ch08 sm fa7e

Solutions Manual

to accompany

Financial Accountingin Australia 7e

by

John Hoggett

Lew Edwards

John MedlinMatthew Tilling

Solutions Manual to accompany Financial Accounting 7e by Hoggett et al

John Wiley & Sons Australia, Ltd

© John Wiley & Sons Australia, Ltd 2009 8.1

Chapter 8: Partnerships: formation, operation and reporting

CHAPTER 8PARTNERSHIPS: FORMATION, OPERATION AND REPORTING

CONTENTSPage

DISCUSSION QUESTIONS – SOLUTIONS 8.2

EXERCISE SOLUTIONS:Exercise 8.1 Partnership formation 8.6Exercise 8.2 Partnership formation 8.8Exercise 8.3 Partnership formation 8.9Exercise 8.4 Partnership profit distribution – fixed ratio 8.10Exercise 8.5 Partnership profit distribution

– capital balances 8.11Exercise 8.6 Allocation of net profit 8.12Exercise 8.7 Interest on capital and drawings 8.14Exercise 8.8 Interest on capital and drawings 8.15Exercise 8.9 Allocation of profit 8.16Exercise 8.10 Allocation of profit – average capital

balances 8.17Exercise 8.11 Formation and allocation of partnership

profits 8.18Exercise 8.12 Statement of changes in partners’ equity 8.19

PROBLEM SOLUTIONS:Problem 8.1 Partnership formation 8.20Problem 8.2 Partnership formation 8.22Problem 8.3 Allocation of profit and loss 8.24Problem 8.4 Allocation of profits 8.26Problem 8.5 Formation and allocation of profit – method 1 8.27Problem 8.6 Formation and allocation of profit – method 2 8.29Problem 8.7 Allocation of profits – method 2 8.31Problem 8.8 Formation and allocation of profit – method 2 8.33Problem 8.9 Allocation of profits – method 2 8.36Problem 8.10 Allocation of profits – method 1 8.39Problem 8.11 Comprehensive problem 8.42Problem 8.12 Comprehensive problem 8.44

CASE STUDY SOLUTIONSDecision Case A partnership without a partnership

agreement 8.46Critical Thinking Case Conflict resolution in a partnership 8.47Communication/Group Activity Forming partnerships 8.48Ethical Issues Partnership concerns 8.49Using the web Partnerships – some taxing issues 8.50Financial Reporting Case David Jones Ltd 8.51



CHAPTER 8PARTNERSHIPS: FORMATION, OPERATION AND REPORTING

DISCUSSION QUESTIONS

SOLUTIONS

Suggested topics for discussion are provided for each question. Discussion need not be confined to the topics indicated.

1. ‘The big disadvantage of a sole trader business is that the personal liability of the owner is unlimited – the owner could lose everything. I think I will take on a partner and convert my business to a partnership. That way I will certainly reduce the chances of losing my personal assets if the business fails.’ Discuss.

The principle of unlimited liability exists for partners of a partnership as for a sole trader. Admitting a new partner does not remove the liability to contribute personal assets to pay creditors of the firm on the part of the old partners or any incoming partner.

Whether the amount of the liability of the old partner is reduced will depend on the circumstances, such as the state of the partnership assets and liabilities at the time of insolvency of the firm, and the state of the personal financial affairs of the partners. Consider the case where the incoming partner is insolvent when the partnership debts are to be paid – the old partner would have to cover all the partnership debts!

2. ‘There is really no need for a partnership agreement since all issues likely to arise among partners are adequately covered in the appropriate Partnership Act.’ Discuss.

The Partnership act is designed to cater for partnership and partner inter-relationships generally: e.g. profits are shared equally, the percentage appropriate for interest on partner advances, etc.

Normally, the relationship and arrangements among partners is specific to each particular partnership. Partners usually prefer to specify rights, duties, and interests as amongst themselves in a particular business relationship, e.g. managerial rights, profit-sharing rights, drawing rights, arrangements for interest on capital and drawings, managerial responsibilities, etc.

Since each partnership is generally unique, a written partnership agreement should be drawn up to cover those items of concern to individual partners. The Partnership Act then need only be relied upon for those items not specifically addressed in the partnership agreement.

3. Which is likely to last longer and why, a partnership or a company?



a company is likely to last longer than a partnership

a partnership is dissolved for a number of reasons

a partnership is dissolved on the death of a partner, the bankruptcy of the partnership or an individual partner etc.

refer to “Limited life” on page 353

4. Liam sold his partnership interest to Jason even though his other partners were unaware that Liam intended to do so. Does Jason have the right to be a partner? Does Jason have the right to take over Liam’s position as manager of the business? Would Jason be entitled to share in the partnership profits, and if so, how much?

Yes, Jason is entitled to be a partner in the firm

No, because Jason does not have the right to participate in the management of the firm unless he is accepted by all partners. Old partners, and only they, may decide to allow Jason to assume a managerial role.

Yes, Jason is entitled to a share in the profits which Liam would have received.

5. ‘The accounting treatment of a partner’s drawings differs when separate Retained Earnings accounts are kept for each partner as opposed to not having Retained Earnings accounts. Choice of method is immaterial.’ Discuss.

If each partner’s capital account is used to reflect his or her share of profits or losses, and no retained earnings account is kept (Method 1 as in the book), any withdrawals are recorded by debiting the drawings account of the partner concerned and crediting cash at bank . The drawings account is then closed to capital at the end of the period. Under Method 2 (as in the book), which consists of capital accounts with fixed balances and retained earnings accounts, after the initial capital contribution very few entries are made to the fixed capital account. Withdrawals in anticipation of profits are debited to the drawings account which is eventually closed off to the retained earnings account. Only withdrawals of capital are debited to the capital account. Method 2 closely follows company accounting procedures and is in line with relevant accounting standards.

The choice of accounting treatment is influenced by how partners want equity and changes in equity recorded and disclosed and, particularly, whether they wish to maintain “fixed” capital accounts which only reflect capital invested unaffected by profit share, interest on capital, drawings, and salary arrangements for partners. However, although there is greater disclosure under Method 2, the total of each partner’s equity interest is ultimately the same under either method.

6. A student of accounting was heard to remark: ‘You really do not need a Profit Distribution account when accounting for profit distribution in a partnership. Everything can be done through the Profit and Loss Summary account.’ Discuss.

The statement is correct from a strictly accounting viewpoint.



If no Distribution account is used, the Profit and Loss Summary account contains income/revenues, expenses, and capital adjustments as amongst the partners such as drawings, interest on capital and drawings, and other arrangements such as salary adjustments.

