ACT 3121 Intermediate Financial Accounting 1 G 2

1
ACT 3121Intermediate Financial Accounting 1G - 2

• Lecture 4 (21st Nov)
• 1 hr

2
Revaluation

• Revaluation need to be done BEFORE new partner
  admitted into the partnership to avoid an
  inequitable state of affairs (some get less and
  some get more than what they should)
• Same basic rule for retirement or deceased partner

3
Extreme case

• Brown and White have been equal partners for many
  years. They decided to admit Reddish. Their
  Balance Sheet immediately before admitting
  Reddish was as follows
• Balance Sheet Brown and White
• Capital Accounts Premises 2000
• Brown 3000 Equipment 800
• White 3200 Stock 4250
• 6200 Debtors 3250
• Creditors 4300 Bank 200
• 10500 10500

4

• Reddish is to bring in 3000 as capital and
  entitled to one-fifth share of profits, and Brown
  and White are to take two-fifth each. Suppose
  that
• No revaluation of assets took place
• The new partnership dissolved immediately after
  admitting Reddish
• On dissolution, all assets except premises
  realised their book value. The premises were sold
  for 12000 (profit of 10000).

5
Discussion

• After dissolution, each partner will get
• Capital Profit
• Brown 3000 4000 (2/5)
• White 3200 4000 (2/5)
• Reddish 3000 2000 (1/5)
• OR revaluation before admission
• White - 3000 (cap.) 5000 (premises rev.)
• Brown - 3200 (cap.) 5000 (premises rev.)
• Reddish - 3000 (cap.) 0!!!

6
Accounting for revaluation

• Accounts involved Revaluation a/c, revalued
  assets a/c and partners capital a/c
• Increase in value
• Dt. Asset a/c , Cr. Revaluation a/c
• Decrease in value
• Cr. Asset a/c, Dt. Revaluation a/c
• Final If profit (Revaluation a/c credit
  balance)
• Dt. Revaluation a/c, Cr. Capital a/c
• If loss (Revaluation a/c debit
  balance)
• Dt. Capital a/c, Cr. Revaluation a/c
• Use profit sharing ratio

7
Goodwill and change in ratio

• Change in ratio may be due to change in
  contribution of partners in terms of skills or
  efforts
• Reduce ill health, old age, busy elsewhere
• Increase increase in skills, education, time
  contributed
• Treatment (a) open goodwill a/c
• (b) adjustment made without
• goodwill a/c

8
Goodwill and admission of new partner

• New partner will pay cash (in addition to
  capital) for the share of future goodwill and
  recompense the old partners for giving the rights
  to the new partner.
• 3 ways of paying for that premium
• Payment made privately to old partners
• - no entries needed

9

• Cash paid into the business but will then paid
  out immediately
• Cash paid into the business and retained for the
  use of the business.
• Goodwill should be valued before admitting new
  partner and should be recorded in old partners
  capital a/c.
• However, goodwill should be eliminated
  immediately after admitting the new partner.

10

• No Goodwill a/c to be opened, treatment should be
  just like changes in ratio without opening
  Goodwill a/c.
• Note
• if there existed in the Balance Sheet of the
  partnership Goodwill a/c at full value, thus old
  partners should have already been credited with
  goodwill. No adjustment needed.
• Premium is not necessarily paid.

11
Goodwill and retirement of partner

• Equal treatment for retirement and death
• Retiring partner has interest in the firm that
  need to be accounted for
• Share of profits
• Revaluation of assets
• Goodwill
• Calculation of goodwill and revaluation is done
  solely to ensure that the proper amount which the
  business owes to the retiring partner is given
  back to him

12

• Current a/c and all associated a/c will be
  credited to Capital a/c.
• Method of payment
• Immediately
• Dt. Partners Capital a/c , Cr. Cash / Assets
  a/c
• By installment ? convert to Loan a/c
• Dt. Partners Capital a/c , Cr. Partners Loan
  a/c
• By payment of annuity (fixed amount paid
  regularly, usually annually)
• Dt. Partners Capital a/c , Cr. Annuity Suspense
  a/c
• ? annually allowed for interest for remaining
• amount (charge in P L) and annual payment