PARTNERSHIP ACCOUNTS

THE PARTNERSHIP ACT

The law on partnership is contained in the “Incorporated Private Partnership Act, 1962 Act 152”. Most of the
rules established by the Act are meant to regulate the relationship between the partners in absence of any
agreement, express or implied, between them. There is no doubt that since the Act cannot take into account
every possible behavior of partners, or since certain provisions of the Act might be specifically excluded by an
agreement between the partners, the court would have to be resorted to in order to settle some disagreements
between partners.

DEFINITION OF PARTNERSHIP
Partnership is defined by the Act under section 3(1) as “the association of two or more individuals carrying on
business jointly for the purpose of making profits”.

Business includes every trade or profession basically commercial and professional undertakings. Profit here
means net profit or gross returns minus out-going of the business. The partners must also carry on the business
themselves or through their agents.

PARTNERSHIP AGREEMENT
The partnership agreement is the basic document setting out the relationship and conditions under which the
partners agree to operate.

Contents of Partnership Agreements

i. The name and business of the firm.
ii. The amount of capital to be contributed by each partner.
iii. The rate of interest, if any, to be paid on capital before the profits are shared.
iv. The ratio for sharing profits and losses.
v. Salaries, if any, to be paid to partners.
vi. Whether partners’ drawings are to be limited in amount.
vii. The rate of interest, if any, to be charge on partners’ drawings.
viii. The keeping of books and accounts.
ix. The date for the commencement of the partnership.
x. How disputes shall be settled.

RULES APPLYING WHERE THERE IS NO AGREEMENT

i. The partners are expected to contribute equal amount of capital.
ii. Profits and losses are to be shared equally.
iii. Any contribution by partners over the agreed capital will attract interest of per annum.
iv. No interest is to be charge on drawings.
v. Salaries to partners are not allowed.
vi. There is to be no interest allowed on capital.
vii. Every partner is expected to take part in the management of the firm.
viii. No person may be introduced as a partner without his consent and the consent of all the existing partners.

OCCASIONS WHERE PARTNERSHIP ACCOUNTS ARE DRAWN

i. At the end of the accounting period (Final Account).
ii. When there is change in the partnership agreement.
iii. When there is admission of a new partner.
iv. When there is a retirement or death of a partnership.
v. When there is dissolution of the partnership.
vi. When there is a valuation of the assets of the partnership.

pg. 1
CHARACTERISTICS OF A PARTNERSHIP FIRM
Section 12 of the Incorporated Private Partnership Act, 1962, Act 152, gives the nature of a partnership firm form
under the Act.
i. Legal Nature
The firm is a body corporate under the firm name, and distinct from the partners of whom it is composed,
from the day a certificate of registration is issued.

ii. Power
Upon registration, the firm attains the powers of a natural person of full capacity, provided such powers can
be exercised by a body corporate.

iii. Existence
The dissolution of the partnership does not affect the existence of the firm as a corporate body. The firm will
only cease to exist after it is wound-up.

iv. Liability
Each partner is personally liable for the firm’s even though the firm is a body corporate. But each partner
shall be entitled to be indemnified by the firm or to a contribution from the co-partner in case of liability.

FINAL ACCOUNTS OF PARTNERSHIP

The Final Account of partnership is made up of:
i. Income Statement
ii. Profit and Loss Appropriation Account
iii. Current Account
iv. Capital Account
v. Balance Sheet

PROFIT AND LOSS APPROPRIATION ACCOUNT

GH¢ GH¢
Net Profit / (Loss) xxxx
Interest on Drawings: A xxxx
B xxxx

Interest on Current A/c A (xxxx)

B (xxxx)

Interest on Capital A (xxxx)

B (xxxx)

Salary – B xxxx
xxxx
Share of Profit / (Loss) A xxxx
B xxxx xxxx

CURRENT ACCOUNT
A B A B
GH¢ GH¢ GH¢ GH¢
Balance b/f (Debit Balance) xxxx xxxx Balance b/f (Credit Balance) xxxx xxxx
Drawings xxxx xxxx Interest on Capital xxxx xxxx
Interest on Drawings xxxx xxxx Salary xxxx xxxx
Share of Loss xxxx xxxx Share of Profit xxxx xxxx
Balance c/d xxxx xxxx Balance c/d xxxx xxxx
xxxx xxxx xxxx xxxx
xxxx xxxx xxxx xxxx
Balance b/f Balance b/f

pg. 2
Q1
Kofi and Dudimah are in partnership sharing profits and losses in the ratio of 2:1. They employed a book-keeper
who uses accounting software to produce a trial balance. At the year end, the Accountant manually prepares
journal entries and asks the book-keeper to enter these in the computerized accounting system.

The trial balance of the firm as at 31 st December, 2005 is set out below:
DR CR
¢’ million ¢’ million
st
Stock at 1 January 2005 480.00
Discount Allowed 50.00
Sales 7,660.00
Salaries and wages 720.00
Rent 90.00
Advertising 160.00
Cash 40.00
20% short term Bank loan 200.00
Capital Accounts: Kofi 300.00
Dudimah 200.00
Current Accounts: Kofi 130.00
Dudimah 70.00
Drawings: Kofi 400.00
Dudimah 260.00
Purchases 4,800.00
Bank loan Interest 40.00
Carriage outwards 240.00
Computing Expenses 200.00
Creditors 400.00
Debtors 600.00
Discount received 60.00
Fixtures at cost 1,200.00
Electricity 60.00
Prov. for depr. on Fixtures at 1st Jan, 2005 300.00
Provision for doubtful debts: 1/1/ 2005 20.00
9,340.00 9,340.00

The following additional information has been provided by the book-keeper to the Accountant:
i) The Stock at 31st December 2005 has been valued as follows: Historical cost ¢600 million; net realizable
value ¢400 million.

ii) The prepayment for rent at 31st December 2005 is ¢40 million.

iii) The computer crashed in December 2005, and this brought the operation of the software to a halt. An
Engineer gave an estimate of ¢5 million to repair the computer and the software which the partnership firm
accepted. The engineer repaired it in December 2005, but has not yet submitted his invoice.