Use of a Distribution account clearly separates items of operating income and expenses which appear in the Profit and Loss Summary from items which constitute capital adjustments and profit sharing. The Distribution account clearly shows how profits are shared, and provides a summary of adjustments to partners’ equity. Discussion could concentrate on whether this arrangement is useful or not.

7. ‘Partners’ advances and capital both represent money contributed to the partnership by the partners. Therefore the accounting treatment for interest paid on advances and capital should be the same.’ Discuss.

The distinction lies in the extent of the partner providing the resources to the firm. Capital contributions represent an investment and a commitment to finance the firm for the long term. A loan or advance, on the other hand, represents the provision of funds for use in the partnership on a normal commercial basis in return for interest.

A partner who provides loan funds via an advance, will expect the partnership to treat such an advance as a normal commercial loan and account for it as such.

Interest on an advance will be treated as an operating expense, while interest on capital constitutes an adjustment among the partners for differing amounts of capital invested by the partners. Differences in accounting treatment appear to be justified.

8. Hannah and Jeremy set up a partnership to run a café. At the time of establishing the business Hannah was in a better financial position than Jeremy and so contributed 60% of the capital required. Jeremy believes that he contributes as much effort to running the café as Hannah and therefore assumes that any profit made will be distributed evenly between Hannah and him as they are partners. Is Jeremy correct and what factors might determine how much profit each of the partners will receive?

Jeremy is correct that in the absence of an agreement or if the partners are unable to reach an agreement, the Partnership Act provides that profits are to be divided equally, regardless of the amount invested by the partners.

Factors that might determine how much profit each partner will receive include:- return for the personal services performed by the partners- return on the capital provided by the partners- return for the business risks assumed by the partners

The profit and loss agreement should reward each partner for resources and services contributed to the business

As the partners contribute the same effort but Hannah contributed more capital then it would be fair for Hannah to get more than half of the share of the profits.

9. Eduardo and Evanthia run a craft shop as a partnership. During the year Eduardo incurred an unusual amount of personal expenses in relation to his family and felt that his share of the partnership profit for the year would not cover these costs. Eduardo approached Evanthia to see if he can get any extra cash out of the business just for the current year to cover the shortfall in his personal finances. What options



are there for Eduardo to receive extra cash and what are some of the future implications of this?

Eduardo can receive extra cash from the partnership with Evanthia’s agreement

The extra cash could be treated as a withdrawal of future profits so that in future periods Eduardo gets less of the share of the profits

Alternatively the extra cash could be treated as a withdrawal of Eduardo’s capital contribution. If this happens then Eduardo’s contribution of capital to the business could be less than Evanthia’s and this may leave him entitled to a lower proportion of future profits.

The partnership agreement may also require that Eduardo pay interest on any drawings or capital that he withdraws from the partnership

10. Ethan and Amy who have been friends for a long time, decide to go into partnership selling a range of pet accessories. They seek advice from an accountant regarding the best system, the generally accepted accounting principles to be used in the accounting records, and the format and contents of the financial reports. The accountant replies that since the partnership will be a non-reporting entity, they can account any way they like, and include whatever they like in the reports to suit their own requirements. The partners point out that they have other business interests and would like to have some comparability in accounting and reports. As the accountant, how would you advise the partners?

Since the partnership and, presumably, the other businesses referred to, are non-reporting entities, the accountant is correct – special purpose reports are prepared. These reports do not have to comply with accounting standards.

There is probably a need to ascertain how and on what basis reports for the other business interests of the partners are prepared, and the degree of compliance with some or all of the accounting standards. It will obviously be of some benefit to the partners if there is consistency in the preparation of the various reports from the different businesses for interpretation purposes. If any of the other businesses are reporting entities, it may be useful to prepare general purpose financial reports for the partnership.

The accountant could seek input from the partners on how best to employ “their” particular accounting concepts and principles to enable him/her to produce reports which are the most useful.



EXERCISE SOLUTIONS

Exercise 8 .1 Partnership formation

SUDJAI AND SUTRIN

Required:A. Assuming that Sudjai and Sutrin agree that their capitals should be equal to the fair

value of the net assets contributed, prepare general journal entries to record the formation of the partnership.

B. If Sudjai and Sutrin agree that their respective capitals should be $220 000, show the general journal entries to establish the partnership.

A.

2009

July 1 Cash at Bank $80 000

Accounts Receivable 12 000

Inventory 45 000

Plant and Equipment 90 000

Accounts Payable 12 500

Sudjai, Capital 214 500

Cash at Bank 90 000


Inventory 40 000



H Hogart, Capital 199 500



B.2009



Inventory 45 000


Goodwill 5 500


L Lewin, Capital 220 000

Cash at Bank 90 000


Inventory 40 000


Goodwill 20 500


H Hogart, Capital 220 000



Exercise 8.2 Partnership formation

BECKER AND DICKSON

Required:Prepare separate journal entries to record the initial investment of each partner, assuming assets are recorded by the business to reflect their purchase price, and the arrangement is GST-free.

Cash at Bank $6 200


Inventory 21 500

Equipment 48 000


Becker, Capital 75 100

Cash at Bank 5 800


Inventory 18 300

Equipment 32 000


Dickson, Capital 54 700



Exercise 8.3 Partnership formation

BECKER AND DICKSON

Required:Prepare separate journal entries to record the initial investment of each partner, assuming assets are recorded by the business to reflect their purchase price, the capital is set at $80 000 for each partner, and the arrangement is GST-free.

Cash at Bank $6 200


Inventory 21 500

Equipment 48 000

Goodwill 4 900


Becker, Capital 80 000

Cash at Bank 5 800


Inventory 18 300

Equipment 32 000

Goodwill 25 300


Dickson, Capital 80 000



Exercise 8.4 Partnership profit distribution – fixed ratio

GOTTSCHE AND GUTTERIDGE

Required:A. Prepare the closing entry to transfer the profit disclosed in the Profit and Loss

Summary to the Profit Distribution account under methods 1 and method 2.B. Prepare the closing general journal entry to distribute the profit to Gottsche and

Gutteridge assuming they have agreed to share profits in proportion to each partner’s initial capital balance under both method 1 and method 2.

