withdrawn $12 000 cash on 1 April; Simpson’s cash drawings included $24 000 on 1 March and $12 000 on 1 May. Required (a) Prepare the Profit Distribution account for 6 months ended 30 June 2019. (b) Prepare the Retained Earnings accounts for each partner at 30 June 2019. (c) Prepare a balance sheet as at 30 June 2019. (LO5 and LO8) (a) Profit Distribution Interest on capital: Profit* $44 080 Gregory, Retained Earnings $5 760 Simpson, Retained Earnings 3 840 Partners’ salaries:** Gregory, Retained Earnings 60 000 Simpson, Retained Earnings 50 000 Residual loss: Gregory, Retained Earnings (60%) 45 312 Simpson, Retained Earnings (40%) 30 208 $119 600 $119 600 * $44 080 = $46 000 less interest on advance $1920 ** Since partners’ salaries appear in the trial balance, the entry made to record these salaries would have been a debit to salaries accounts for Gregory and Simpson and a credit to cash. The normal entry for partners’ salaries as an allocation of profits is followed here, and hence the salaries accounts shown in the trial balance are closed off to the retained earnings accounts of the partners. The balance of the net credit to the partners’ salaries account is the portion of the salary not paid in cash. ***There is no interest on drawings as neither partners’ drawings exceeded their salary (b) Gregory, Retained Earnings Balance b/d $22 000 Salary $60 000 Gregory, Salary (clos. entry) 30 000 Interest on capital 5 760 Share of residual loss 45 312 Balance c/d 31 552 $97 312 $97 312 Balance b/d 31 552 Simpson, Retained Earnings Balance b/d $16 000 Salary $50 000 Simpson, Salary (clos. entry) 25 000 Interest on capital 3 840 Share of residual loss 30 208 Balance c/d 17 368 $71 208 $71 208 Balance b/d $17 368 (c) GREGORY AND SIMPSON Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $ 3 200 Accounts receivable 22 000 Inventory 32 000 TOTAL CURRENT ASSETS $57 200 NON-CURRENT ASSETS Plant and equipment 106 000 Accumulated depreciation (47 800) 58 200 TOTAL NON-CURRENT ASSETS 58 200 TOTAL ASSETS $115 400 LIABILITIES Accounts payable 18 400 Interest payable on advance 1 920 Gregory, Advance 24 000 TOTAL LIABILITIES $44 320 NET ASSETS $71 080 EQUITY Gregory, Capital 72 000 Gregory, Retained Earnings (31 552) 40 448 Simpson, Capital 48 000 Simpson, Retained Earnings (17 368) 30 632 TOTAL EQUITY $71 080 Problem 8.27 Allocation of profit — method 1 At the end of the financial year ended 30 June 2018, the trial balance of Veronica, Valda and Victoria is as shown below. Victoria made her advance before 1 July 2017. Veronica and Valda each withdrew $12 000 on 30 September 2017, $8000 on 31 December 2017, $5000 on 31 March 2018, and the remainder on 30 June 2018. Victoria made her drawing on 30 June 2018. The partnership agreement contains the following provisions in relation to the allocation of profits. 1. A salary of $92 000 per year for Veronica and $56 000 per year for Valda. 2. Interest of 6% p.a. on capital contributed at the start of each financial year. 3. Interest on advances of 8% p.a. 4. Interest on drawings at 8% p.a. Required (a) Prepare the Profit Distribution account for the year ended 30 June 2018. (b) Prepare the capital accounts for each partner at 30 June 2018. (c) Prepare the balance sheet as at 30 June 2018. (LO5 and LO8) (a) Profit Distribution 2018 2018 30/6 Salary: Veronica $92 000 30/6 P/L Summary (after $246 400 Valda 56 000 (interest on advances of $25 600) 30/6 Interest on capital: 30/6 Interest on drawings: Veronica 9 600 Veronica *1 140 Valda 19 200 Valda *1 140 Victoria 38 400 Victoria — Share of profit: ($33 480) Veronica 11 160 Valda 11 160 Victoria 11 160 $248 680 $248 680 * ($12 000  8%  9/12) + ($8000  8%  6/12) + ($5000  8%  3/12) = 720 + 320 + $100 = $1140 (b) Veronica, Capital 30/6 Interest on Drawings $1 140 1/7 Balance $160 000 30/6 Drawings 60 000 30/6 Salary 92 000 30/6 Balance 211 620 30/6 Interest on Capital 9 600 30/6 Share of Profit 11 160 $272 760 $272 760 1/7 Balance $211 620 Valda, Capital 30/6 Interest on Drawings $1 140 1/7 Balance $320 000 30/6 Drawings 60 000 30/6 Salary 56 000 30/6 Balance 345 220 30/6 Interest on Capital 19 200 30/6 Share of Profit 11 160 $406 360 $406 360 1/7 Balance $345 220 Victoria, Capital 30/6 Drawings $20 000 1/7 Balance $640 000 30/6 Balance 669 560 30/6 Interest on Capital 38 400 30/6 Share of Profit 11 160 $689 560 $689 560 1/7 Balance $669 560 (c) VERONICA, VALDA AND VICTORIA Balance Sheet as at 30 June 2018 CURRENT ASSETS Cash at bank $162 500 Accounts receivable 