iv) Depreciation on fixtures is to be provided at the rate of 20% per annum using reducing balance method.

v) Interest on capital and drawings were agreed at 10% and 5% respectively.

vi) Madam Dora, a debtor was declared bankrupt and the partners have decided to write off the total amount
due from her. This amount stood at ¢20 million in her ledger. A further provision for doubtful debts is to
be made at 5%

Required:

pg. 3
 a. Prepare the partnership’s Trading, Profit and Loss and Appropriation Accounts for the year ended 31 st
December 2005 and a Balance Sheet as at that date.
b. The partners’ Current Account in columnar form up to 31 December 2005. (Total: 20 marks)

Q2
Adongo, Boateng and Coffie started a partnership on 1 st January 2004. The business of the partnership includes
the sale of stationery and text books. The partnership is governed by an agreement drafted by the partners.
Below are excerpts of some of the provisions of the agreement:

i. The partners are to share profit and losses in the ratio of 3:2:1.
ii. Partners’ capital is to attract interest at 15% per annum.
iii. Drawings of capital by partners are to attract interest at the rate of 20% per annum.

The trial balance of the partnership as at 31/12/2005 after the preparation of the partnership profit and loss
account is given below:

Adongo, Boateng and Coffie Partnership Trial balance as at 31/12/2005

Dr Cr
¢’000 ¢’000
Partners’ capital a/c:
Adongo 1,250,000
Boateng 1,125,000
Coffie 1,000,000
Buildings 2,500,000
Furniture and fittings 187,500
Motor vehicles 812,500
Stock 31/12/2005 437,500
Debtors 337,500
Creditors 225,000
Bank 262,500
Net profit for the year 425,000
10% Loan – Coffie 250,000
Current accounts:
Adongo 200,000
Boateng 50,000
Coffie 112,500

4,587,500 4,587,500

The following entries have not been made in the books:

i. Coffie is the Administrative Manager of the partnership and is entitled to annual salary of ¢37,500,000.

ii. Boateng paid an amount of ¢18,750,000 for general expenses from his personal resources on behalf of the
partnership.

iii. During the year, each of the partners made drawings totaling:
¢ million
Adongo 75
Boateng 50
Coffie 37.5
Additionally, Adongo took goods valued at ¢87,500,000 for his personal use. All of these have not yet been
reflected in the accounts.
The interest on the loan has not yet been accounted for. The loan will be repaid in 2008.

It is the policy of the partnership to deduct interest on loan as well as expenses made by a partner on behalf of
the firm before ascertaining distributable profit.

You are required to prepare the following accounts for the partnership.

pg. 4
 i. Profit and loss appropriation account for the year ended 31/12/2005.
ii. Partners’ current account.
iii. The balance sheet of the partnership as at 31/12/2005. (20 Marks)

GOODWILL
Goodwill is an intangible asset. It represents the value of a business attaching all factors, which enable it to earn a
differential return on the capital employed. Goodwill can only exist if the purchased price of a business exceeds
the value of its net assets.

Factors Affecting the Value of Goodwill

Value of goodwill depends on the capacity of the business to earn excess profits. Thus, all such factors which
helps in increasing the profitability of the business will also affect the value of the goodwill. These factors are:

i. Location: A favourable location of a business helps to a great extent in attracting customers. It increases
profitability and thus also the value of goodwill.

ii. Time: A business older in age will normally have more goodwill since it is better known to the customer.

iii. Nature of Business: A business dealing in goods of a monopolistic type or goods have a stable demand will
have a higher value of goodwill as compared to a business which does not have these characteristics.

iv. Reputation of Management: A business managed by persons of high integrity and efficiency will have higher
profitability and thus will have more value for its goodwill.

Factors Which Give Rise to the Valuation of Goodwill

i. Admission of partner.
ii. Retirement or death of a partner.
iii. Change in the profit sharing ratio of partner.
iv. Amalgamation of a partnership firm with another firm.
v. Sale of partnership business.
vi. When a new partner is substituted for an old one.

Methods of Valuing Goodwill

i. Average Profits Method
With this method, goodwill is calculated using average of past few years profits.

Illustration
The profits disclosed by Kumi’s business for the last three years were as follows:
GH¢
2001 80,000
2002 180,000
2003 190,000

Calculate the value of the firm’s goodwill on the basis of two years’ purchase of the average profits for the last
three years.

ii. Weighted Average Method

With this method, the profits are given weights before the average is calculated.

Illustration
The goodwill of the firm is to be revalued at 1⅟₂ years purchase of the weighted average profit for the past
three years which were 2001 - GH¢30,000, 2002 - GH¢18,000 and 2003 - GH¢42,000.

Recording of Goodwill
After valuation, goodwill can be dealt with as follows:
a. Where goodwill is maintain in the books.
b. Where goodwill is not maintain in the books.

pg. 5
Illustration
Sakaah and Pomaah are in partnership sharing profit and loss equally. They decided to admit Ruth into the
partnership, based on the agreement that goodwill be introduce into the books of the firm at GH¢6,000.00. Ruth
was to contribute GH¢10,000.00 as capital. The new profit and loss sharing ratio is Sakaah 4, Pomaah 3 and Ruth
3.
a. Assume that goodwill is to remain in the books.
b. Assume that goodwill is to not remain in the books.

REVALUATION ACCOUNT
Any time there is a change in the profit and loss sharing ratio, all assets and liabilities must be revalued so that the
true capital values of the partners can be determined before the ratio is applied.

The revaluation account is a sort of profit and loss account in which all capital profits are credited and all capital
losses debited with the corresponding entries appearing in the respective asset and liabilities account.

The balance in the revaluation account if any is then divided among the partners in the old profit and loss sharing
ratio.

ADMISSION OF A NEW PARTNER

The nature of partnership agreement will determine the terms under which a new partner will be admitted into
an existing partnership. A new partner will usually introduce capital of his own in a form of cash or other tangible
assets such as Plant and Machinery or occasionally an intangible asset like Goodwill. Whatever asset is
introduced, will be credited to his/her capital account.