C. Show how the partners’ equity accounts would appear in the balance sheet of the partnership at 30 June 2010.

A & BGottsche GutteridgeMethod 1

Variable capitalbalances

Method 2Fixed capital

balancesDebit Credit Debit Credit

A. Profit and Loss Summary $96 000 $96 000Profit Distribution $96 000 $96 000

Transfer profit to distribution a/c

B. Profit Distribution 96 000 96 000Gottsche, Capital 57 600 -Gutteridge, Capital 38 400 -Gottsche, Retained Earnings - 57 600Gutteridge, Retained Earnings - 38 400

C.GOTTSCHE AND GUTTERIDGE

Balance Sheetas at 30 June 2010

Method 1 Method 2EQUITYGottsche, Capital, $147 600 $90 000Gutteridge, Capital 98 400 246 000 60 000 150 000Gottsche, Retained Earnings 57 600Gutteride, Retained Earnings

38 400 96 000

TOTAL EQUITY $246 000 $246 000



Exercise 8.5 Partnership profit distribution – capital balances

LEE AND LIU

Required:A. Prepare the closing entry to transfer the profit disclosed in the Profit and Loss Summary

account to the Profit Distribution account under method 1 and method 2.B. Prepare the closing general journal entry to distribute the profit to Lee and Liu,

assuming they have agreed to share profits in the ratio of 3:2.C. Show how the partners’ equity accounts would appear in the balance sheet of the

partnership at 30 June 2010.

A. & B.

Lee LiuMethod 1




A. Profit and Loss Summary $110 000 $110 000Profit Distribution $110 000 $110 000


B. Profit Distribution 110 000 110 000Lee, Capital 66 000 -

Liu, Capital 44 000 -Lee, Retained Earnings - 66 000Liu, Retained Earnings - 44 000

C.LEE AND LIUBalance Sheet

as at 30 June 2010Method 1 Method 2

EQUITYLee, Capital, $186 000 $120 000Liu, Capital 144 000 330 000 100 000 220 000Lee, Retained Earnings 66 000Liu, Retained Earnings 44 000 110 000TOTAL EQUITY $330 000 $330 000



Exercise 8.6 Allocation of profit

MILLER AND MONTEROSA

Required:A. Prepare the journal entries to record the allocation of profit under each of the following

assumptions, using method 1 procedures:1. Miller and Monterosa agree to a 60:40 sharing of profits.2. The partners agree to share profits in the ratio of their original capital investments.3. The partners agree to recognise a $12 000 per year salary allowance to Miller and a

$8000 per year salary allowance to Monterosa. Each partner is entitled to 8% interest on her original investment, and any remaining profit is to be shared equally.

B. Repeat requirement A3 above assuming the partnership has a profit of $30 000 for the first year.

A.

1 2 3

Profit & Loss Summary $72 000 $72 000 $72 000Profit Distribution $72 000 $72 000 $72 000

Profit Distribution 72 000 72 000 72 000Miller, Capital 43 200 39 600 38 800*Monterosa, Capital 28 800 32 400 33 200*

1. $72 000 x 0.6 = $43 200$72 000 x 0.4 = $28 800

2. Miller $110 000 110/200 x $72 000 =$39 600 Monterosa $ 90 000 90/200 x $72 000 =$32 400

$200 000 $72 000

3. Miller Monterosa TotalSalary Allowance $12 000 $8 000 $24 000Interest on Capitals (8%) 8 800 7 200 16 000

20 800 15 200 36 000Remainder 18 000 18 000 36 000

$38 800 $33 200 $72 000*Total profit (including salary, interest)



B. Profit and Loss Summary $30 000

Profit Distribution $30 000

Profit Distribution 30 000

Miller, Capital 17 800*

Monterosa, Capital 12 200*

Miller Monterosa Total

Salary Allowance $12 000 $8 000 $24 000Interest on Capitals (8%) 8 800 7 200 16 000

20 800 15 200 36 000Excess allocation (loss) (3 000) (3 000) (6 000)*Total profit (inc. salary, interest) $17 800 $12 200 $30 000



Exercise 8.7 Interest on capital and drawings

ZOLLO AND ZOUMBOULIS

RequiredPrepare the journal entries for the above transactions for the year ended 30 June 2011 using both method 1 and method 2.

Zollo ZoumboulisMethod 1



balances2010 Debit Credit Debit CreditNov 30 Zollo, Drawings 12 000 12 000

Cash at Bank 12 000 12 000(Cash drawings by Zollo)

Dec 20 Zoumboulis, Drawings 8 000 8 000Cash at Bank 8 000 8 000

(Cash drawings by Zoumboulis)2011Mar 31 Zoumboulis, Drawings 15 000

Zoumboulis, Capital 15 000Cash at Bank 15 000 15 000



Exercise 8.8 Interest on capital and drawings

DARSHIL AND DALE

Required:Prepare journal entries to account for interest on capital and on drawings, and any necessary closing entries using:1. method 1 – variable capital balances2. method 2 – fixed capital balances.

Darshil DaleMethod 1




Profit and Loss Summary $32 000 $32 000Profit Distribution $32 000 $32 000


Profit Distribution 10 560 10 560Darshil, Capital 5 760 -Dale, Capital 4 800 -Darshil, Retained Earnings - 5 760Dale, Retained Earnings - 4 800

Interest on capital

Darshil, Capital 2 160 -Dale, Capital 1 920 -Darshil, Retained Earnings 2 160Dale, Retained Earnings 1 920

Profit Distribution 4 080 4 080Interest on drawings

Profit distribution 25 520 25 520Darshil, Capital 12 760 -Dale, Capital 12 760 -Darshil, Retained Earnings - 12 760Dale, Retained Earnings - 12 760

Darshil, Capital 18 000Dale, Capital 16 000Darshil, Retained Earnings 18 000Dale, Retained Earnings 16 000

Darshil, Drawings 18 000 18 000Dale, Drawings 16 000 16 000

Close entry for drawings.



Exercise 8.9 Allocation of profit

RICHARDS AND ROGERS

Required:Prepare the Profit Distribution accounts and partners’ Retained Earnings accounts for the year ended 30 June 2010.

Profit Distribution

2010 2010

30/6 Salary – Richards $30 000 30/6 Partnership Profits $68 000

30/6 Interest on Capital:

Richards 6 400

Rogers 9 600

30/6 Residual Profit:

Richards (1/3) $7 333

Rogers (2/3) $14 667 22 000

$68 000 $68 000

Richards, Retained Earnings

2010 2009

1/7 Balance $25 000

2007

30/6 Drawings $12 000 30/6 Interest on Capital 6 400

30/6 Salary 30 000

30/6 Balance 56 733 30/6 Share of Profits 7 333

$68 733 $68 733

30/6 Balance 56 733

Rogers, Retained Earnings

2010 2009

1/7 Balance $32 000

2007

30/6 Drawings $17 000 30/6 Interest on Capital 9 600

30/6 Balance 39 267 30/6 Share of Profits 14 667

$56 267 $56 267

30/6 Balance 39 267

Exercise 8.10 Allocation of profit – average capital balances



KRYSTLE, KIMBERLEY and KAREN

Required:Prepare a schedule showing how profit will be divided among the three partners if the profit for the year before the adjustments is $169 000.