248 620 Inventory 178 460 TOTAL CURRENT ASSETS $589 580 NON-CURRENT ASSETS Equipment $1 430 800 Accumulated depreciation (462 600) 968 200 Goodwill 360 000 TOTAL NON-CURRENT ASSETS 1 328 200 TOTAL ASSETS $1 917 780 CURRENT LIABILITIES Accounts payable 345 780 Interest payable on advance 25 600 Victoria, Advance $320 000 TOTAL CURRENT LIABILITIES $691 380 TOTAL LIABILITIES $691 380 NET ASSETS $1 226 400 EQUITY Veronica, Capital $211 620 Valda, Capital 345 220 Victoria, Capital 669 560 TOTAL EQUITY $1 226 400 Problem 8.28 Comprehensive problem Harris, Harmar and Higgins are partners in the consulting firm of Harris and Associates. The bal¬ance sheet of the partnership as at 31 March 2018 is shown below. It was agreed that all profits would be divided equally between the partners. Business transactions for the year ending 31 March 2019 were as follows (ignore GST). Required (a) Prepare the income statement for the year ended 31 March 2019. (b) Prepare a statement of changes in partners’ equity for the year ended 31 March 2019. (c) Prepare the balance sheet as at 31 March 2019. (LO8) (a) HARRIS AND ASSOCIATES Income Statement for the year ended 31 March 2019 INCOME: Professional fees revenue $450 000 EXPENSES Salaries expense 92 800 Rent expense 18 000 Office expenses* 19 300 Library maintenance expense 9 200 Insurance expense 6 500 Depreciation of furniture 9 975 155 775 PROFIT $294 225 *Office expenses $19 500 – $15 200 + $15 000 = $19 300 Workings: Allocation of $294 225 profit Harris Harmar Higgins Total $98 075 $98 075 $98 075 $294 225 (b) HARRIS AND ASSOCISATES Statement of Changes in Partners’ Equity for the year ending 31 March 2019 CAPITAL Harris Harmar Higgins Total Capital balances 1 April 2015 $51 450 $51 450 $44 100 $147 000 Capital balances 31 March 2019 51 450 51 450 44 100 147 000 RETAINED EARNINGS Balances 1 April 2018 29 500 25 500 22 660 77 660 Profit allocation 98 075 98 075 98 075 294 225 127 575 123 575 120 735 371 885 Less: Drawings 96 000 72 900 36 300 205 200 Balances 31 March 2019 31 575 50 675 84 435 166 685 TOTAL EQUITY $83 025 $102 125 $128 535 $313 685 (c) HARRIS AND ASSOCIATES Balance Sheet as at 31 March 2019 CURRENT ASSETS Cash at bank $167 780 Accounts receivable 57 500 Advances on account of clients 11 880 TOTAL CURRENT ASSETS $237 160 NON-CURRENT ASSETS Office furniture 66 500 Accumulated depreciation (9 975) 56 525 Professional library 45 000 TOTAL NON-CURRENT ASSETS 101 525 TOTAL ASSETS $338 685 CURRENT LIABILITIES Accounts payable 15 000 TOTAL CURRENT LIABILITIES 15 000 NET ASSETS $323 685 EQUITY Partners’ capital 147 000 Partners’ retained earnings 166 685 TOTAL EQUITY $313 685 Workings: Cash at bank $61 980 + $497 000 – $391 200 = $167 780 Accounts receivable $59 500+ $450 000 – $452 000 = $57 500 Advances made to clients $6 880 + $45 000 – $40 000 = $11 880 Problem 8.29 Comprehensive problem Miller, Morris and Mason are partners in the consulting firm of MMM Partners. The balance sheet of the partnership as at 30 June 2018 is set out below. It was agreed that all profits should be divided equally between the partners. Business transactions for the year ending 30 June 2019 were as follows (ignore GST). Inventory at 30 June 2019 was $45 000. Non-current assets are depreciated at 10% p.a. Required (a) Prepare the income statement for the year ended 30 June 2019. (b) Prepare a statement of changes in partners’ equity for the year ended 30 June 2019. (c) Prepare the balance sheet as at 30 June 2019. (LO8) (a) MMM PARTNERS Income Statement for the year ended 30 June 2019 INCOME: Professional fees revenue $472 600 Less: Cost of sales Opening Inventory 46 700 Add: Purchases 260 600 307 300 Less: Closing Inventory 45 000 262 300 GROSS PROFIT 210 300 EXPENSES Salaries expense 62 900 Office expenses 24 500 Operating expenses 43 300 Depreciation of furniture 12 270 142 970 PROFIT $67 330 Assume opening accounts payable relates to purchases. Closing accounts payable is assumed to be nil as it is not listed. Workings: Allocation of $67 330 profit Miller Morris Mason Total $22 443 $22 443 $22 444 $67 330 (b) MMM PARTNERS Statement of Changes in Partners’ Equity for the year ended 30 June 2019 CAPITAL Miller Morris Mason Total Capital balances 1 July 2018 $62 000 $62 000 $42 000 $166 000 Capital balances 30 June 2019 62 000 62 000 42 000 166 000 RETAINED EARNINGS Balances 1 July 2018 16 200 12 800 14 600 43 600 Profit allocation 22 443 22 443 22 444 67 330 38 643 35 243 31 044 110 930 Less: Drawings 12 000 12 500 11 