P.a Book2 Chp.4

C hapter 4: Partnership accounts Contents of chapter This chapter examines how partnerships come into being and introduces the laws that govern them. The adjustments needed to bring out a fair division of profits among partners are also discussed. Finally, the preparation of a partnership’s final accounts is described.

Notes for teachers 1 2

There are a very large number of partnerships. Some types of businesses cannot be incorporated as limited companies (e.g. solicitors and doctors). Many partnerships are formed by family members. You should only enter into a partnership with someone you trust. This is because all partners are personally liable for the debts of the partnership. This means all partners will have to bear the loss incurred from the poor decision of an irresponsible partner.

3

There are fewer conflicts among the partners when a written agreement has been made by all the partners.

4

The Hong Kong Partnership Ordinance will be applied when there is no partnership agreement — either verbal or written.

39

Answers to MCQs and exercises 4.1

4.2

B

4.3

C

A

4.4

A

4.5

B

4.6 Lam and Kwan Profit and Loss Appropriation Account for the year ended 31 March 20X6 $ Net profit Less Interest on capital: Lam Kwan Salary : Lam

$

2,000 4,000

6,000 5,250

$ 26,250

11,250 15,000

Balance of profit shared: 1 ) 2 1 Kwan ( ) 2

7,500

Lam (

7,500

15,000

$

$

$ 20,000 40,000 60,000

Lam 4,500 2,000 5,250 7,500 19,250

Kwan 5,400 4,000 — 7,500 16,900

Lam and Kwan Balance Sheet as at 31 March 20X6 (extracts) Capital: Lam Kwan Current: Balances as at 1 April 20X5 Add Interest on capital Salary Share of profit

36,150 96,150

4.7X Wing, Poon and Ho Profit and Loss Appropriation Account for the year ended 31 December 20X7 $ Net profit Add Interest on drawings: Wing Poon Ho Less Interest on capitals: Wing ($40,000 × 5%) Poon ($30,000 × 5%) Ho ($18,000 × 5%) Salaries: Poon Ho Balance of profit shared: Wing (50%) Poon (30%) Ho (20%)

40

$

240 180 130

2,000 1,500 900

4,400

2,000 3,500

5,500

10,500 6,300 4,200

$ 30,350

550 30,900

9,900 21,000

21,000

Wing, Poon and Ho Balance Sheet as at 31 December 20X7 (extracts) $

$

Capitals: Wing Poon Ho

$ 40,000 30,000 18,000

$

88,000

Current Accounts: Balances 1.1.20X7 Add Share of profits Salaries Interest on capital Less Drawings Interest on drawings

Wing 1,860 10,500 — 2,000 14,360 9,200 240

Poon 946 6,300 2,000 1,500 10,746 7,100 180

Ho 717 4,200 3,500 900 9,317 6,900 130

4,920

3,466

2,287

10,673 98,673

4.8 Sun, Wai and Mei Profit and Loss Appropriation Account for the year ended 31 December 20X6 Net profit Less Salaries: Wai Mei

$

$

3,000 1,000

4,000

600 400 200

1,200

Interest on capital: Sun ($6,000 × 10%) Wai ($4,000 × 10%) Mei ($2,000 × 10%)

$ 25,200

5,200 20,000

Balance of profit shared: 2 ) 5 2 Wai ( ) 5 1 Mei ( ) 5

Sun (

8,000 8,000 4,000

20,000

$ 6,000 4,000 2,000

$

12,000

Mei 3,600 200 1,000 4,000 8,800

36,000

Balance Sheet as at 31 December 20X6 (extracts) Capital: Sun Wai Mei

$

$

Current: Balances as at 1.1.20X6 Add Interest on capital Salary Share of profit

Sun 4,800 600 — 8,000 13,400

Wai 2,400 400 3,000 8,000 13,800

48,000

41

4.9 (a)

Kin, Lo and Wong Profit and Loss Appropriation Account for the year ended 31 December 20X6 $

$

Net profit Add Interest on drawings: Kin ($8,000 × Lo ($7,200 ×

1 2 1 2

Wong ($4,800 ×

× 10% × × 10% × 1 2

9 12 9 12

× 10% ×

+ $8,000 × + $7,200 × 9 12

1 2 1 2

+ $4,800 ×

× 10% × × 10% × 1 2

3 12 ) 3 ) 12

× 10% ×

$ 50,400

400 360

3 ) 12

240

Less Salary: Lo Interest on capital: Kin ($30,000 × 10%) Lo ($28,000 × 10%) Wong ($16,000 × 10%)

