Chapter 12 - partnership UK GAAP

Question 1

How is accounting for partners different from that of sole traders?

Answer 1

Partnership accounts are recorded using UK GAAP

• (asset - liabilities = capital)
• SFP = Balance sheet

Question 2

How are profits allocated between partners through a partnership agreement?

(4 marks)

Answer 2

• Salaries → awarded to partners who take on extra responsibilities
• Interest on capital → set percentages to reflect the capital invested
• Interest drawings → penalise partners who take out more drawings. Interest charged on drawings reducing profit allocated to a partner
• Profit share ratio → the ratio at which remaining profit should be shared after allocation of slaries, interest on capital & interest drawings

Question 3

How is profit legally shared when there is no partnership agreement?

Answer 3

• Profits are shared equally
• No salaries / interest on capital
• if a partner invests a higher capital than agreed they are entitled to interest with an excess of 5%

Question 4

1. What is an appropriation statement?
2. What are current accounts?

Answer 4

1. An extra statment in which calculations can be made on how net profit from the profit and loss account is allocated between partners
2. The profit allocated to each partner is credited to the partners current account. (part of capital on the balace sheet)

Question 5

What are capital accounts?

Answer 5

• Capital accounts record the initial capital invested by each partner
• Transactions in this acount can be the withdrawal of capital by a partner or ivestment of further capital

Question 6

Answer 6

Question 7

What is a guaranteed minimum profit share?

Answer 7

• A minimum amount of profit a partner is promised
• If the pertner does not recieve this guarntee after allocating profits the shortfall shoud be funded by the other partners

Question 8

Answer 8

• (£18,000 profit remaining after salaries)
• £2000 shortfall
• Funded in a 2:3 ration between Laura and Jane

Question 9

Answer 9

• Pierre → 12 months interest on drawings
• Wolfgang → 12 months interest on drawings
• Edwin → 6 months interest on drawings
• Carmen → 12 months inteest on drawings

Question 10

When a partner loans a business money they may recieve interest on the loan.

1. What is the double entry when the loan is made?
2. What is the double entry for the loan interest?

Answer 10

1. Dr cash, Cr loan (liability)
2. Dr loan interest expense → charged to profits before the profit is shared between partners.

Cr bank (if loan paid), Current account (if loan outsatnding)

Question 11

Answer 11

Question 12

What are the double entries for the following?

1. To transfer drawings to the current account (if during the year a seperate drawings account used)
2. Divide provide profits as calculated in the appropraition statment

Answer 12

1. Dr current accounts (drawings), Cr Drawings
2. Dr profit and loss account, Cr current acounts

Question 13

What happens when there is a change in patnership structure during the year? (change to salary, profit ratio etc)

• Answer the question bellow to demonstrate

Answer 13

• Need to treat as two sections

1. for the number of months on old structure
2. for the number of months on the new structure

Question 14

Answer 14

Question 15

1. When a partner retires what money is owed to them?
2. How does goodwill come about?
3. When should goodwill be shared?

Answer 15

1. Capital account balance

• Current account balance
• Share of goodwill in partnership → what can be is paid in cash, the rest may be left as a loan to the business

2. Excellent reputation, good quality products, excellent employees
3. Given to a partner on retirring or share between current partnrs when a new parter joins → (good will is not recorded in the SFP unless purchased)

Question 16

Explain the step to accounting for payments owed to a rettiring partner in the question bellow

Answer 16

1. Calculate profit up to date of change and allocate according to PSR (not in this question)
2. Determine the goodwill in accordance to the PSR

• Cr Partners capital account, Dr Goodwill account
  3. Transfer the retiring partners current account balance to their capital account (total amount sue to partner)
  4. Cash available for payment to retiring partner
• Dr retiring partner’s capital, Cr Bank
  5. Remaing amount owed to retiring partner is left as a loan
• Dr retiring partnerss capital acount
• Cr Loan account

Question 17

1. What is the balance on Linda’s capital account after the admission of Claudia?
2. What is the value of Calaudia’s capital account after her admission?

Answer 17

• Cr Goodwill in capital account before Claudia’s admission → Old PSR (loss of an asset)
• Dr Goodwill in capital account after Claudia’s admission → New PSR

1. £80,000
2. £60,000

Question 18

What is the journal entry for…

1. Interest earnt on partners capital account balance?
2. Interest payable on partners drawings?

Answer 18

1. Cr Partners current account
   * Dr Profit and Loss appropriation account
2. Cr Profit and loss appropriation account
   * Dr Partners current account

Question 19

What value is given when a question asks…

• What is X’s share of residual profit?

Answer 19

Their profit share ratio (not including interest or salaries)

Question 20

Answer 20

Remaining minimum garanteed profit willl be pais soully be P as he has guaranteed it.