800 36 300 Balances 30 June 2019 26 643 22 743 25 244 74 630 TOTAL EQUITY 88 643 84 743 67 244 240 630 (c) MMM PARTNERS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $54 800 Accounts receivable 30 400 Inventory 45 000 TOTAL CURRENT ASSETS $130 200 NON-CURRENT ASSETS Plant and equipment 88 400 Accumulated depreciation (8 840) 79 560 Office furniture 34 300 Accumulated depreciation (3 430) 30 870 TOTAL NON-CURRENT ASSETS 110 430 TOTAL ASSETS $240 630 CURRENT LIABILITIES — TOTAL CURRENT LIABILITIES — NET ASSETS $240 630 EQUITY Partners’ Capital 166 000 Partners’ Retained Earnings 74 630 TOTAL EQUITY $240 630 Workings: Cash at bank $30 200 + $474 800 – $450 200 = $54 800 Accounts receivable $32 600 + $472 600 – $474 800 = $30 400 Problem 8.30 Comprehensive problem Jones, Jackman and Johnson are partners in the consulting firm of Triple J Partners. The balance sheet of the partnership as at 30 June 2018 is set out below. It was agreed that all profits be divided equally between the partners. Business transactions for the year were as follows (ignore GST). Inventory at 30 June 2019 was $38 700 and Accounts Payable was $18 000. Non-current assets are depreciated at 10% per annum. Required (a) Prepare the income statement for the year ended 30 June 2019. (b) Prepare a statement of changes in partners’ equity for the year ended 30 June 2019. (c) Prepare the balance sheet as at 30 June 2019. (LO8) (a) TRIPLE J PARTNERS Income Statement for the year ended 30 June 2019 INCOME: Professional fees revenue $368 600 Less: Cost of sales Opening inventory 40 000 Add: Purchases 218 500 258 500 Less: Closing inventory 38 700 219 800 GROSS PROFIT 148 800 EXPENSES Salaries expense 50 000 Office expenses 19 100 Operating expenses 34 000 Depreciation of non-current assets 10 600 113 700 PROFIT $35 100 Purchases = $220 000 – $19 500 + $18 000 = $218 500 Workings: Allocation of $35 100 profit Jones Jackman Johnson Total $11 700 $11 700 $11 700 $35 100 (b) TRIPLE J PARTNERS Statement of Changes in Partners’ Equity for the year ended 30 June 2019 CAPITAL Jones Jackman Johnson Total Capital balances 1 July 2018 $55 000 $52 000 $54 000 $161 000 Capital balances 30 June 2019 55 000 52 000 54 000 161 000 RETAINED EARNINGS Balances 1 July 2018 8 200 8 200 8 000 24 400 Profit allocation 11 700 11 700 11 700 35 100 19 900 19 900 19 700 59 500 Less: Drawings 9 360 9 750 9 200 28 310 Balances 30 June 2019 10 540 10 150 10 500 31 190 TOTAL EQUITY 65 540 62 150 64 500 192 190 (c) TRIPLE J PARTNERS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $49 790 Accounts receivable 26 300 Inventory 38 700 TOTAL CURRENT ASSETS $114 790 NON-CURRENT ASSETS Plant and equipment 76 000 Accumulated depreciation (7 600) 68 400 Office furniture 30 000 Accumulated depreciation (3 000) 27 000 TOTAL NON-CURRENT ASSETS 95 400 TOTAL ASSETS $210 190 CURRENT LIABILITIES Accounts payable 18 000 TOTAL CURRENT LIABILITIES 18 000 NET ASSETS $192 190 EQUITY Partners’ capital 161 000 Partners’ retained earnings 31 190 TOTAL EQUITY $192 190 Workings: Cash at bank $30 900 + $370 300 – $351 410 = $49 790 Accounts receivable $28 000 + $368 600 – $370 300 = $26 300 Case studies Decision analysis A partnership without a partnership agreement O’Malley and O’Reilly formed a partnership on 1 July 2018 to run an information systems con¬sultancy business by investing $400 000 and $360 000 respectively. Both partners work similar hours in the business. O’Reilly has a Masters degree in information systems and 5 years’ experi¬ence in the workforce; O’Malley has an undergraduate degree and has worked for 3 years; she has invested money inherited from her parents. On 1 January 2019 O’Malley invested an additional $40 000 cash as a capital contribution. On 1 May 2019 O’Malley and O’Reilly withdrew $50 000 each in cash in expectation of profits for the current year ended 30 June 2019. They had not drawn up a partnership agreement and so are not sure how the profits of $120 000 should be distributed to each partner. You have been asked to decide the most appropriate way to divide the profit, and a number of alternative scenarios are provided for you to consider: 1. no suggestions have been made by the partners 2. the partners suggest distributing the profits in the ratio of the original capital balances 3. the partners suggest that O’Malley receives a salary of $40 000 and O’Reilly receives a salary of $60 000 to reflect his greater qualifications and experience, with interest of 5% on ending capital balances, and the remainder distributed evenly between the partners. Required (a) Calculate the amount of profit distribution to each partner under each scenario. Which scenario is most favourable to O’Malley and to O’Reilly? (b) Given the capital commitments and expertise of each partner, which scenario is the most appropriate for the partnership agreement? (c) What recommendations would you make for any proposed partnership agreement in the event that the partnership incurs a loss for the year? (a) If there are no suggested arrangements to distribute the profit then the provisions of the partnership act apply, i.e. that the profit be divided between the partners equally. 