Question

Melinda and Melissa are partners in a clothing design shop trading as M&M Boutique. They share profits and losses in the ration 2:1.

On 30 June 2017, the statement of financial position was as follows:

M&M Boutique
Statement of financial position as at 30 June 2017
		N$	N$
Asse ts
Non-Current Assets
Land & Building			300,000.00
Vehic les			60,000.00
Goodwill			90,000.00
Furniture			30,000.00
		-	480,000.00
Current Assets
Inventories		144,000.00
Trade Receivable		186,000.00
Bank		27,000.00
		357,000.00	357,000.00
Total Assets			837,000.00
Equity and Liabilities
Equity
Capital: Melinda			450,000.00
Capital: Melissa			225,000.00
Total Equity			675,000.00
Non-current liabilities
Long-term borrowings			120,000.00
Current Liabilities
Trade payable			42,000.00
Total current liabilities			42,000.00
Total liabilities			162,000.00
Total equity and liabilities			837,000.00

Page 8 of 18

On 1 July 2017 the decided to admit Melintha to the partnership on the following conditions: a) Assets should be re-valued as follows:

i. ii. iii. iv. v. vi.

2. b) Melintha will

   premium for good will for her share.

3. c) Melinda and Melissa will share the remaining profits in the ratio 3:2. Melinda and

   Melissa must make cash payments/withdrawals in order to get their capital balances in

   line with their profit-sharing ratio.

4. d) Goodwill should not be disclosed in the statement of financial position after admitting

   Melintha.

You are required to:

1. Calculate the new profit sharing ratio after admission of Melintha on 01 July 2017. ( 4 marks)

2. Provide the journal entries of the transactions above. ( 11 Marks)

3. Prepare the capital accounts of the partners in columnar format.

4. Prepare a statement of financial position of a partnership on 30 June 2017. ( 8 Marks)

5. Discuss in short four reasons for the formation of partnerships ( 4 Marks)

Land & buildings Vehicles Furniture Goodwill Inventory

N$ 360, 000.00 N$ 54, 000.00 N$ 16, 000.00 N$ 120, 000.00 N$ 132, 000.00 N$ 180, 000.00

Trade receivable
obtain 1/5 share of partnership and it was agreed that she would pay a

Page 9 of 18

Answer 1

1) Calculation of New Profit Sharing ratio after admission of Melintha on 01 July 2017:

let total share after admission of Melintha = 1

Melintha's share = 1/5

Therefore remaining share = 1 - 1/5 = 4/5

And according to ques. Melinda and Melissa will share the remaining profits (i.e. 4/5) in the ratio 3:2

so, Melinda's New share = 4/5 * 3/5 = 12/25

and Melissa's New share = 4/5 * 2/5 = 8/25

so Melintha's share would be = 1/5 * 5/5 = 5/25

So, New Profit Sharing Ratio = 12:8:5

2) The journal entries of the transactions above :

(i) Land Building a/c Debited $ 60000

Revaluation a/ c Credited $ 60000

(ii) Revaluation a/c Debited $ 6000

Vehicles a/c Credited $ 6000

(iii) Revaluation a/c Debited $ 14000

Furnitures a/c Credited $ 14000

(iv) Revaluation a/c Debited $ 12000

Inventory a/c Credited $ 12000

(v) Revaluation a/c Debited $ 6000

Trade Receivable a/c Credited $ 6000

(vi) Revaluation a/c Debited $ 22000

Melinda's capital a/c Credited $ 14667

Melissa's capital a/c Credited $ 7333

(vii) Cash brought by Melintha for her share of premium of goodwill :

Cash a/c Debited $ 24000

Melintha's capital a/c Credited $ 24000

(viii) Distribution of premium to existing partners in their sacrificing ratio (i.e. 14:1 old share - new share)

Melintha's capital a/c Debited $ 24000

Melinda's Capital a/c Credited $ 22400

Melissa's Capital a/c Credited $ 1600

(ix) Since, Goodwill should not be disclosed in the statement of financial position after admitting Melintha:

Therefore, First write off the old goodwill :

Melinda's capital a/c Debited $ 60000

Melissa's Capital a/c Debited $ 30000

Goodwill a/c  Credited $ 90000

3)

4) A statement of financial position of a partnership on 30 June 2017 :