Question

Refer to the 2017 annual report of Woolworth on its website, and answer the following questions using the consolidated income statement and balance sheet/ statement of financial position and notes to the consolidated financial statements.

The Woolworth 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.

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 Woolworth Limited? Explain the reasons for any differences.

Refer to the balance sheet (statement of financial position) of Woolworth and the note titled ‘issued capital’. How do these differ from that of a typical partnership? Explain.

Woolworth 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 state­ment? Explain.

Answer 1

Hello,

Quetiosn No 1 - Accounting treatment of income tax in case of Partnership

Answer No 1 - Income tax will not form part of Income statement of Partnership, reason being partners are responsible for paying taxes on their respective share of partnership income. Income generated out of partnership is attributable to their partners and accordignly it would be taxable in the hands of Partners. This income will form part of their personal income tax returns.

Quetiosn No 2 - Profit & Loss appropriation account - Partnership firm and Company

Answer No 2 (Part 1) - Profit & Loss appropriation account - Partnership firm

Profit & Loss appropriation account is just extension of general Profit & loss account, it shows how the profit earned during the year will be allocated or distributed to partners. General Profit & loss account of partnership will show the total profit made by partnership during the relevant year, however this profit would require some adjustment to be made before it is finally distrubuted among their partner. Various adjustment would include Interest on capital contributed by partners, Interest on partners withdrawal, commission (if any) to be payable to partners, Salary to partners etc. All these items will be carried in partners individual account as well.

Answer No 2 (Part 2) - Profit & Loss appropriation account - Limited Company

Profit Before Tax (PBT) will be further adjusted to give the impact of corporate tax and to arrive at Profit After Tax. Profit & Loss appropriation account will show how the total profit earned by the company during year will be distributed or allocated in terms tranfer to General reserve, Dividend payout etc

Conceptully, Profit & loss appropriation account in case of both partnership and limited company shows profit attributable to the stakeholders of the organisation. In case of partnership, it shows profit distributed to their partners and in case of limited company, it shows profit attributable to shareholders