1. O’Malley 50% $60 000 O’Reilly 50% $60 000 $120 000 2. O’Malley = $63 158 O’Reilly = $56 842 $120 000 3. O’Malley Salary $40 000 5% interest on ending capital ($400 000 + 40 000) 22 000 Residual loss 50% (10 000) $52 000 O’Reilly Salary $60 000 5% interest on ending capital ($360 000) 18 000 Residual loss 50% (10 000) $68 000 $120 000 Scenario (b) is the most favourable to O’Malley Scenario (c) is the most favourable to O’Reilly. (b) As scenario (c) takes into account the capital commitments and expertise of both parties, it is the most appropriate to recommend. (c) Losses should be shared in the same manner as profits. Communication and leadership Forming partnerships Divide into groups of three or four according to students’ major areas of interest — for example, a group of commerce students, a group of management students, a group of marketing students. Discuss the following and report back to the whole class. 1. If your group formed a partnership to carry out the business of your major area of study, how would you determine who was the senior partner? 2. On what basis can you agree to share profit? Would this be affected by the amount of capital each partner contributed or would you share profits evenly? Would you pay interest to the part¬ners based on their capital contributions? 3. Would you consider paying each partner a salary that reflected their expertise, experience or ability to generate business for the partnership? If so, how would you determine the impact of such factors on the salary of each partner? 4. What other factors would you include in a partnership agreement? 1. The senior partner could be determined on the basis of who had the most experience, who was the most highly qualified, who had contributed the most capital and some combination of these factors. If all the partners contributed the same capital, had the same level of qualifications and similar levels of experience, then they may choose not to have a senior partner. 2. The profit could be shared equally. Interest could be paid to partners based on their capital contributions if they were different and then the balance of the profit shared equally. Alternatively, the whole profit could be distributed based on the capital contributed by each of the partners. This should be determined up front, before a profit is made, and included in a partnership agreement to avoid disputes later on. 3. This is really up to the group to determine. As most partners would want their level of qualifications, experience, and ability to generate business for the partnership rewarded in some way, this should be discussed at the outset and included in the partnership agreement. 4. Refer to the list in the chapter under the heading ‘Partnership Agreement’. Ethics and governance Partnership concerns Craig Fraser and Michelle Mason set up a partnership to run a small retail business. Craig con¬tributed $60 000 to begin the business and Michelle’s contribution was $50 000. Craig is confident with numbers and accounting whereas Michelle prefers to deal with people and to ignore anything requiring numbers. Michelle has put her trust in Craig to set up the financial side of the business. Craig has decided that all profits should be distributed according to the initial capital contribution by each of the partners. During the second year of operation Craig bought a new house and to finance the deposit he withdrew $20 000 from his capital investment in the partnership. Michelle accepted that this was reasonable and did not even think about the implications for profit distribution. The following year Craig withdrew another $20 000 from his capital investment in the partnership to reduce his house mortgage. Michelle accepted that as Craig had put the money into the partnership it was only fair that he could take it out again. Craig and