Q1
Baba and Tunde are in partnership sharing profits and losses equally. On 31 st December 2006 they decided to
admit Adansi as a partner. Their trial balance as at this date was as follows:
DR CR
¢’000 ¢’000
Capital Accounts:
Baba 900,000
Tunde 900,000
Current Accounts:
Baba 495,000
Tunde 450,000
Creditors 895,000
Premises 780,000
Plant and machinery 600,000
Motor Vehicles 450,000
Fixture 215,000
Office Equipment 180,000
Stock 480,000
Debtors 685,000
Cash at Bank 320,000
Prepayments 80,000
Accruals . . 150,000
3,790,000 3,790,000

The following additional information is available:

a. Adansi was to contribute a capital of ¢400,000,000 for one-fifth share of profit.
b. Goodwill was to be brought into the books at ¢120,000,000.
c. Assets were revalued at:
¢’000
Premises 1,200,000
Plant and Machinery 540,000
Motor Vehicles 400,000
Office Equipment 92,000

pg. 6
 Debtors 645,000
Stocks 440,000
The partners are to share profit in the ratio of 2:2:1 after the admission of Adansi.

The partners consider the goodwill as non-purchased and as such should not be carried in the books of accounts.

One of the motor vehicles which was considered unserviceable was transferred to Tunde at a valuation of
¢15,000,000.

You are required to prepare:

a. Revaluation account;
b. Partner’s capital accounts;
c. Balance sheet as at 31st December, 2006 after admitting Adansi. (20 marks)

Q2
Talim and Kum entered into partnership in the retail business. The partnership agreement provided as follows:

a. Profits and Losses should be shared equally.

b. Interest on Partners’ Capital Accounts to be allowed at 10% per annum before a sharing of profits and losses.

c. A fixed charge of GH¢320 would be charged on current accounts with a deficit balance outstanding at the
beginning of the year. This amount should be charged only to the second half of the year.

After many years of successful operations, Malita, their Administrative Manager was admitted as a partner with
effect from 1st July 2012. Malita was to take one-fifth of the profit after interest on capital. Talim and Kum shared
the balance in the ratio of 2:1 respectively.

It was decided among the partners that, Malita’s share of profit should not fall below GH¢1,000 per month. Any
shortfall was to be contributed by Talim and Kum.

i. Malita was required to bring in GH¢15,000 cash as his capital contribution. Malita paid the amount on the date
of admission. In addition, Malita was to retain 50% of his share, of profit at the end of each year to be credited
to his capital account until his capital account balance equals that of Talim.

ii. With the admission of Malita, the partners agreed to value goodwill at 3 years’ purchase of the firm’s average
profits for the last 3 years up to the date of the admission. No goodwill account was to be left in the books.

The profits for the last three years are as follows:

Year to 31 December 2009 GH¢18,200

Year to 31 December 2010 GH¢19,000
Year to 31 December 2011 GH¢21,500

iii. A revaluation of the land and buildings resulted in surplus of GH¢15,200 and the new value of the building was
to be brought into the books, whilst the vehicles were to be reduced by GH¢10,000 at that date. Included in
wages and salaries is an amount of GH¢600 per month which previously was being paid to Malita.

iv. Assume profits accrue evenly throughout the year. No adjustments had yet been made in respect of Malita’s
admission.

v. Depreciation on equipment and vehicle is to be charged at 20% per annum and a provision for doubtful debts
of 5% is to be made on receivables.

Below is the Trial Balance of the Firm as at 31 December 2012

pg. 7
 GH¢ GH¢
Land and building at cost 36,000.00
Motor vehicles at cost 22,000.00
Offi ce equipment 20,000.00
Accumulated depreciation (01/01/2012):
Buildings 12,000.00
Offi ce equipment 2,000.00
Motor vehicles 2,000.00
Inventories – 31/12/2012 18,400.00
Cost of sales 38,000.00
Operating expenses 15,000.00
Wages and salaries 8,000.00
Sales 120,000.00
Trade receivables 6,800.00

Trade payables 5,200.00

Bank 29,000.00
Capital accounts:
Talim 25,000.00
Kum 15,000.00
Malita 15,000.00
Current accounts:
Talim 3,000.00
Kum 6,000.00
Malita -
199,200.00 199,200.00

Required: Prepare
(a) Income Statement for the year ended 31 December 2012.
(b) Appropriation account for the year ended 31 December 2012.
(c) Partners’ capital and current account in Columnar form.
(d) Statement of financial position as at 31 December 2012. 15 marks

Solution
(a) Income Statement for the six-month period ended:
30th June 2012 31st Dece 2012
GH¢ GH¢ GH¢ GH¢
Sales 60,000.00 60,000.00
Cost of sales (19,000.00) (19,000.00)
Gross profit 41,000.00 41,000.00
Operating expenses 7,500.00 7,500.00
Wages and salaries (W1) 5,800.00 2,200.00
Doubtful debts provision 170.00 170.00
Depreciation (W2) 4,200.00 (17,670.00) 3,200.00 (13,070.00)

(b) Income Appropriation Account

pg. 8
 30th June 2012 31st Dece 2012
GH¢ GH¢ GH¢ GH¢
Sales 60,000.00 60,000.00
Cost of sales (19,000.00) (19,000.00)
Gross profit 41,000.00 41,000.00
Operating expenses 7,500.00 7,500.00
Wages and salaries (W1) 5,800.00 2,200.00
Doubtful debts provision 170.00 170.00
Depreciation (W2) 4,200.00 (17,670.00) 3,200.00 (13,070.00)
30th June 2012 31st Dece 2012
GH¢ GH¢ GH¢ GH¢
Sales 60,000.00 60,000.00
Cost of sales (19,000.00) (19,000.00)
Gross profit 41,000.00 41,000.00
30th June 2012 31st Dece 2012
GH¢ GH¢ GH¢ GH¢
Sales 60,000.00 60,000.00
Cost of sales (19,000.00) (19,000.00)
Gross profit 41,000.00 41,000.00
Operating expenses 7,500.00 7,500.00
Wages and salaries (W1) 5,800.00 2,200.00
Doubtful debts provision 170.00 170.00
30th June 2012 31st Dece 2012
GH¢ GH¢ GH¢ GH¢
Sales 60,000.00 60,000.00
Cost of sales (19,000.00) (19,000.00)
Gross profit 41,000.00 41,000.00
Operating expenses 7,500.00 7,500.00
Wages and salaries (W1) 5,800.00 2,200.00
Doubtful debts provision 170.00 170.00
(d) Talim, Kum and Malita
Statement of Financial Position as at 31st December 2012