Allocation of $169 000 profitKrystle Kimberley Karen Total

Interest on average capital $12 000 $7 200 $4 800 $24 000Salary allowance 25 000 20 000 20 000 65 000Bonus to Krystle [30% of ($169 000 - $24 000 - $65 000)] 24 000 - - 24 000

Total interest, salary and bonus 61 000 27 200 24 800 113 000

Residual: Krystle (1/2) 28 000Kimberley (1/3) 18 667Karen (1/6) 9 333 56 000

Total allocations $89 000 $45 867 $34 133 $169 000



Exercise 8.11 Formation and allocation of profits of partnership

WING, WEN AND WINNIE

Required:A. Prepare the journal entries necessary to open the records of the partnership. (Ignore

GST.)B. Assuming in the first year that the partnership makes a profit of $65 000, show how

this profit would be allocated to partners. (Round amounts to nearest $1 – 50c is rounded down.)

A. Cash at Bank $7 000

Computers 8 000

Debtors 12 000

Wing, Capital 27 000

Lease of Premises 12 500

Computers 10 000

Cash at Bank 5 000

Wen, Capital 27 500

Computers 13 750

Winnie, Capital 13 750

B.Allocation of $65 000 profit

Wing Wen Winnie Total

Salary - - $20 000 $20 000Interest on capital $2 160 $2 200 1 100 5 460

Total salary and interest 2 160 2 200 21 100 25 460

Residual Profit:Wing (27000/68250) 15 642Wen (27500/68250) 15 932Winnie (13750/68250) 7 966 39 540

$17 802 $18 132 $29 066 $65 000



Exercise 8.12 Statement of changes in partners’ equity

JOSHUA AND JAMES

RequiredPrepare Statement of Changes in Partner’s Equity for the year ended 30 June 2010 using both method 1 and method 2.

JOSHUA AND JAMES PARTNERSHIPStatement of Changes in Partners’ Equity

for the year ended 30 June 2010Method 1

Joshua James TotalCapital contributions 1/7/09 $120 000 $100 000 $220 000Add: Additional investment 20 000 20 000Profit allocation 39 000 39 000 78 000

159 000 159 000 318 000Less: Capital withdrawal 10 000 10 000Less: Drawings 8 000 12 000 20 000CAPITAL BALANCES 30/6/10 $141 000 $147 000 $288 000

Method 2Joshua James Total

CAPITALCapital contributions 1/7/09 $120 000 $100 000 $220 000Add: Additional investment 20 000 20 000Less: Capital withdrawal 10 000 . . 10 000Capital balances 30/6/10 110 000 120 000 230 000

RETAINED EARNINGSBalances at 1/7/09 - - -Add: Profit allocation 39 000 39 000 78 000Less: Drawings 8 000 12 000 20 000Balances at 30/6/10 31 000 27 000 58 000TOTAL EQUITY $141 000 $147 000 $288 000



PROBLEM

SOLUTIONS

Problem 8.1 Partnership formation

JONES AND JEFFERY

Required:A. Prepare the journal entries to record each partner’s initial investment.B. Prepare the partnership’s balance sheet as at 1 July 2009.C. Prepare a statement of changes in partners’ equity for the year ended 30 June 2010,

using method 2 for recording partners’ equity accounts.


Land 180 000

Jones, Capital $210 000

Cash at Bank 22 500


Inventory 23 800

Office Equipment 62 000


Bank Loan 18 000

Jeffery, Capital 91 600



B.JONES AND JEFFERY

Balance SheetAs at 1 July 2009

CURRENT ASSETSCash at Bank $ 52 500Accounts receivable 12 800Inventory 23 800TOTAL CURRENT ASSETS $89 100NON-CURRENT ASSETSLand $180 000Office Equipment 62 000TOTAL NON-CURRENT ASSETS 242 000TOTAL ASSETS $331

100

CURRENT LIABILITIESAccounts payable $11 500Bank Loan 18 000TOTAL CURRENT LIABILITIES $29 500TOTAL LIABILITIES $29 500NET ASSETS $301

600EQUITYCapital, J Jones $210 000Capital, J Jeffery 91 600TOTAL EQUITY $301

600

C.JONES AND JEFFERY

Statement of Changes in Partners’ Equity30 June 2010

Jones Jeffery TotalCAPITALCapital balances 1 July 2009 $210 000 $91 600 $301 600Add: Additional investment 12 000 - 12 000

Capital balances 30/6/2010 $222 000 $91 600 $313 600

RETAINED EARNINGSProfit allocation $56 000 x 60% 33 600

$56 000 x 40% 22 400 56 000Less: Drawings 8 000 16 000 24 000

Balances 30/6/2010 $25 600 $6 400 $32 000

TOTAL EQUITY $247 600 $98 000 $345 600



Problem 8.2 Partnership formation

CHAN AND PAPADOPOULOS

Required:A. Prepare the journal entries to record each partner’s initial investment.B. Prepare the partnership’s balance sheet as at 1 January 2009.C. Prepare a statement of changes in partners’ equity for the year ended 31 December

2009, using method 1 for recording partners’ equity accounts.



Chan, Capital $180 000

Cash at Bank 12 600


Inventory 30 400

Buildings 480 000


Bank Loan 180 000

Papadopoulos, Capital 347 000

B.



CHAN AND PAPODOPOULOSBalance Sheet

As at 1 January 2009CURRENT ASSETSCash at Bank $ 72 600Accounts receivable 22 500Inventory 30 400TOTAL CURRENT ASSETS $125

500NON-CURRENT ASSETSPlant and Equipment $120 000Building 480 000TOTAL NON-CURRENT ASSETS 600 000TOTAL ASSETS $725

500

CURRENT LIABILITIESAccounts payable $18 500Bank Loan 180 000TOTAL CURRENT LIABILITIES $198

500TOTAL LIABILITIES $198

500NET ASSETS $527

000EQUITYCapital, C Chan $180 000Capital, P Papadopoulos 347 000TOTAL EQUITY $527

000

C.CHAN AND PAPODOPOULOS

Statement of Changes in Partners’ Equity31 December 2009

Chan Papodopoulos Total

Capital balances 1 January 2009 $180 000 $347 000 $527 000Add: Additional investment 22 000 - 22 000Profit allocation $82 000 x 50% 41 000 41 000 82 000Less: Drawings (18 000) (16 000) (34 000)

Balances 31/12/2009 $225 000 $372 000 $597 000



Problem 8.3 Allocation of profit and loss

JONG AND JOY

Required:A. Determine the division of the profit or loss assuming a profit of $120 000.B. Determine the division of the profit or loss assuming a profit of $60 000.C. Determine the division of the profit or loss assuming a loss of $6000.