Michelle both worked actively in the business, and generally worked well together as business partners. They both were entitled to a salary of $30 000 on the assumption that they would contribute equally to the management of the business. Required (a) Who are the stakeholders in this situation? (b) Does Craig appear to be doing anything wrong? Explain your response. (c) Are there any ethical issues involved here? If so, identify them. (a) The major stakeholder is Michelle, who appears to be disadvantaged both personally in terms of her relative contribution to the affairs of the partnership, in her return from the partnership, and in terms of the threat that the partnership could decline to the point where it may have to be dissolved. Craig is also a stakeholder, as would be the creditors of the firm if it were to cease to operate because of Craig’s actions. (b) While Craig may not be doing anything legally wrong, he would be fully aware that his capital contribution has been reduced from $60 000 to $20 000 compared to Michelle maintaining her capital contribution at $50 000. Yet according to the partnership agreement Craig is still receiving more of the profit than Michelle. Both contribute equally to the partnership and are rewarded by receiving the same salary. It would be reasonable that they would both share in the profit equally and that interest be paid on the remaining capital balance of the partners. (c) The major ethical issue here is that Craig appears to be taking advantage of Michelle’s lack of confidence with numbers and accounting and the trust that she has put in him. Financial analysis Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions using the consolidated income statement and balance sheet/statement of financial position and notes to the consolidated financial statements. 1. The JB Hi-Fi Limited income statement shows a deduction (in brackets) for income tax expense. Would this expense item be seen in the income statement of a partnership? Explain your answer. 2. In the statement of changes in equity regarding retained earnings, how is the total profit available appropriated? How does the allocation of the total profit available for appropriation in a partnership differ from that shown for JB Hi-Fi Limited? Explain the reasons for any differences. 3. Refer to the balance sheet (statement of financial position) of JB Hi-Fi Limited and the note titled ‘issued capital’. How do these differ from that of a typical partnership? Explain. 4. JB Hi-Fi Limited is required to produce a statement of cash flows (cash flow statement) and include this in its annual financial statements. Would the typical partnership be required to prepare such a statement? Why or why not? Would a typical partnership prepare such a state¬ment? Explain. 1. A partnership income statement would not show the item income tax expense. A partnership is not a separate legal entity and therefore does not itself pay income tax. The profits are split between the partners who include the profit in their personal tax returns. 2. The 2016 annual report for JB Hi-Fi Limited statement of changes in equity shows the profit, ($136,511,000) is added to the opening balance of retained earnings ($219,985,000) from which is deducted dividends ($87,174,000) to come to a 30/6/2016 closing retained earnings balance of $269,322,000. In a partnership the profit is split between the partners based on their partnership agreement. Each partner has a separate retained earnings account for the profits. 3. The 2016 balance sheet shows contributed equity. In the statement of changes in equity it can be seen that this balance of $56,521,000 is from the ordinary shares opening balance added to the value of shares issued during the year. A partnership would instead have a capital account for each partner e.g. Capital- Penny and Capital- James or “Partners’ capital” with the details of each partner shown in the “statement of changes in Partner’ equity”. 4. Partnerships are not required to produce a cash flow statement, but they may do so for their own purposes to manage cash flow. Partnerships have minimal reporting requirements unlike a company structure. They are not required to produce annual reports like a company does. Partners would be advised to still ensure annual reports are produced to track their progress. Without cash the partnership will fail, so close monitoring of cash with a cash flow statement is strongly advised. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568