pg. 9
 30th June 2012 31st Dece 2012
GH¢ GH¢ GH¢ GH¢
Sales 60,000.00 60,000.00
Cost of sales (19,000.00) (19,000.00)
Gross profit 41,000.00 41,000.00
Operating expenses 7,500.00 7,500.00
Wages and salaries (W1) 5,800.00 2,200.00
Doubtful debts provision 170.00 170.00
Depreciation (W2) 4,200.00 (17,670.00) 3,200.00 (13,070.00)
Net profit c/d 23,330.00 27,930.00

30th June 2012 31st Dece 2012

GH¢ GH¢ GH¢ GH¢
Net profit b/d 23,330.00 27,930.00
Interest on current account - 320.00
Interest on capitals:
Talim (1,250.00) (1,250.00)
Kum (750.00) (750.00)
Malita - (750.00)
21,330.00 25,500.00

Share of Profit:

Q3
Badu and Whyte, who make up their accounts to 31 st March in each year, carried on a retail business, sharing
profit and loss, Badu 2/3 and Whyte 1/3. On 1 st July, 1999, they admitted Gyasi as a partner and from that date,
profits and losses were to be shared; Badu-2/5, Whyte-2/5 and Gyasi-1/5.

Gyasi introduced ¢6 million into the firm on 1 st July, 1999, of which it was agreed ¢4 million should be fixed
capital, the balance being credited to his current account.

Interest on fixed capital is allowed at the rate of 6% per annum but no interest is charged or allowed on current
accounts. The Trial Balance of the partnership as at 30 th March, 2000 is as follows:
¢’000 ¢’000
Leasehold Premises 1/4/1999 16,000
Motor Vehicles 5,200
Shop-fittings at cost 3,200
Purchases 43,000
Capital Accounts: Badu 8,000
Whyte 6,000
Current Accounts: Badu 2,400
Whyte 1,800
Gyasi 6,000
Sales (¢16 million for three months to June 30, 1999) 80,000
Provision for Depreciation: Motor Vehicles 2,800
Shop-fittings 1,200
Creditors 5,600
Provision for doubtful debts 480
Bank balance 6,120
Salaries including partners drawings 14,400
Stock 31st March, 1999 7,600
Debtors 3,000
Professional Charges 720
Shop wages 6,640
pg. 10
Rent, Rates and Electricity 2,800
General Expenses for 3 months to 30/6/99 5,600 . .
114,280 114,280
You are given the following information
1. For the purpose of the partnership changes the value of the Goodwill of the firm was agreed to be ¢30 million.
No account for Goodwill is to be maintained in the books but adjusting entries for the transactions between
the partners are to be made in their current accounts.

2. The as at 31st March, 2000 amounting to ¢8,200,000.

3. The following partners’ drawings are included above under salaries:

Badu - ¢2,400,000
Whyte - ¢1,440,000
Gyasi - ¢1,000,000

4. A Motor Vehicle which cost ¢2 million and on which depreciation of ¢1,400,000 had been provided had been
sold on 1st June, 2000 for ¢800,000 and the proceeds created to Motor Vehicle account.

5. Depreciation policy on Motor Vehicle and Fixtures and Fittings is 20% and 10% respectively.

6. Prepaid rent was ¢400,000 and General Expenses accrued amounted to ¢240,000.

7. Gyasi is to credited with a salary at the rate of ¢600,000 per annum as from the date of the admission as a
partner.

8. Professional charges include ¢320,000 in respect of the acquisition of the leasehold premises. The amount is to
be capitalized as part of the lease. The total cost of which should be written off in equal annual installments.

9. Doubtful debts amounted to ¢558,000 on 30 th June, 1999 and to ¢596,000 on 31 st March, 2000 (full provision is
to be made).

Required

Prepare

a) The Trading and Profit and Loss account for the year ended 31 st March, 2000. Gross Profit is to be
apportioned on the basis of sales and expenses unless otherwise indicated on a time basis.
b) The Balance Sheet as at that date and partners’ current account in columnar form. (25 marks)

RETIREMENT/DEATH

Q1.
Oti, Asante and Berchie were in partnership sharing profits and losses 4:3:3 respectively. The accounts of the firm
were made up to December 31 each year.

The partnership agreement provided that:

a) interest was to be credited at 10% per annum on capital account balances at the beginning of the year
b) no interest was to be charged on drawings
c) on the death of a partner:

i. goodwill was to be valued at three (3) years‟ purchase of the simple average profits of the three (3) years
prior to the year of death;

ii. The total amount due to a deceased partner was to receive interest at 12% from the date of death until
paid;

iii. Land and buildings and fixtures and fittings were to be valued by an independent valuer. All other assets
and liabilities are to be taken at their book values.
pg. 11
 iv. Accounts were not to be drawn up to the date of death but the profit or loss of the year in which a
partner died was to be apportioned on a time basis.

The balances in the books of the firm as at December, 2009 subject to final adjustments were:

GOODWILL ACCOUNT
‘000 ‘000
Capital: Baba 60,000 Capital: Baba 48,000
Tunde 60,000 Tunde 48,000
Adansi 24,000
120,000 120,000

GOODWILL ACCOUNT
GH¢ GH¢
Capital: Norman 60,000
Boison 40,000 Balance c/d 100,000
100,000 100,000

REVALUATION ACCOUNT
Additional Information
i) Profits for earlier years prior to the year of death were:
GHC
2006 60,000
2007 62,000
2008 77,800
ii) Oti died on 30th June 2009

iii) The independent valuation of the assets at the date of death were:
GHC
Land and Buildings 300,000
Fixtures and fittings 30,000

iv) Any adjustment for goodwill was to be made in the capital accounts, but goodwill was not to be maintained
as an asset of the firm at December 31, 2009.

v) Asante and Berchie would share profits and losses equally after the date of death of Oti.