A.

Jong Joy

Profit of $120 000Plan (a) Ratio of 50:50 $60 000 $60 000

Plan (b) Salaries 20 000 30 000Remainder 6:4 42 000 28 000

$62 000 $58 000

Plan (c) Salary - 25 000Interest at 8% on original investment 7 200 4 800Remainder equally 41 500 41 500

$48 700 $71 300

Plan (d) Ratio of initial investments (9 : 6) $72 000 $48 000

15 15

B.Jong Joy

Profit of $60 000Plan (a) Ratio of 50:50 $30 000 $30 000

Plan (b) Salaries 20 000 30 000Excess allocation 6:4 6 000 4 000

$26 000 $34 000

Plan (c) Salary - 25 000Interest at 8% on original investment 7 200 4 800

Total salary and interest 7 200 29 800Remainder equally 11 500 11 500

$18 700 $41 300

Plan (d) Ratio of initial investment (9 : 6) $36 000 $24 000

15 15



C.

Jong Joy

Loss of $6 000Plan (a) Ratio of 50:50 $(3 000) $(3 000)

Plan (b) Salaries 20 000 30 000Excess allocation 6:4 (33 600) (22 400)

$(13 600) $ 7 600

Plan (c) Salary - 25 000Interest at 8% on original investment 7 200 4 800

Total salary and interest 7 200 29 800Excess allocation equally (21 500) (21 500)

$(14 300) $8 300

Plan (d) Ratio of initial investment (9 : 6) $(3 600) $(2 400)

15 15



Problem 8.4 Allocation of profits

TRIPLE M TRADERS

Required:Prepare a schedule showing the distribution of profit to each partner (round to the nearest dollar).

Allocation of $179 040 profit*Molika Ming Mengyao Total

Total profit before interest on drawings $179 040

Add: Interest on drawings:Molika ($12 600 x 10% x 4/12) 420 Ming ($7 900 x 10% x ½) 395 Mengyao ($5 900 x 10% x 9/12) 443 1 258

180 298Less: Salaries 20 000 18 000 - 38 000 Bonus to Mengyao [20% x ($180 298 - $38 000)] 28 460 28 460

Residual profit for allocation $113 838

Allocation of residual profit:Molika ($113 838 x 3/8) 42 689Ming, ($113 838 x 3/8) 42 689Mengyao, ($113 838 x 1/4) 28 460 113 838

$62 269 $60 294 $56 477 $179 040

*Profit before interest on advances $188 000 Less Interest on advances (loans) ($112 000 x 8%) 8 960 Profit for distribution $179 040



Problem 8.5 Formation and allocation of profits – method 1

LLOYD AND SCHULZ

Required:A. Prepare the journal entries to record the initial investments of both partners.

(ignore GST.)B. Prepare a Balance Sheet as at 1 October 2009.C. Prepare a statement of partners’ equity for the year ended 30 September 2010.

A. 1/10/2009 Cash at Bank $28 000

Marketable Securities 26 800


Inventory 125 400

Equipment 230 000

Accounts Payable $36 000

Lloyd, Capital 421 200

Building 820 000

Land 350 000

Mortgage Payable 456 000

Schulz, Capital 714 000



B.LLOYD AND SCHULZ

Balance Sheetas at 1 October 2009

CURRENT ASSETSCash at bank $28 000Marketable securities 26 800Accounts receivable 47 000Inventory 125 400

TOTAL CURRENT ASSETS $227 200NON-CURRENT ASSETS

Equipment 230 000Building 820 000Land 350 000

TOTAL NON-CURRENT ASSETS 1 400 000

$1 627 200

CURRENT LIABILITIESAccounts payable 36 000

TOTAL CURRENT LIABILITIES 36 000NON-CURRENT LIABILITIES

Mortgage payable 456 000

TOTAL NON-CURRENT LIABILITIES 456 000

TOTAL LIABILITIES $492 000NET ASSETS $1 135 200

PARTNERS’ EQUITYCapital, Lloyd 421 200Capital, Schulz 714 000

TOTAL PARTNER’S EQUITY $1 135 200

C.LLOYD AND SCHULZ

Statement of Changes in Partners’ Equity (Method 1)for the year ending 30 September 2010

Lloyd Schulz TotalCapital balances 1/10/09 $421 200 $714 000 $1 135 200Add: Additional investment 60 000 115 200 175 200

Profit allocation 53 076 35 384 88 460

534 276 864 584 1 398 860Less: Drawings 45 000 17 200 62 200

Capital balances 30/9/10 $489 276 $847 384 $1 336 660



Problem 8.6 Formation and allocation of profit – method 2

ARNOLD, OMOND AND EDWARDS

Required:A. Prepare journal entries necessary to open the records of the partnership.B. Prepare the Balance Sheet of the partnership immediately after formation.C. Prepare a Profit Distribution account for the year ended 30 June 2010 using

method 2.

A. 2009


Inventory 42 500

Plant and Machinery 78 600


Arnold, Capital 153 800

Cash at Bank 37 500

Omond, Capital 37 500

Cash at Bank 16 500

Land 120 000

Premises 240 000

Furniture and Fittings 40 500

Motor Vehicles 31 500

Mortgage 180 000

Edwards, Capital 268 500



B.ARNOLD, OMOND AND EDWARDS

Balance Sheetas at 1 July 2009

CURRENT ASSETSCash at bank $74 000Accounts receivable 12 700Inventory 42 500


Plant and machinery 78 600Land 120 000Premises 240 000Furniture and fittings 40 500Motor vehicles 31 500

TOTAL NON-CURRENT ASSETS 510 600

TOTAL ASSETS $639 800

NON-CURRENT LIABILITIESMortgage $180 000

TOTAL NON-CURRENT LIABILITIES $180 000

TOTAL LIABILITIES $180 000

NET ASSETS $459 800

EQUITYCapital, Arnold $153 800Capital, Omond 37 500Capital, Edwards 268 500

TOTAL EQUITY $459 800

C.Profit Distribution

2010 2010

30/6 Omond, salary $32 000 30/6 Profit ($120 800 - $43 000) $77 800

30/6 Interest on capital: Interest on drawings:

Retained Profit, Arnold (153 800 x 8%) 12 304 Arnold (12 000 x 10% x 9/12)

Retained Profit, Omond (37 500 x 8%) 3 000 + (8 000 x 10% x 6/12) 1 300

Retained Profit, Edwards (268 500 x 8%) 21 480 Omond (4 000 x 10% x 3/12) 100

30/6 Residual profits: ($10 416)

Retained Profit, Arnold (2/5) 4 166

Retained Profit, Omond (2/5) 4 166

Retained Profit, Edwards (1/5) 2 084

$79 200 $79 200



Problem 8.7 Allocation of profits –method 2

GEORGE, MARCUS AND SAMUEL

Required:A. Complete the Profit and Loss Summary account for the year ended 30 June 2010.B. Prepare the Profit Distribution account.C. Complete each partner’s Retained Earnings account after all adjustments.