1,000 51,400

2,000 3,000 2,800 1,600

7,400

9,400 42,000

Balance of profit shared: 3 ) 6 2 Lo ( ) 6

21,000

Kin (

14,000

1 Wong ( ) 6

(b)

7,000

42,000

$ 30,000 28,000 16,000

$

Kin, Lo and Wong Balance Sheet as at 31 December 20X6 (extracts) Capital: Kin Lo Wong

$

$

74,000

Current: Balances as at 1.1.20X6 Add Salary Interest on capital Share of profit Less Drawings Interest on drawings

Kin 750 — 3,000 21,000 24,750 8,000 400 16,350

Lo 1,340 2,000 2,800 14,000 20,140 7,200 360 12,580

Wong 220 — 1,600 7,000 8,820 4,800 240 3,780

32,710 106,710

42

4.10X (a)

K Wong and L Shen Profit and Loss and Appropriation Account for the year ended 31 December 20X5 $ Gross profit Less Expenses Wages and salaries ($18,560 – $6,000) Rent and rates Interest on loan from T Chan Net profit Add Interest on drawings: Wong ($6,000 × 10%) Shen ($9,000 × 10%)

$

12,560 4,440 2,000 600 900

Less Appropriations: Interest on capitals: Wong Shen

4,000 6,000

Salary: Shen

2 ) 3 1 Shen ( ) 3

19,000 37,000 1,500 38,500

10,000 6,000

Balance of profits shared: Wong (

$ 56,000

16,000 22,500

15,000

(b)

7,500

22,500

Wong $ — 15,000

Shen $ 3,700 7,500

15,000

11,200

Current

Balance b/f Interest on drawings Balances c/f

Wong $ 500 600 13,900 15,000

Shen $ — 900 10,300 11,200

Balance b/f Share of profits

Note: It implies that the given current account balances as at 31 December 20X5 have already included the interest on capital, drawings and salary to Shen. (c)

Credit balances on current accounts signify that the profits are still available to a partner to draw out of the business. Debit balances show the amount by which drawings have exceeded profits.

43

4.11 Sang and Yau Trading and Profit and Loss Account for the year ended 30 June 20X5 $ Sales Less Cost of sales: Opening stock Add Purchases

18,000 184,980 202,980 19,000

Less Closing stock Gross profit Less Expenses: Wages and salaries ($32,700 + $500) Rent, rates and insurance ($3,550 – $250) Electricity Stationery and printing Motor expenses General office expenses Depreciation — Van ($16,000 × 20%) — Office equipment ($5,600 × 10%) Net profit Less Interest on capital Sang ($50,000 × 10%) Yau ($20,000 × 10%)

$ 254,520

183,980 70,540

33,200 3,300 980 420 3,480 1,700 3,200 560

5,000 2,000

Balance of profit shared: 3 Sang ( )

46,840 23,700

7,000 16,700

10,020

5

Yau ( 2 )

6,680

5

16,700

Sang and Yau Balance Sheet as at 30 June 20X5 Cost Fixed Assets Premises Office equipment Motor vans

Current Assets Stock Debtors Prepayments Cash at bank Less Current Liabilities Creditors Accruals Net current assets

44

$ 28,000 8,400 16,000 52,400

Accumulated Net book depreciation value $ $ — 28,000 3,360 (W1) 5,040 8,200 (W2) 7,800 11,560 40,840

19,000 28,000 250 7,250

54,500

15,200 500

15,700 38,800 79,640

Financed by: Capital Accounts Balance b/f Current Account Balance as at 1.7.20X4 Add Share of profit Interest on capital Less Drawings

Sang $ 50,000

Yau $ 20,000

640 10,020 5,000 15,660 10,000

300 6,680 2,000 8,980 5,000

5,660

3,980

Total $ 70,000

9,640 79,640

(W1) (W2)

Provision for depreciation on office equipment: $8,400 – $5,600 + $560 = $3,360 Provision for depreciation on motor vans: $16,000 – $11,000 + $3,200 = $8,200

4.12X Mok, Wai and Kwan Trading and Profit and Loss Account for the year ended 30 September 20X1 $ Sales Less Returns inwards Less Cost of goods sold: Opening stock Add Purchases Carriage inwards

$ 210,500 6,800

$ 203,700

42,850 137,190 1,500

Less Closing stock Gross profit Less Expenses: Salaries and wages Discounts allowed Rent and rates ($2,565 – $120) Electricity and water Postage ($2,450 – $190) Motor expenses Bad debts Provision for bad debts General expenses Depreciation: Vans Office equipment

