Question

The Capital balances of Partners Eliza and Sara are k20, 600 and K14, 400 respectively before
Ruth and Tatty are admitted to the Partnership. At admission Ruth purchased One third of Eliza’s
interest for k8, 000 and one third of Sara’s interest for k4, 200. Tatty was admitted to the
Partnership with an investment of K8, 000. For which she is to receive ownership title of K8, 000.
After one year of operations, the Partnership made an income of K7, 000 and the Partners participation in
net income was to be done under the following income ratios.Interest allowance of 30% annually on their capital balances, salary allowance of K1, 600, k4, 000,
K3,000 and K2, 000 to Eliza, Sara, Ruth and Tatty respectively. Furthermore, Eliza was entitled to a
bonus of 10% if the difference between her salary allowance and Net income is less than k5, 000 and the
residual should be shared on an equal basis
i. Journalize the entries for the admission of Ruth and Tatty. ( 5 Marks)
ii. Determine the Capital balances of Eliza and Sara after admission of Ruth and Tatty (10
Marks)
iii. Prepare the income sharing schedule and pass the necessary journal entry ( 5 Marks)
b. Mulungushi University freight line is a provider of transportation services to Muteteshi residents.
Included in its balance is land, Buildings and coach equipment. Depreciation is calculated
separately for each depreciable item. The following transaction was completed for Mulungushi
University in the year 2019.
Equipment with an accumulated depreciation of K80, 000 and a cost of K120, 000 was traded for
similar new equipment with a cash cost of K186, 000. A trade in allowance was received by
Mulungushi on the old equipment and paid the balance in cash.
Required: (show workings clearly)
i. Calculate the book value of the old asset on the date of the transaction ( 2 Marks)
ii. What is the Gain on Loss on the trade for the old asset( 2 Marks)
iii. What is the value to be recorded as the cost for the New Equipment? ( 6 Marks)

Answer 1

1)JOURNAL ENTRY FOR ADMISSION OF PARTNERS

RUTH PURCHASE PARTNERS INTERST

ELIZA CAPITAL ACCOUNTdr 68661/3 of20600)

SARA CAPITAL ACCOUNTdr 4800(1/3 14400)

RUTH CAPITAL ACCOUNT 11666

(ruth purchased partnership interst from partners)

TATTY ADMITTED TO PARTNERSHIP

CASH dr 8000

TATTY CAPITAL ACCOUNT 8000

(TATTY BROUGNT CAPITAL RS 8000)

2)CAPITAL BALANCES OF SARA AND ELIZA

Eliza capital =20400(intial)

less given to ruth 6866(20400*1/3)

=13534

SARA CAPITAL =14 400(intial)

less given to ruth =(1/3*14400)4800

=9600

3)income distribution

capital 30% on capital balance

eliza 30/100*13534

4060

sara =9600*30/100

=2880

ruth =11666*30/100

=3500

tatty =8000*30/100

2400

salary allowance

eliza 1600

sara 4000

ruth 3000

tatty 2000

net income

sara =1740 (7000/4) equall sharing net income

elisa 1740

ruth 1740

tutty 1740

(it is assumed net income earned after allowing all allowances )

journal will be

salary allowance 10600

elisa capital 1600

sara capital 4000

ruth capital 3000

tutty capital 2000

(salary allowance allowed to partners capital a/c)

p&l account 10600

salary allaowance 10600

(salary allowance charged to p& l account)

interst on capital allowance 12840

elisa capital 4060

sara capital 2880

ruth capital 3500

tatty capital 2400

(allowance on interest capital given to partners capital account)

P&L ACCOUNT 12840

INTERST ON CAPITAL ALLOWANCE 12840

(interst on capital allowance charged to p&l)

P&L ACCOUNT 7000

ELISA CAPITAL 1750

SARA CAPITAL 1750

RUTH 1750

TATTY 1750

(NET INCOME DIDTRIBUTED AMONG PASRTNERS EQUALLY)