A.Profit and Loss Summary

2010 2010

30/6 Interest on advance $928 30/6 Balance $72 900

30/6 Interest on loan 1 800

30/6 Profit for distribution 70 172

$72 900 $72 900

B.Profit Distribution

30/6 Cash - Salary, Marcus $13 000 30/6 Profit & loss summary $70 172

30/6 Interest on capital: 30/6 Interest on drawings:

George 6 904 George 2 030

Marcus 3 440 Marcus 1 160

Samuel 2 296 12 640 Samuel 1 430 4 620

30/6 Residual profits:

George (3/6) 24 576

Marcus (2/6) 16 384

Samuel (1/6) 8 192 49 152

$74 792 $74 792



C.George, Retained Earnings

1/7 Balance $1 900 30/6 Interest on capital $6 904

30/6 Interest on drawings 2 030 30/6 Residual profit 24 576

30/6 Drawings 20 300

30/6 Balance 7 250

$31 480 $31 480

30/6 Balance $7 250

Marcus, Retained Earnings

30/6 Drawings $11 600 1/7 Balance $1 000

30/6 Interest on drawings 1 160 30/6 Interest on capital 3 440

30/6 Balance 21 064 30/6 Residual profit 16 384

30/6 Salary 13 000

$33 824 $33 824

30/6 Balance $21 064

Samuel, Retained Earnings


30/6 Interest on drawings 1 430 30/6 Interest on capital 2 296

30/6 Residual profit 8 192

30/6 Balance 4 142

$15 730 $15 730

30/6 Balance $4 142



Problem 8.8 Formation and allocation of profit – method 2

WARNER AND ELLIS

Required:A. Prepare journal entries to record the formation of the partnership.B. Prepare a statement of changes in partner’s equity as at 30 June 2010 showing each

partner’s share of profit/loss for the year. C. Prepare the balance sheet of the partnership as at 30 June 2010.

A. 2009

July 1 Accounts Receivable $61 280

Inventory 48 380

Furniture and Fittings 26 260

Equipment 24 894

Goodwill 49 086


Bank Overdraft 18 430

Warner, Capital 150 000

Warner’s net assets into the partnership

July 1 Cash at Bank 59 900


Inventory 73 720

Goodwill 25 600


Ellis, Capital 150 000

Ellis’s net assets into the partnership.



B.WARNER AND ELLIS

Statement of Changes in Partners’ Equity (Method 2)for the year ending 30 June 2010

Warner Ellis TotalCAPITAL

Capital balances 1/7/2009 $150 000 $150 000 $300 000 Capital balances 31/3/2010 $150 000 $150 000 $300 000

RETAINED EARNINGS Balances 1/7/09 - - -Profit allocation 68 055 68 055 136 110

68 055 68 055 136 110Less: Drawings 28 800 36 240 65 040

Balances 30/6/10 39 255 31 815 71 070

TOTAL EQUITY $189 255 $181 815 $371 070

Calculation of share of profits:Total partnership equity at 30 June 2009 $371 070(300 000 + 23 040 – 10 120 + 36 860 + 27 650 –26 260*10% - 24 894*15%)Add back: Drawings ($28 800 + $36 240) 65 040Partnership equity before drawings 436 110Beginning partnership equity ($150 000 + $150 000)300 000Profit for year $136 110

Warner’s share (1/2) = $68 055Ellis’s share (1/2) = $68 055



C.WARNER AND ELLIS


CURRENT ASSETSCash at bank $64 510Accounts receivable 97 240Inventory 158 960


Furniture and fittings $26 260Accumulated depreciation 2 626 23 634

Equipment 24 894Accumulated depreciation 3 734 21 160

Goodwill 74 686



CURRENT LIABILITIESAccounts payable $69 120


NET ASSETS $371 070

PARTNERS’ EQUITYWarner, Capital 189 255Ellis, Capital 181 815 371 070


Calculations:

Net assets at 30 June 2010:

Net cash at bank = $59 900 - $18 430 + $23 040 $64 510Net accounts receivable = $61 280 + $46 080 - $10 120 97 240Inventory = $48 380 + $73 720 + $36 860 158 960Furniture and Fittings = $26 260 – (10% x $26 260) 23 634Equipment = $24 894 – (15% x $24 894) 21 160Goodwill = 74 686

440 190Less: Creditors ($41 470 + $55 300 - $27 650) (69 120)

Net Assets $371 070



Problem 8.9 Allocation of profit –method 2

COPELAND AND HALL

Required:Prepare:1. the Profit Distribution account for 6 months ended 30 June 2010.2. the Retained Earnings accounts for each partner at 30 June 2010.3. a balance sheet as at 30 June 2010.

A.Profit Distribution

Interest on capital: Profit* $8 440

Copeland, Retained Earnings $2 880

Hall, Retained Earnings 1 920

Partners’ salaries:**

Copeland, Retained Earnings 12 000

Hall, Retained Earnings 8 000

Residual loss:

Copeland, Retained Earnings (2/3)

10 907

Hall, Retained Earnings (1/3) 5 453

$24 800 $24 800

* $8 440 = $9 400 less interest on advance $960

** Since partners’ salaries appear in the trial balance, the entry made to record these salaries would have been a debit to salaries accounts for Copeland and Hall and a credit to cash. The normal entry for partners’ salaries as an allocation of profits is followed here, and hence the salaries accounts shown in the trial balance are closed off to the retained earnings accounts of the partners. The balance of the net credit to the partners’ salaries account is the portion of the salary not paid in cash.

*** There is no interest on drawings as neither partners’ drawings exceeded their salary



B.

Copeland, Retained Earnings

Balance $1 800 Salary $12 000

Copeland, Salary (clos. entry)

6 000 Interest on capital 2 880

Share of residual loss 10 907

Balance 3 827

$18 707 $18 707

Balance 3 827

Hall, Retained Earnings

Balance $5 400 Salary $8 000

Hall, Salary (clos. entry) 4 000 Interest on capital 1 920

Share of residual loss 5 453

Balance 4 933

$14 853 $14 853

Balance $4 933



C.COPELAND AND HALL


CURRENT ASSETSCash at Bank $ 3 200Accounts Receivable 8 400Inventory 15 400


Plant and Equipment 44 600Accumulated Depreciation (3 200) 41 400



LIABILITIESAccounts Payable 4 200Interest Payable on Advance 960Copeland, Advance 12 000


NET ASSETS $51 240

EQUITYCapital, Copeland 36 000Retained Earnings, Copeland (3 827) 32 173

Capital, Hall 24 000Retained Earnings, Hall (4 933) 19 067




Problem 8.10 Allocation of profit –method 1

DICKSON, DOENING AND DOLLING

Required:Prepare:A. the Profit Distribution account for the year ended 30 June 2009.B. the Capital Accounts for each partner at 30 June 2009.C. the Balance Sheet as at 30 June 2009.