You are required to prepare:

a. The Partners‟ Capital and Current Accounts in columnar form for the year ended December 31, 2009
b. The Statement of Financial Position of the firm as at December 31, 2009. (15 marks)

Q2

Abe, Akutu and Asaa have been in partnership sharing profits and losses equally. The balance sheet of the firm as
at 31st December 2004 is as follows:
Abe, Akutu & Asaa
Balance Sheet as at 31st December 2004

¢’ 000 ¢’ 000
Capital Accounts: Sundry Assets 18,600
Abe 24,000 Furniture & Fittings 12,300
Akutu 18,000 Motor Vehicle 35,600
Asaa 20,000 Office Equipment 13,400

pg. 12
Life Assurance Policy Fund 12,000 Stocks 13,400
20% Loan – Asaa 10,000 Trade debtors 10,200
Creditors & Accruals 17,200 Prepayment 7,500
Bank 25,600 Cash in hand 3,800
Life Assurance Policy 12,000
126,800 126,800

Akutu and Asaa were each entitled to salary of ¢36 million per annum. Interest on partners’ capitals and loans
were fixed at 10% and 20% per annum respectively. No current accounts were opened in the books of the firm.

Asaa retired from the partnership on 30 th September 2005 to pursue further studies abroad. Considering the
financial status of the firm, Asaa agreed to leave his combined interest in the firm (capital, salary, loan and loan
interest) as loan at a rate of 22.5% per annum from that date.

Following Asaa’s retirement, assets were revalued resulting in the following:

¢’ 000
Increase in furniture & fittings 3,300
Increase in motor vehicles 2,400
Decrease in office equipment 1,200

Sundry assets in the books relate to unamortized portion of goodwill that arose when Akutu was admitted into
the firm 10 years ago. Before Akutu’s admission, Abe and Asaa shared profits and losses in the ratio 3:2
respectively. The goodwill was being amortized over 15 years.

Abe, Akutu and Asaa took a joint survivorship policy for ¢60,000,000 paying annual premium of ¢4,000,000. They
decided to terminate the policy on 30 th September, 2005 and the insurance company paid the surrender value at
the end of the third year in the sum of ¢9,000,000.

Abro, an employee receiving annual salary of ¢48,000,000 was admitted into the firm on 1 st October 2005. Abe,
Akutu and Abro agreed to share profits and losses in the ratio 3:2:1 respectively, to receive salaries of ¢4,200,000
each per annum and to receive interest on capital at 15% per annum Abro contributed a total sum of
¢50,000,000 in respect of capital and his share of goodwill. The goodwill of the partnership was estimated at
¢60,000,000. Abro’s contribution towards goodwill was retained as working capital. No goodwill account was
raised in the books of the new firm. Abe and Akutu increased their capitals by ¢18,950,000 and ¢8,400,000
respectively on 1st October 2005.

The draft profit and loss accounts for the year ended 31 st December 2005 showed a profit of ¢120,000,000 before
charging loan interest and after deducting Abro’s salary whilst an employee. The profit of ¢120,000,000 for 2005
resulted in the following:

Increase in bank balance ¢90,000,000

Increase in debtors ¢35,000,000
Decrease in stocks ¢5,000,000

All payments were passed through the bank account. Turnover, cost of sales and operating expenses accrued
evenly throughout the year.

Abe, Akutu and Abro decided to maintain current accounts as well as fixed capital accounts in the books of the
firm.

No payments were made to partners in respect of their salaries and interest on capitals.

Required: Prepare:

a. The Profit and Loss and Appropriation Accounts for the year ended 31 st December, 2005.(8 marks)
b. The Capital Accounts of the partners. (4 marks)
c. Current Accounts of the partners. (2 marks)

pg. 13
 d. Balance Sheet of the firm as at 31st December, 2005. (6 marks)
(Total: 20 marks)
Solution

PROFIT AND LOSS APPROPRIATION ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 2005

9 MONTHS TO 3 MONTHS TO TOTAL

30-Sep-05 31-Dec-05
¢000 ¢000 ¢000

Net Profit 117,000 39,000 156,000

Less:
Salary- Abro (36,000) (36,000)
Interest on Loan (1,500) (3,670) (5,170)
Net Profit 79,500 35,330 114,830
Less:
Interest on Capital
Abe (1,800) (1,875) (2,625)
Akutu (1,350) (4,050)
Asaa (1,500) (3,600)
Abro (1,500) (1,500)
Salaries: Abe (10,500) (10,500)
Akutu (27,000) (10,500) (37,500)
Asaa (27,000) 27,000
Abro (10,500) 10,500
20,850 (2,170) 18,680
Share of (Profits)/Loss
Abe 6,950 (1,085) 5,865
Akutu 6,950 (723) 622
Asaa 6,950 (362) 6,588

CAPITAL ACCOUNT TO 30 SEPT., 2005

Abe Akutu Asaa Abe Akutu Asaa
¢’000 ¢’000 ¢’000 ¢’000 ¢’000 ¢’000
Goodwill written off 6,200 6,200 6,200 Balance b/f 24,000 18,000 20,000
Life Assurance Policy 1,000 1,000 1,000 Loan 10,000
Loan 65,250 Profit 6,950 6,950 6,950
Interest of Loan 1,500
Interest on Capital 1,800 1,350 1,500
Salary 27,000 27,000
Profit on Revaluation 1,500 1,500 1,500
Balance c/d 31,050 51,600 -- Life Ass. Policy Fund 4,000 4,000 4,000
38,250 58,800 72,450 38,250 58,800 72,450

CAPITAL ACCOUNT TO 30 DEC, 2005

Abe Akutu Abro Abe Akutu Abro
¢’000 ¢’000 ¢’000 ¢’000 ¢’000 ¢’000
Premium 10,000 Balance b/f 31,050 51,600
Bank 18,950 8,400 50,000
50,00
Balance c/d 0 70,000 40,000 Premium 10,000
50,00
0 70,000 50,000 50,000 70,000 50,000

