Chapter 17 Partnerships

Question 1

What is a partnership?

Answer 1

It is formed when two or more people carry on business together with the intention of making a profit. It is an unincorporated business.

Question 2

What are the rules of the partnership act?

Answer 2

• all partners are entitled to contribute equally to the capital of the partnership.
• Partners are not entitled to interest on capital
• Partners are not charged interest on drawings
• Partners are not entitled to salaries
• Partners will share profits and losses equally
• Partners will be paid 5% interest on loans allows to the business by them.

Question 3

What does the appropriation account consist of?

Answer 3

The total profit at the year-end will be appropriated to the following factors

• Add interest to drawings
• Less interest on capital
• Less partner’s salaries
• Share of the residual profit

Question 4

What is the current account?

Answer 4

It is used to complete the double entry from the partnership appropriation account for the partner’s share of profits, losses, interest on drawings, and salaries. It is also credited with interest on a partner’s loan to a firm. Drawings are transferred to the debit side of his current account.

Question 5

What is the format of the SOFP?

Answer 5

Non-current assets
Current assets
Capital
Current accounts
Non-current liabilities
Current liabilities

Question 6

What are the pros of partnerships?

Answer 6

• Added ideologies, creativity and expertise brought into the business
• The capital invested by partners will be more than in a soletradership
• The business does not have to close down in the absence of one partner.
• Losses are shared by all partners

Question 7

What are the cons of partnerships?

Answer 7

• A partner doesn’t have the same freedom to act independently
• Profits will be shared between all partners
• A partner may be legally liable for the actions of other partners

Question 8

What are realised profits and losses?

Answer 8

These are all those elements that are listed in the in the income statement such as revenue, expenses and cost oof sales.

Question 9

What are unrealised profits?

Answer 9

These are gans and losses arising from the revaluation of assets and liabilities, when there are partnership changes .

Question 10

Describe the process of revaluing assets.

Answer 10

These are adjustments made to the value of the partnership assets to reflect their current market value.

Question 11

What are the principles of revaluation?

Answer 11

Step 01
Debit the revaluation account with the old book value of any assets being revalued. The opposite entry is to credit the asset account.
Step 02
Credit the revaluation account with the old book value of any liabilities being revalued. The opposite entry is to debit the liability account.
Step 03
Credit the revaluation account with the new value of the assets, the opposite entry is to debit the asset account.
Step 04
Debit the revaluation account with the new value of the liabilities, the opposite entry would be to credit the liability account.
The remaining balance on the revaluation account will be the profit or loss on revaluation. This will be shared in the profit sharing ratio. This will be entered into the partner’s capital account.

Question 12

What is goodwill?

Answer 12

It is an intangible asset. It is the amount by which the value of a Business as a going concern exceeds the value of its net assets that would be sold for (realized) if they were sold separately.

Question 13

What are the two types of goodwill?

Answer 13

Purchased goodwill - This arises when one business buys another. If the purchaser pays more for the business than the net book value, the difference is goodwill.

Question 14

What is inherent goodwill?

Answer 14

This has not been paid for, and so does not have an objective value. It is someone’s best estimate of the business’s goodwill.

Question 15

What should you remember when preparing goodwill/

Answer 15

• always prepare the revaluation account first and calculate the profit or loss on revaluation.
• Then adjust the partners capital account for the goodwill
• Never record goodwill in the revaluation account
• never record goodwill in the Current account

Question 16

What’s the accounting treatment for goodwill?

Answer 16

Credit the partners capital accounts in the old PSR

Debit the partners goodwill with their share of goodwill in the new PSR

Question 17

How to account for goodwill when no goodwill account has been opened?

Answer 17

Perhaps in the case of a new admission of a partner.
Credit the partner’s capital account with their share of goodwill in their old profit sharing ratio.
Debit the capital accounts with their share of goodwill in the new profit sharing ratio.

Question 18

When do we open a realization account?

Answer 18

It is an account opened when a partnership is dissolved,, in order to record the book value of the assets and liabilities and how much is received or paid out. The result will be a gain or loss in realization.

Question 19

What are the steps and transactions involved in the realization account?

Answer 19

Step 01 All the assets will be debited in the realization account
Step 02 All the liabilities will be credited to the realization account
Step 03 Any money received is credited and the bank account will be debited.
Step 04 If a partner takes an asset. It will be credited to the realization account and debited in the partner’s capital account.
Step 05
Any expenses arising from the dissolution will be debited in the realization account

Once these entries have been made, the profit or loss will be credited or debited in the profit sharing ratio to partners’ capital accounts

Step 06
The balances on the current account are transferred to their capital accounts. Finally, their capital accounts will be closed by debiting them with the money from the business bank account.