A.Profit Distribution

2009 2009

30/6 Salary: Dickson $92 000 30/6 P & L Summary (after 246 400

Doening 56 000 (interest on advances of $25 600)

30/6 Interest on capital: 30/6 Interest on drawings:

Dickson 9 600 Dickson *1 140

Doening 19 200 Doening *1 140

Dolling 38 400 Dolling -

Share of profit: ($33 480)

Dickson 11 160

Doening 11 160

Dolling 11 160

$248 680 $248 680

* ($12 000 x 8% x 9/12) + ($8 000 x 8% x 6/12) + ($5 000 x 8% x 3/12)= 720 + 320 + $100= $1 140

B.Dickson, Capital

30/6 Interest on Drawings $1 140 1/7 Balance $160 000

30/6 Drawings 60 000 30/6 Salary 92 000

30/6 Balance 211 620 30/6 Interest on Capital 9 600

30/6 Share of Profit 11 160

$272 760 $272 760

30/6 Balance $211 620



Doening, Capital

30/6 Interest on Drawings $1 140 1/7 Balance $320 000

30/6 Drawings 60 000 30/6 Salary 56 000



$406 360 $406 360

30/6 Balance $345 220

Dolling, Capital




$689 560 $689 560

30/6 Balance $669 560



C.DICKSON, DOENING AND DOLLING


CURRENT ASSETSCash at Bank $162 500Accounts Receivable 248 620Inventory 178 460

TOTAL CURRENT ASSETS $589 580

NON-CURRENT ASSETSEquipment $1 430 800Accumulated Depreciation (462 600)

968 200 Goodwill 360 000

TOTAL NON-CURRENT ASSETS 1 328 200

TOTAL ASSETS $1 917 780

CURRENT LIABILITIESAccounts Payable 345 780Interest Payable on Advance 25 600Advance – Dolling $320 000

TOTAL CURRENT LIABILITIES $691 380


NET ASSETS $1 226 400

EQUITYCapital, Dickson $211 620Capital, Doening 345 220Capital, Dolling 669 560

TOTAL EQUITY $1 226 400



Problem 8.11 Comprehensive problem

CLARKE AND ASSOCIATES

Required:A. Prepare the income statement for the year ended 31 March 2010.B. Prepare a statement of changes in partners’ equity for the year ended 31 March

2010.C. Prepare the balance sheet as at 31 March 2010.

A.CLARKE AND ASSOCIATES

Income Statementfor the year ended 31 March 2010

INCOME:Professional fees revenue $365 160EXPENSESSalaries expense 75 750Rent expense 14 880Office expenses* 18 290Library maintenance expense 7 530Insurance expense 5 250Depreciation of furniture 8 145 129 845

PROFIT $235 315

*Office expenses $15 690 - $12 400 + $15 000 = 18 290

Workings:

Allocation of $235 315 profitClarke Cooper Cornish Total

78 439 78 438 78 438 235 315



B.CLARKE AND ASSOCISATES

Statement of Changes in Partners’ Equityfor the year ending 31 March 2010

CAPITALClarke Cooper Cornish Total

Capital balances 1/4/09 $42 000 $42 000 $36 000 $120 000

Capital balances 31 /3/10 42 000 42 000 36 000 120 000

RETAINED EARNINGSBalances 1/4/09 24 120 20 800 18 600 63 520Profit allocation 78 439 78 438 78 438 235 315

102 559 99 238 97 038 298 835Less: Drawings 96 000 72 900 36 300 205 200

Balances 31/3/10 6 559 26 338 60 738 93 635

TOTAL EQUITY $48 559 $68 338 $96 738 $213 635

C.CLARKE AND ASSOCIATES

Balance Sheetas at 31 March 2010

CURRENT ASSETSCash at Bank $96 530Accounts Receivable 46 080Advances on account of clients 3 070


Office Furniture 54 300Accumulated Depreciation (8 145)

46 155Professional library 36 800



CURRENT LIABILITIESAccounts Payable 15 000

TOTAL CURRENT LIABILITIES 15 000

NET ASSETS $213 635

EQUITYPartners’ Capitals 120 000

Partners’ Retained Earnings 93 635


Workings:Cash at Bank $50 600 + $402 930 - $357 000 = 96 530Accounts receivable $48 600 + $365 160 - $367 680 = 46 080Advances made to clients $5 620 + $32 700 - $35 250 = 3 070



Problem 8.12 Comprehensive problem

PPP PARTNERS

Required:A. Prepare the income statement for the year ended 30 June 2010.B. Prepare a statement of changes in partners’ equity for the year ended 30 June 2010.C. Prepare the balance sheet as at 30 June 2010.

A.PPP PARTNERSIncome Statement

for the year ended 30 June 2010

INCOME:Professional fees revenue $472 600Less: Cost of Sales

Opening Inventory 46 700Add: Purchases 260 600

307 300Less: Closing Inventory 45 000 262 300

GROSS PROFIT 210 300EXPENSESSalaries expense 62 900Office expenses 24 500Operating expenses 43 300Depreciation of furniture 12 270 142 970

PROFIT $67 330

Assume opening Accounts Payable relates to purchases. Closing Accounts payable is assumed to be nil as it is not listed.

Workings:

Allocation of $67 330 profitPearson Pelham Perrin Total

22 443 22 443 22 444 $67 330



B.PPP PARTNERS

Statement of Changes in Partners’ Equityfor the year ending 30 June 2010

CAPITALPearson Pelham Perrin Total

Capital balances 1/7/09 $62 000 $62 000 $42 000 $166 000

Capital balances 30 /6/10 62 000 62 000 42 000 166 000

RETAINED EARNINGSBalances 1/7/09 16 200 12 800 14 600 43 600Profit allocation 22 443 22 443 22 444 67 330

38 643 35 243 31 044 110 930Less: Drawings 12 000 12 500 11 800 36 300

Balances 30/6/10 26 643 22 743 25 244 74 630

TOTAL EQUITY 88 643 84 743 67 244 240 630

C.PPP PARTNERS


CURRENT ASSETSCash at Bank $54 800Accounts Receivable 30 400Inventory 45 000


Plant and Equipment 88 400Accumulated Depreciation (8 840) 79 560Office Furniture 34 300Accumulated Depreciation (3 430) 30 870



CURRENT LIABILITIES-

TOTAL CURRENT LIABILITIES -

NET ASSETS $240 630

EQUITYPartners’ Capitals 166 000

Partners’ Retained Earnings 74 630


Workings:Cash at Bank $30 200 + $474 800 - $450 200 = 54 800Accounts receivable $32 600 + $472 600 - $474 800 = 30 400



CASE STUDY SOLUTIONS

Decision Case A partnership without a partnership agreement

O’MALLEY AND O’REILLY

Required:A. Calculate the amount of profit distribution to each partner under each scenario.