CURRENT ACCOUNT

pg. 14
 Abe Akutu Abro Abe Akutu Abro
¢’000 ¢’000 ¢’000 ¢’000 ¢’000 ¢’000
Loss 1,085 723 362 Salaries 10,500 10,500 10,500
Interest on Capital 1,875 1,500
11,29
Balance c/d 0 12,402 11,638
12,37
5 10,500 12,000 12,375 10,500 12,000

BALANCE SHEET AS AT DECEMBER 31, 2005

¢’000 ¢’000
Fixed Assets
Fixtures & fittings 15,600
Office Equipment 12,200
Motor Vehicle 65,800 93,600

Current Assets
Stocks 8,400
Trade debtors 45,200
Prepayments 7,500
Cash in hand 3,800
Bank 150,750
215,650
Current Liabilities
Creditors & accruals 17,200
Interest on loan 3,670
20,870 184,780
260,580
Capital Accounts: Abe 50,000
Akutu 60,000
Abro 40,000 160,000

Current Accounts: Abe 11,290

Akutu 12,402
Abro 11,638 35,330

Loan - Asaa 65,250

260,580

AMALGAMATION

Q1
Asiedu and Ayitey were trading in partnership sharing profits in the ratio of 2:1. Andy was trading as a sole trader
in the same class of business. Both businesses made up their accounts to 31 st December each year.

It was agreed that with effect from 1 st January 2007, the two businesses should be merged with Ayitey and Andy
sharing profits equally and Asiedu retiring.

For the purpose of the merger and retirement, goodwill was to be valued at two years’ purchase of the average
adjusted profits of the last three years but was not to be brought in as an asset in the new firm.

The summarized balance sheets of the businesses at 31 st December, 2006 were as follows:

Asiedu & Ayitey Andy

¢000 ¢000
Capital Accounts
Aseidu 10,000

pg. 15
 Ayitey 5,000
Andy 8,500

Current Accounts
Aseidu 1,500
Ayitey 3,200
Creditors 14,000 12,000
33,700 20,500

Freehold land at cost 12,000 3,000

Fixtures & fittings (NBV) 3,500 1,200
Stocks at cost 9,000 6,000
Debtors 3,200 2,800
Balance at bank 6,000 7,500
33,700 20,500
Additional information:

i. In valuing goodwill, the profits were to be adjusted for the following:

- The surplus or deficiency arising on the revaluation of the freehold premises and fixtures and fittings.
- The salary of ¢500,000 per annum to Andy’s wife was to be added back. Andy’s wife has been working in
the husband’s business for the past three years.
- Obsolete stocks and bad debts were to be eliminated

ii. Premises and fixtures and fittings were to be taken into the new firm at the values placed on them by an
Independent Valuer.

iii. Stocks were to be taken in at cost less ¢300,000 in respect of obsolete stock held by Asiedu and Ayitey.

iv. Creditors, debtors and bank balances were to be taken in at book values less bad debts amounting to ¢150,000
in the case of Asiedu and Ayitey and ¢100,000 in the case of Andy.

v. The new firm was to take over the liabilities to Asiedu for his share in Asiedu and Ayitey

vi. The valuations by the Independent Valuer were:

Asiedu & Ayitey Andy

¢ ¢
Freehold premises 18,000,000 10,000,000

Fixture and fittings 3,800,000 1,000,000

Ignore depreciation adjustment relating to the revaluation.

vii. The unadjusted profits of the business for the last three years were:

Asiedu & Ayitey Andy

¢ ¢
Year to 31/12/03 7,300,000 3,300,000
Year to 31/12/04 6,100,000 3,800,000
Year to 31/12/05 7,510,000 3,900,000

Required:

Prepare in Columnar form:

i. The partners Capital Accounts.

ii. The balance sheet of the new firm of Ayitey and Andy on January 1 st 2007. (Total 20 marks)

pg. 16
Q2
Fiifi and Mokobi are in partnership sharing profits/losses in the ratio 2:1 respectively. Their balance sheet as at
31st December, 1999 was as follows:
¢’000 ¢’000 ¢’000
Fixed Assets:
Buildings 45,200
Vehicles 22,700
Fixtures & Fittings 11,900
Goodwill 2,000
81,800
Current Assets:
Stocks 4,750
Debtors 7,310
Cash 120 12,180

Current Liabilities:
Creditors 3,070
Bank Overdraft 1,120 4,190 7,990
89,790
Represented by:
Capital Accounts: Fiifi 36,000
Mokobi 48,000 84,000

Current Accounts: Fiifi 6,940

Mokobi (1,150) 5790 89,790

On the same date, the Balance Sheet of Hackman, a sole trader was:
¢’000 ¢’000
Fixed Assets: Vehicles 13,100
Fixtures & Fittings 8,200

Current Assets: Stocks 2,810

Bank 1,930
4,740
Current Liability: Creditors (2,380) 2,360
23,660
Represented by:
Capital 23,660

On December 31, 1999, Fiifi retired from the Partnership and at that date:
(1) Goodwill was revalued at ¢9.60 million
(2) Fixtures & Fittings were revalued at ¢11.160 million
(3) Vehicles were revalued at ¢19.8 million
(4) Fiifi retained his vehicle valued at ¢10.1 million
(5) Mokobi introduced additional capital amounting to ¢10.0 million
(6) Fiifi was paid ¢9.0 million and the balance of the amount due him to be placed on a loan account.
(7) Fiifi's current account balance was to be transferred to his capital account.

On January 1, 2000, Hackman formed a partnership with Mokobi, bringing his assets and liabilities into the
business. The profits were to be shared in the ratio 1:3 respectively. Further information was as follows:
(1) Hackman's goodwill was valued at ¢6.3 million
(2) Net Tangible assets, with the exception of the bank balance, were introduced into new partnership.
(3) A sale on credit amounting to ¢0.6 million had not been entered in Hackman’s I edger although the cost
of goods sold had been correctly dealt with.