138,690 181,540 51,060

130,480 73,220

18,296 110 2,445 5,250 2,260 3,940 1,234 70 945 2,500 1,680

Net profit Add Interest on drawings: Mok Wai Kwan

4,180

38,730 34,490

170 110 120

Less Salaries: Wai Kwan Interest on capitals: Mok Wai Kwan

1,200 700 3,000 1,600 1,200 5

Balance of profit shared: Mok ( 10 )

1,900

5,800

8,157

Kwan ( 2 )

5,438

10

7,700 27,190

13,595

Wai ( 3 ) 10

400 34,890

27,190

45

Mok, Wai and Kwan Balance Sheet as at 30 September 20X1 Cost Fixed Assets Office equipment Vans Current Assets Stock Debtors Less Provision for bad debts Prepayments ($120 + $190) Bank

$ 8,400 12,500

Accumulated depreciation $ 4,380 6,700

Net book value $ 4,020 5,800

20,900

11,080

9,820

51,060 31,928 870

Less Current Liabilities Creditors Net current assets

24,356 58,738 68,558

Financed by: Capitals: Mok Wai Kwan Current Accounts: Balances as at 1.10.20X0 Add Salaries Interest on capitals Share of profit Less Drawings Interest on drawings

31,058 310 666 83,094

30,000 16,000 12,000 Mok $ 1,390 — 3,000 13,595

Wai $ (153) 1,200 1,600 8,157

Kwan $ 2,074 700 1,200 5,438

17,985 12,610 170 5,205

10,804 8,417 110 2,277

9,412 6,216 120 3,076

58,000

10,558 68,558

46

4.13X (a)

K Yau and T Ping Trading and Profit and Loss Account for the year ended 30 June 20X5 $ Sales Less Returns inwards Less Cost of goods sold: Opening stock Add Purchases ($246,800 – $600) Carriage inwards

$ 375,200 1,200 34,740 246,200 1,650 282,590 42,800

Less Closing stock Gross profit Add Discounts received Less Expenses: Salaries ($22,600 – $2,000) General expenses Rent and rates Carriage outwards ($3,080 – $1,650) Bad debts Provision for bad debts (W1) Loss on scrapped machine (W2) Depreciation: Machinery (W2) Office equipment [($80,000 – $24,000) × 15%] Net profit Less Salary: Yau Interest on capital: Yau ($30,000 × 5%) Ping ($42,000 × 5%)

20,600 3,100 5,860 1,430 200 1,320 400 19,120 8,400

374,000

239,790 134,210 3,000 137,210

60,430 76,780

2,000 1,500 2,100

3,600

3 ) 5 Ping ( 2 ) 5

Balance of profit shared: Yau (

(b)

$

5,600 71,180

42,708 28,472

71,180

K Yau and T Ping Balance Sheet as at 30 June 20X5 Cost Fixed Assets Machinery Office equipment Current Assets Stock Debtors ($27,000 – $200) Less Provision for bad debts ($520 + $800) Cash at bank Cash in hand Less Current Liabilities Creditors Net current assets

$ 154,400 (W2) 80,000 234,400

Accumulated depreciation $ 77,920 (W2) 32,400 110,320

Net book value $ 76,480 47,600 124,080

42,800 26,800 1,320

25,480 6,400 2,200 76,880 36,000 40,880 164,960

47

Financed by: Capitals: Yau Ping

30,000 42,000

Current Accounts: Balances b/f Add Salary Interest on capital Share of profit Less Drawings (W3)

Yau 16,480 2,000 1,500 42,708 62,688 10,000

Ping 12,300 — 2,100 28,472 42,872 2,600

52,688

40,272

72,000

92,960 164,960

W1: Debtors $27,000 – Bad debts $200 – K Tan $800 = $26,000 Provision for bad debts $26,000 × 2% + K Tan $800 = $1,320 W2: Machinery Balance b/f

$ 156,000

Machinery disposal Balance c/f

156,000

$ 1,600 154,400 156,000

Provision for Depreciation: Machinery Machinery disposal Balance c/f

$ 1,200 77,920 79,120

Balance b/f Profit and loss

$ 60,000 19,120 79,120

Machinery Disposal Machinery

$ 1,600

Provision for depreciation: Machinery Profit and loss

1,600 Depreciation on machinery: [($156,000 – $1,600) – ($60,000 – $1,200)] × 20% = $19,120 Note that machine scrapped has been taken out of depreciation calculation. W3: Yau’s drawings $8,000 + Salary paid $2,000 = $10,000 Ping’s drawings $2,000 + Goods for own use $600 = $2,600

