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9706 · 3.1.2

Partnerships: Changes and Dissolution — practice questions

Practice and worked examples for 9706 Partnerships: Changes and Dissolution. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A and B are partners sharing profits 3:2. Goodwill is valued at $60,000 on the admission of C, who is to receive a 1/5 share of profits. C introduces capital of $40,000 cash. Assume A and B's share of the remaining profit is in their old ratio.

Required: Prepare the journal entries to record the admission of C, including the treatment of goodwill using the memorandum revaluation method.

Show solution outline

Step 1: Calculate the new Profit Sharing Ratio (PSR). C's share = 1/5. Remaining share for A and B = 1 - 1/5 = 4/5. A's new share = (4/5) of (3/5) = 12/25. B's new share = (4/5) of (2/5) = 8/25. C's new share = 1/5 = 5/25. New PSR (A:B:C) = 12:8:5.

Step 2: Journal entry to raise and credit goodwill to old partners (Old PSR 3:2). A's share: $60,000 * (3/5) = $36,000 B's share: $60,000 * (2/5) = $24,000

DateDetailsDr ($)Cr ($)
Goodwill60,000
------
    To A Capital36,000
    To B Capital24,000
To record goodwill on admission

Step 3: Journal entry to write off goodwill against all partners (New PSR 12:8:5). A's share: $60,000 * (12/25) = $28,800 B's share: $60,000 * (8/25) = $19,200 C's share: $60,000 * (5/25) = $12,000

DateDetailsDr ($)Cr ($)
A Capital28,800
------
B Capital19,200
C Capital12,000
    To Goodwill60,000
To write off goodwill

Step 4: Journal entry for capital introduced by C.

DateDetailsDr ($)Cr ($)
Bank40,000
------
    To C Capital40,000
To record capital from new partner

Net effect on Capital Accounts for Goodwill:

  • A: $36,000 (Cr) - $28,800 (Dr) = $7,200 Net Credit
  • B: $24,000 (Cr) - $19,200 (Dr) = $4,800 Net Credit
  • C: $0 - $12,000 (Dr) = $12,000 Net Debit (This is C's payment for goodwill)

Worked example 2

X, Y, and Z are partners sharing profits and losses in the ratio 2:2:1. They decide to dissolve the partnership on 31 December 20X3. Their statement of financial position on that date was as follows:

Statement of Financial Position as at 31 December 20X3

  • Assets: Non-current assets: $80,000; Inventory: $35,000; Trade Receivables: $20,000; Bank: $5,000. Total Assets: $140,000
  • Equity and Liabilities: Capital X: $50,000; Capital Y: $45,000; Capital Z: $20,000; Trade Payables: $25,000. Total Equity and Liabilities: $140,000

Dissolution Details:

  1. Non-current assets were sold for $72,000.
  2. Inventory was sold for $30,000.
  3. Trade receivables of $18,000 were collected; the rest were written off.
  4. Trade payables were paid in full.
  5. Dissolution expenses amounted to $3,000.

Required: Prepare the Realisation Account, Partners' Capital Accounts, and the Bank Account to close the books.

Show solution outline

1. Realisation Account This account is used to gather all assets and liabilities to be realised and to calculate the final profit or loss on dissolution. Realisation AccountDetails$Details$Non-current assets80,000Trade payables25,000Inventory35,000Bank (assets realised)120,000Trade receivables20,000Loss on realisation (2:2:1):Bank (payables paid)25,000X Capital7,200Bank (expenses)3,000Y Capital7,200Z Capital3,600163,000‾‾163,000‾‾\text{Realisation Account} \\ \begin{array}{l|r|l|r} \hline \textbf{Details} & \textbf{\text{\textdollar}} & \textbf{Details} & \textbf{\text{\textdollar}} \\ \hline \text{Non-current assets} & 80,000 & \text{Trade payables} & 25,000 \\ \text{Inventory} & 35,000 & \text{Bank (assets realised)} & 120,000 \\ \text{Trade receivables} & 20,000 & \text{Loss on realisation (2:2:1):} & \\ \text{Bank (payables paid)} & 25,000 & \quad \text{X Capital} & 7,200 \\ \text{Bank (expenses)} & 3,000 & \quad \text{Y Capital} & 7,200 \\ & & \quad \text{Z Capital} & 3,600 \\ \hline & \underline{\underline{163,000}} & & \underline{\underline{163,000}} \\ \end{array} Note: Assets realised = $72,000 + $30,000 + $18,000 = $120,000.

2. Partners' Capital Accounts This shows the distribution of the realisation loss and the final settlement to partners. Partners’ Capital AccountsDetailsX ($)Y ($)Z ($)DetailsX ($)Y ($)Z ($)Realisation (Loss)7,2007,2003,600Balance b/d50,00045,00020,000Bank (Final pay)42,80037,80016,40050,000‾‾45,000‾‾20,000‾‾50,000‾‾45,000‾‾20,000‾‾\text{Partners' Capital Accounts} \\ \begin{array}{l|r|r|r|l|r|r|r} \hline \text{Details} & \textbf{X (\text{\textdollar})} & \textbf{Y (\text{\textdollar})} & \textbf{Z (\text{\textdollar})} & \text{Details} & \textbf{X (\text{\textdollar})} & \textbf{Y (\text{\textdollar})} & \textbf{Z (\text{\textdollar})} \\ \hline \text{Realisation (Loss)} & 7,200 & 7,200 & 3,600 & \text{Balance b/d} & 50,000 & 45,000 & 20,000 \\ \text{Bank (Final pay)} & 42,800 & 37,800 & 16,400 & & & & \\ \hline & \underline{\underline{50,000}} & \underline{\underline{45,000}} & \underline{\underline{20,000}} & & \underline{\underline{50,000}} & \underline{\underline{45,000}} & \underline{\underline{20,000}} \\ \end{array}

3. Bank Account This account confirms that all cash has been correctly received and paid out. It must balance to zero. Bank AccountDetails$Details$Balance b/d5,000Realisation (payables)25,000Realisation (assets)120,000Realisation (expenses)3,000Capital X (final pay)42,800Capital Y (final pay)37,800Capital Z (final pay)16,400125,000‾‾125,000‾‾\text{Bank Account} \\ \begin{array}{l|r|l|r} \hline \textbf{Details} & \textbf{\text{\textdollar}} & \textbf{Details} & \textbf{\text{\textdollar}} \\ \hline \text{Balance b/d} & 5,000 & \text{Realisation (payables)} & 25,000 \\ \text{Realisation (assets)} & 120,000 & \text{Realisation (expenses)} & 3,000 \\ & & \text{Capital X (final pay)} & 42,800 \\ & & \text{Capital Y (final pay)} & 37,800 \\ & & \text{Capital Z (final pay)} & 16,400 \\ \hline & \underline{\underline{125,000}} & & \underline{\underline{125,000}} \\ \end{array}

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