Required:
(a) In the books of Fiifi and Mokobi, prepare
(i) the revaluation account to deal with entries necessary on the retirement of Fiifi;

pg. 17
 (ii) the Capital accounts of Fiifi and Mokobi in columnar form.
(b) Prepare the opening Balance Sheet of Hackman and Mokobi as at January 1, 2000. (25 marks)

Solution

a. Fiifi & Mokobi Partnership

Revaluation Account
¢’000 ¢’000
Fixtures and Fittings 740 Goodwill 7,600
Vehicle 2,900
Capital Fiifi 2,640
Mokobi 1,320
7,600 7,600

Capital Accounts
Fiifi Mokobi Fiifi Mokobi
¢’000 ¢’000 ¢’000 ¢’000
Vehicle 10,100 Bal b/f 36,000 48,000
Bank 9,000 Current a/c 6,940
Loan 26,480 Revaluation 2,640 1,320
Bal c/d 59,320 Bank 10,000
45,580 59,320 45,580 59,320

a. Hackman & Mokobi Partnership

Balance Sheet as at 1/1/2000
¢ ¢
Fixed Assets
Goodwill 15,900
Buildings 45,200
Fixtures and Fittings 19,360
Vehicles 22,800
103,260
Current Assets
Stock 7,560
Debtors 7,910
Cash 120
15,590
Current Liabilities
Creditors 5,450
Bank Overdraft 120
5,570 10,020
113,280
Loan : Fiifi (26,480)
86,800
Financed By:
Capital Account: Mokobi 59,320
Hackman 28,630 87950

Current Account: Mokobi (1,150)

86,800

CONVERSION OF SOLE PROPRIETORSHIPS AND PARTNERSHIP FIRMS INTO COMPANIES

Q1.
Balahu and Gazu are in partnership. The following balances were extracted from their books of account as at 31st
December 2011.

pg. 18
 Debit Credit
GH¢ GH¢
Capital account 1/1/2011
Balahu 10,000.00
Gazu 2,500.00
Accruals 22,500.00
Cars: at cost 137,500.00
Accumulated depreciation (1/1/11) 62,500.00
Cash and Bank Balance 52,500.00
Drawings:
Balahu (all on 30/6/11) 37,500.00
Gazu (all on 30/6/11) 25,000.00
Furniture: at cost 50,000.00
Accumulated depreciation (1/1/11) 20,000.00
Net Profit (for the year to 31/12/11) 372,500.00
Prepayments 7,500.00
Salary paid to Gazu 50,000.00
Stocks at cost (31/12/11) 175,000.00
Trade payables 295,000.00
Trade Receivables 250,000.00
785,000.00 785,000.00

Additional information:
a) The partnership agreement includes the following arrangements between the partners:
i. Profits and losses are to be shared in the ratio 4:2;
ii. Interest of 10% per annum is to be paid on the partners’ capital account balance;
iii. Interest at the rate of 15% per annum is to be charged on the partners’ drawings;
iv. Gazu is entitled to be paid GH¢50,000 per annum salary.

b) On 1 January 2012 a company called Piotorico Ltd was formed in order to make an offer for the purchase of
the partnership. The arrangement were as follows:
i. Gazu was to purchase one of the cars at an agreed valuation of GH¢12,500
ii. Other assets and liabilities (except cash and bank) were taken over by the company at the values below:
GH¢
Cars 45,000
Furniture 25,000
Stock 185,000
Trade Receivables 200,000
Trade Payables 290,000
Accruals 25,000

iii. Goodwill is to be valued at one year’s purchase of the weighted average net profit of the preceding three
years.
Weighting Amount
GH¢
Year to 31 December 2009 1 182,500
Year to 31 December 2010 2 325,000
Year to 31 December 2011 3 372,500

iv. Additional costs incurred by the partnership in arranging the conversion amounted to GH¢7,500.

v. The company agreed to issue 150,000 ordinary shares at GH¢3.10 of no par value. The shares are to be
divided equally between the partners.

vi. Any remaining balance on the partners’ capital accounts was settled between them in cash.

pg. 19
 Required:
(a) Prepare the Partners Profit and Loss Appropriation Account for the year ended 31 December 2011.
(b) Prepare the Partners’ Capital Accounts (to close their books)
(c) Prepare Piotorico Ltd’s Statement of Financial Position as at 1 January 2012. 15 marks

Q2.
Esther, Florence and Agnes have been trading in partnership as key distributors for Pramso Textiles Limited (PTL)
under the firm name EFA Enterprise, sharing profits and losses in the ratio 4:3:1 respectively. Following the influx
of cheap textiles from China, business slowed down and the partners agreed to sell their business to another
distributor, Success Ltd on 1 January 2011. The statement of financial position of EFA Enterprise as at 31st
December 2010 was as follows:

GH¢
Freehold premises 24,000.00
Vehicles 9,600.00
Equipment 5,000.00
Inventory 12,250.00
Trade Receivable 9,630.00
Bank balance 4,400.00
Total Assets 64,880.00
GH¢
Freehold premises 24,000.00
Vehicles 9,600.00
Equipment 5,000.00
Inventory 12,250.00
Trade Receivable 9,630.00
GH¢
Freehold premises 24,000.00
Vehicles 9,600.00
Equipment 5,000.00
Inventory 12,250.00
Trade Receivable 9,630.00
Bank balance 4,400.00
Total Assets 64,880.00

All of the assets except for the cash and one vehicle are to be transferred to Success Ltd and, by agreement with
the trade creditors; Success Ltd will become liable to settle their accounts (the payables). One of the two cars of
the firm is to be taken over by Agnes personally at a valuation of GHS4,000 and the loan from Esther is to be
settled by EFA Enterprise.