48

$ 1,200 400 1,600

4.14 (a)

C Chow and T Sen Trading and Profit and Loss Account for the year ended 30 June 20X4 $ Sales ($123,650 + $880) Less Cost of goods sold: Opening stock Add Purchases

$

41,979 85,416 127,395 56,340

Less Closing stock Gross profit Add Reduction in provision for bad debts ($400 – $320) Less Salaries and wages ($18,917 + $200) Office expenses ($2,416 + $96 + $500) Carriage outwards ($1,288 – $100) Discounts allowed Bad debts Loan interest Depreciation: Fixtures ($11,000 – $3,300) × 10% Buildings ($50,000 × 2%) Net profit Add Interest on drawings: Chow Sen Less Interest on capitals: Chow Sen ($2,800 + $150) Salary : Chow Balance of profit shared: Chow ( Sen (

$ 124,530

71,055 53,475 80 53,555

19,117 3,012 1,188 115 503 4,000 770 1,000

1,770 180 120

3,500 2,950

1 ) 2

6,450 800

29,705 23,850 300 24,150

7,250 16,900

8,450

1 ) 2

8,450

16,900

Accumulated depreciation $ 1,000 4,070 5,070

Net book value $ 49,000 6,930 55,930

C Chow and T Sen Balance Sheet as at 30 June 20X4 Cost Fixed Assets Buildings Fixtures

$ 50,000 11,000 61,000

Current Assets Stock Debtors ($16,243 – $1,020) Less Provision for bad debts Bank

15,223 320

Less Current Liabilities Creditors Expenses owing ($96 + $200) Net current assets

11,150 296

Less Long-term Liabilities Loan from J Tan

56,340 14,903 677 71,920

11,446 60,474 116,404 40,000 76,404

49

Financed by: Capitals: Chow Sen

35,000 28,000

Current Accounts Balance as at 1.7.20X3 Add Interest on capital Salary Balance of profit Less Drawings Interest on drawings

Chow 1,306 3,500 800 8,450 14,056 6,400 180

Sen 298 2,950 — 8,450 11,698 5,650 120

7,476

5,928

63,000

13,404 76,404

(b)

Suspense $ 880 100 1,020 2,000

Sales (i) Carriage outwards (ii) Debtors (iv)

$ 1,500 500

Balance b/f Office expenses (iii)

2,000

4.15X (a)

Mr Ma and Mr Ng Trading and Profit and Loss Account for the year ended 31 December 20X0 $

$

Sales Less Sales returns Less Cost of goods sold: Opening stock Add Purchases Add Carriage inwards Less

49,940 263,260 4,280 267,540 560

Purchases returns

Less Closing stock Gross profit Less Operating expenses: Depreciation: Office equipment ($53,000 × 20%) Motor vehicles ($38,400 × 20%) Carriage outwards ($10,240 – $4,280) Salaries and wages ($8,000 + $700) Rent ($7,500 – $200) Provision for bad debts Net profit Appropriation Interest on capital: Mr Ma ($25,000 × 10%) Mr Ng ($25,000 × 10%) Mr Ma’s salaries Share of balance:

3

Mr Ma ($61,050 × 5 ) Mr Ng ($61,050 × 2 ) 5

50

$ 384,975 720 384,255

266,980 316,920 51,000

10,600 7,680 5,960 8,700 7,300 45

2,500 2,500

265,920 118,335

40,285 78,050

5,000 12,000 61,050 36,630 24,420 61,050

(b)

Mr Ma and Mr Ng Balance Sheet as at 31 December 20X0 Fixed Assets Office equipment, at cost Less Provision for depreciation ($15,900 + $10,600)

$

Motor vehicles Less Provision for depreciation ($7,680 + $7,680)

$ 53,000 26,500 38,400 15,360

Current Assets Stock Debtors Less Provision for bad debts ($320 + $45) Prepayment Cash at bank and in hand

41,920 365

Less Current Liabilities Creditors Accruals Net current assets

32,550 700

$ 26,500

23,040 49,540

51,000 41,555 200 2,400 95,155

33,250 61,905 111,445

Financed by: Capital Account Current Account Balance as at 1 January 20X0 Add Salaries Interest on capital Share of balance Less Drawings

Ma 25,000

Ng 25,000

4,137 12,000 2,500 36,630 55,267 10,000 45,267

(3,742) — 2,500 24,420 23,178 7,000 16,178

50,000

61,445 111,445

51