Which scenario is most favourable to O’Malley? to O’Reilly?B. Given the capital commitments and expertise of each partner, decide which scenario

is the most appropriate for the partnership agreement.C. What recommendations would you make for any proposed partnership agreement in

the event that the partnership incurs a loss for the year?

A. If there are no suggested arrangements to distribute the profit then the provisions of the partnership act apply, i.e. that the profit be divided between the partners equally.

(a) O’Malley 50% $60 000O’Reilly 50% $60 000

$120 000

(b) O’Malley = $63 158

O’Reilly = $56 842

$120 000

(c) O’MalleySalary $40 0005% interest on ending capital ($400 000 + 40 000)

22 000

Residual loss 50% (10 000) $52 000

O’ReillySalary $60 0005% interest on ending capital ($360 000)

18 000

Residual loss 50% (10 000) $68 000$120 000

Scenario (b) is the most favourable to O’MalleyScenario (c) is the most favourable to O’Reilly.

B. As scenario (c) takes into account the capital commitments and expertise of both parties, it is the most appropriate to recommend.

C. Losses should be shared in the same manner as profits.



Critical Thinking Conflict resolution in a partnershipCase

Required:A. What are some issues that the Hush partnership could face because it does not have a

formal contract that outlines how disputes will be dealt with?.B. Why does Paul Brennan believe not having an agreement is a risky approach and what

suggestions does he make?C. In the absence of a partnership agreement how would the Partnership Act settle the

problems discussed in requirement B?

A. Some issues that the Hush partnership could face because it does not have a formal contract that outlines how disputes will be dealt with include:

lack of rules and certainty if the partnership ends for business or personal reasons

arguments about how to split profits

family or associates interfering with the partners

the important points that typically should be included listed on page 622 of the chapter

without an agreement in a dispute the Partnership Act may resolve a disagreement in a manner with which the partners are not happy.

B. Paul Brennan believes not having an agreement is a risky approach as it can lead to argument and frustration. It may lead to fights or their family may interfere with the partnership.

C. Refer to page 354 of the chapter.



Communication / Forming partnershipsGroup Activity

1. The senior partner could be determined on the basis of who had the most experience, who was the most highly qualified, who had contributed the most capital and some combination of these factors. If all the partners contributed the same capital, had the same level of qualifications and similar levels of experience, then they may choose not to have a senior partner.

2. The profit could be shared equally. Interest could be paid to partners based on their capital contributions if they were different and then the balance of the profit shared equally. Alternatively, the whole profit could be distributed based on the capital contributed by each of the partners. This should be determined up front, before a profit is made, and included in a partnership agreement to avoid disputes later on.

3. This is really up to the group to determine. As most partners would want their level of qualifications, experience, and ability to generate business for the partnership rewarded in some way, this should be discussed at the outset and included in the partnership agreement.

4. Refer to the list in the chapter under the heading “Partnership Agreement”.



Ethical Issues Partnership concerns

FRASER AND MASON

Required:A. Who are the stakeholders in this situation?B. Does Craig appear to be doing anything wrong? Explain your response.C. Are there any ethical issues involved here? If so, identify them.

A. The major stakeholder is Michelle, who appears to be disadvantaged both personally in terms of her relative contribution to the affairs of the partnership, in her return from the partnership, and in terms of the threat that the partnership could decline to the point where it may have to be dissolved. Craig is also a stakeholder, as would be the creditors of the firm if it were to cease to operate because of Craig’s actions.

B. While Craig may not be doing anything legally wrong, he would be fully aware that his capital contribution has been reduced from $60 000 to $20 000 compared to Michelle maintaining her capital contribution at $50 000. Yet according to the partnership agreement Craig is still receiving more of the profit than Michelle. Both contribute equally to the partnership and are rewarded by receiving the same salary. It would be reasonable that they would both share in the profit equally and that interest be paid on the remaining capital balance of the partners.

C. The major ethical issue here is that Craig appears to be taking advantage of Michelle’s lack of confidence with numbers and accounting and the trust that she has put in him.



Using the web Partnerships – some taxing issues

Students should document their experiences in negotiating the web sites and the finding of their research, including such issues as the ease of finding the information and the usefulness of the information.



Financial Reporting Case

David Jones Ltd

Required:1. The David Jones Ltd income statement shows a deduction for income tax expense.

Would this expense item be seen in the income statement of a partnership? Explain your answer.

2. In the statement of changes in equity regarding retained earnings, how is the total profit available appropriated? How does the allocation of the total profit available for appropriation in a partnership differ from that shown for David Jones Ltd? Explain the reasons for any differences.

3. Refer to the balance sheet of David Jones Ltd. How does the ‘equity’ segment differ from that of a typical partnership? Explain.

4. David Jones Ltd is required to produce a cash flow statement and include this in its annual financial report. Would the typical partnership be required to prepare such a statement? Why or why not? Would a typical partnership prepare such a statement? Explain.

1. No. Partnerships are not legal entities and therefore are not taxed. Partnership profits are taxed via the partners who include their share of partnership profits in their personal income tax return.

2. Operating profit is either paid out in dividends, or transferred to reserves. Any balance remaining is left in retained earnings. In a partnership, all the profits for a year are allocated in an agreed ratio to each of the partners.

3. For the company, Equity consists of Share Capital and Reserves. For a partnership, Partners’ Equity consists of partners’ capital balances together with Retained Earnings balances if Method 2 is used. If Method 1 is used, only the Capital balances are shown for each partner, and these reflect the position after drawings accounts are closed off to the partners’ capital accounts.

Since the reserves are profit distributions, these reserves would be included in the retained profits and/or partner’s capital accounts balances depending on the method f accounting for equity used.

4. No, since the partnership would most likely to be a non-reporting entity and not required to comply with accounting standards. In this situation, whether a cash flow statement would be prepared would be at the discretion of the partners. Such a statement could be prepared as a special purpose report if required by a prospective lender, for example. If the partnership is a reporting entity, it would be required to prepare a cash flow statement as it is required to comply with Australian accounting standards.


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