For the purpose of arriving at the purchase consideration, Success Ltd agreed on the following
net assets valuation:

Freehold premises 24,000.00

Vehicles 9,600.00
Equipment 5,000.00
Inventory 12,250.00
Trade Receivable 9,630.00
Bank balance 4,400.00
Total Assets 64,880.00

Success Ltd is to issue fully paid ordinary shares at GHS0.50 (50 pesewas) per share to meet the whole of the
purchase consideration. The partners are to distribute the shares on the basis of their fixed capital balances. Any
balances on their accounts (debit or credit) after the share distribution are to be settled by cash payments.
Required:
Write up the following ledger accounts to close the books of EFA Enterprise
a) Realisation Account
b) Partners’ Accounts (in columnar form)

pg. 20
c) Cash Account (15 marks)

Solution

GH¢'000 GH¢'000
Non-current assets 30,000
Current assets: Stocks 187,500
Accounts receivable 50,000
Cash 45,000
282,500

Current liabilities:
Accounts payable 62,500 220,000

GH¢'000 GH¢'000
Non-current assets 30,000
Current assets: Stocks 187,500
Accounts receivable 50,000
Cash 45,000
282,500

GH¢'000 GH¢'000
Non-current assets 30,000
Current assets: Stocks 187,500
Accounts receivable 50,000

DISSOLUTION

Partnership Act Provisions

Under S.50 of the Partnership Act, (1962) Act 152, partners must apply the following rules on dissolution:
a. Losses, other than deficiencies of capital, shall be paid first out of profits, next out of capital and lastly, if
necessary, by the partners individually in the proportion in which they share profits and losses.
b. Deficiencies of capital shall not be made up but shall be borne by solvent partners in the proportions in which
they were entitled to capital.
c. The assets of the firm are utilized in the following manner and order;
 In paying debts owed to persons and bodies who are not partners;
 In paying to each partner ratably what is due from the firm to him for advances or loans as opposed to his
agreed share of capital;
 In paying to each partner ratably what is due from the firm to him in respect of capital;
 The ultimate residue, if any, shall be divided among the partners in proportion in which profit is divisible.

In other words, on dissolution, profits or losses on realization of assets shall be shared in profit and loss sharing
ratio, deficiencies of capital shall be shared by solvent partners in their capital balance ratios, all debts and
liabilities must first be paid, then partners loans and advances paid and finally, amount due to each partner paid.

Q1
(a) Outline the provisions of Section 50 of the Incorporated Partnership Act, 1962 (Act 152) with respect to rules
relating to application of a firm’s property in settling accounts between partners. (5 marks)

(b) Sreso, Jachie and Feyiase have been in partnership sharing profits and losses in the ratio 3:4:3 respectively. As
a result of unresolved misunderstanding, the partners agreed to dissolve the firm on 30th September, 2010.

pg. 21
The draft statement of financial position as at 30th September 2010 was as follows:

GH¢'000
Non-current assets
Current assets: Stocks 187,500
Accounts receivable 50,000
Cash 45,000
282,500

Current liabilities:
Accounts payable 62,500

Financed by:
Capital: Sreso 25,000
Jachie 100,000

Additional information:
Even though business transactions ceased after 30th September 2010, it took some time for the dissolution to be
completed as follows:

02/10/2010 Sreso, agreed to settle an amount of GH¢3,750,000 owed to a leasing company (included in the
accounts payable).

07/10/2010 An accounts receivable of GH¢42,500,000 was assigned to Feyiase.

10/10/2010 Feyiase settled GH¢1,875,000 owed to a creditor through a transfer of a personal house.

15/10/2010 A portion of non-current assets was auctioned for GH¢21,250,000. Feyiase took over another
portion of noncurrent assets for a book value of GH¢5,625,000.

25/10/2010 The remaining accounts payable were settled together with dissolution expenses. The dissolution
expenses amounted to GH¢4,375,000.

30/10/2010 Cash transfers among partners were completed

Required:
Write up the following ledger accounts to close the books of Sreso, Jachie and Feyiase partnership.
(i) Realization
(ii) Partners Capital (in columnar format)
(iii) Cash (10 marks)
(Total: 15 marks)
PIECEMEAL REALIZATION

Methods
1. Maximum Loss
2. Surplus Capital Method

(Maximum Loss Method)

Q1
Messer Okine, Sarfo and Paulus have been partners in business for the past 10 years selling secondhand vehicles.
They have been preparing Accounts on an annual basis to 30th November of each year. The Profit Sharing Ratio
has been 4:2:2. The partners agreed that the firm should be dissolved on 30 th November, 1997. The assets are to
be realized, outstanding debts paid the net proceeds distributed in the most equitable manner as and when cash
is available.

Balance Sheet as at 30th November, 1997

COST DEP. NET
pg. 22
 ¢’000 ¢’000 ¢’000
Fixed Assets
Land and Building 680,000 40000 640,000
Plant and Equipment 120,000 49,920 70,080
Motor Vehicle 250,000 120,000 130,000
Furniture and Fittings 206,000 86,080 119,920
1,256,000 296,000 960,000
Goodwill 270,000

Current Assets
WIP at Workshop 210,000
Stock of Cars 313,000
Debtors 66,800
Cash and Cash Equivalent 61,000
650,800
Current Liabilities
Accounts Payable 112,000
Accrual Rent 170,800
Bills Payable 90,000 372,800
Net Current Asset 278,000
1,508,000
Partners’ Interest
Capital Accounts: Okine 356,000
Sarfo 330,000
Paulus 470,000
1,156,000
Current Account: Paulus 54,000
Sarfo 106,000 160,000
Loan term liability – Loan from Sarfo 192,000
1,508,000
The following information is also available:

A bill for ¢32,000,000 from an estate agent engaged to dispose of the assets was paid on 20 th April, 1998.
Proceeds from the sale of assets:

Date Assets Disposed Amount

¢’000
13th May, 1998 Building 800,000
13th April, 1998 Stock 110,000
14th May, 1998 Motor Vehicle 144,000
12th March, 1998 Plant 160,000
13th February, 1998 Debtors 272,000
10th December, 1997 Stock 321,600

Discounts averaging 2⅟₂ were received from creditors.

All transactions were settled through the firm’s Bank Account.

You are required to:

Prepare a statement showing the distribution of the proceeds of the dissolution as and when they were received;
and show the firm’s Bank and Realization Account. (20 marks)

pg. 23