Question

Question 4
Diana and Nolothando have operated a clothing business called Fabulous Fashions for the past few years. The two became friends after meeting at a fashion design course in their first year of study. Shortly after qualifying in 2007, the two decided to combine their immense talent and flair for fashion and began producing their own designs through a partnership. The partnership began trading on          1 January 2008 and profits and losses were shared equally between the partners. The partners use fixed capital accounts.
Prior year statement of financial position
The following is the statement of financial position of Fabulous Fashion as at 31 December 2009.
Statement of financial position of Fabulous Fashion as at 31 December 2009 Non- current assets: 446 000              Property, plant and equipment – cost 743 000              Property, plant and equipment – accumulated – accumulated       depreciation (297 000) Current Assets: 929 000 Inventory 543 000 Trade receivable 274 000 Bank 112 000 1 375 000 Total Assets Equity 1 084 500          Capital account : Diana 225 000          Capital account: Nolothando 225 000          Current account: Diana 356 000           Current account: Nolothando 278 500 Current liabilities 290 500 Trade payables 73 000 Short – term loan (10% per annum) 217 500 Total equity and liabilities 1 375 000

Admission of a new partner
In January 2017 Tharuna, Diana’s neighbour, returned home after spending two years working for fashion house in Milan. Inspired to begin producing her own designs, she approached Diana and Nolothando and asked to join Fabulous Fashions. The Partners agreed and admitted Thaurana to the partnership on 1 January 2010, knowing that Thaurana would assist considerably in bringing their designs in line with overseas trends.

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On 1 January 2010 the fair value of the assets and liabilities of Fabulous Fashions were as follows:
Goodwill ? Property, plant and equipment 566 000 Trade receivable 244 000

a) Tharuna would be entitled to 20% of the profit and losses of the new partnership. Nolothando and Diana would each be entitled to 40% of the profits and losses. b) Tharuna contributed R254 900 in cash, which included an amount of R20 000 relating to her share of goodwill in the partnership.    c) The new partnership would be called Fabulous International Fashions, and would continue to use the books of the previous partnership. d) Capital account balances would attract interest at a rate of 5% per annum.     
Dissolution of partnership
During the 2010 financial year, inspired by Tharuna’s stories of working overseas, Nolothando and Diana began to feel that they too wanted to spend some time working in a foreign country.
Nolothando was offered a job designing women’s clothes at DKNI and Diana was offered a position in Zurich to work as a designer for the national soccer team. It was decided that the partnership would dissolve, by way of a simple dissolution on 31 December 2010, and that Tharuna would continue to run the business as a sole proprietor.
The net profit earned by Fabulous International fashions for the year ended 31 December 2010, was R636 745. No drawings were made and no additional capital contributions were granted during the year.
Tharuna undertook to purchase the inventory and equipment from the partnership for an amount of R2, 6 Million on 31 December 2010. The debtors balance was recovered in full as it related to only one debtor who settled his account on 1 January 2011. The short-term loan needed to be repaid up on dissolution of the partnership and full trade payables balance was settled. Dissolution costs amounted to R15 000.
Current year statement of financial position
The following is an extra of the statement of financial position of fabulous fashions as at 31 December 2010.
Statement of financial position of Fabulous Fashions as at 31 December 2010 (extract) Non – current assets:        Goodwill ?

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       Property, plant and equipment – cost 566 000        Property, plant and equipment – accumulated depreciation (113 000) 3 309 645 Current Assent:            Inventory 2 080 000            Trade receivables 460 000           Bank 769 645 Total assets ? Equity ? Current liabilities: 1 696 500       Trade payables 1 278 500        Short term loan (10% per annum) 418 000 Total liabilities

Required:
1) Calculate the goodwill to be recognised on 1 January 2010 when the new partnership, Fabulous International Fashions, is formed.   (1.5 marks) 2) Discuss what goodwill is. Given an example of what Fabulous Fashions may have done that may have given rise to goodwill. 3) Prepare the journal entries required to record the admission of Tharuna to the partnership.     4) Prepare the equity section of the statement of financial position of Fabulous International Fashions at 31 December 2010, immediately prior to the dissolution. 5) Process the journal entries to account for the dissolution of Fabulous International Fashions.

Answer 1