Practice Activity 11.14 Presenting the statement of financial position after the amalgamation of a partnership and a sole proprietorship business to form a partnership
James and Jacob were trading as partners, sharing profits or losses in the ratio 3:1, respectively. John was a sole trader in the same line of business. On 1 January 2018, the two firms agreed to merge to form John, James, Jacob & Co., sharing profits or losses in the ratio – John 4; James 3; Jacob 1. The summarised statements of financial position of the two firms on 31 December 2017 are presented subsequently:
Additional information:
The freehold property was to be revalued at ₦42,000 and the plant at ₦15,000. ₦400 of the inventory of John was obsolete.
Goodwill was agreed at ₦10,000 for James and Jacob and ₦4,800 for John. It was agreed that goodwill was not to appear in the books.
All other assets and liabilities were taken over by the new firm at book values.
Required:
i. Show the capital accounts in the old businesses.
ii. Show the capital accounts in the new business.
iii.Prepare the opening statement of financial position of John, James, Jacob & Co as at 1 January 2018.
See the suggested answer to practice activity 11.14 here.
Suggested answer to practice activity 11.14
i. The capital accounts in the old businesses are shown as follows:
The books of James, Jacob & Co.
Capital accounts
Note:
1. Goodwill:
The Good will for the business of James Jacob & Co. is ₦10,000. This will be apportioned between James and Jacob in the profit or loss ratio of their business, which is 3:1
3:1 means 3+1 = 4
James will have 3/4 * 10,000 = ₦7,500
Jacob will have 1/4 * 10,000 = ₦2,500
2. Revaluation of plant:
As at 31 December 2017, the plant for James Jacob & Co. was ₦18,500. It was revalued to ₦15,000 on 1 January 2018.
This represents a revaluation downward of plant as follows:
₦
Revaluation of Plant:
Carrying cost as at 31 December 2017 18,500
Revalued cost as at 1 January 2018 15,000
Revaluation downwards -3,500
Since James Jacob & Co. is a partnership business, the revaluation downwards should be shared in the profit or loss sharing ratio of 3:1.
3+1 = 4
James 3/4 * 3,500 = ₦2,625
Jacob 1/4 * 3,500 = ₦875
The books of John
Note:
3. Goodwill:
The Goodwill for the business of John is ₦4,800.
4. Revaluation of freehold property:
The freehold property for John was ₦27,000. It was revalued to ₦42,000.
This represents a revaluation upward of freehold property as follows:
5. Obsolete inventory:
The inventory for John as at 31 December 2017 was ₦1,000. However, ₦400 was obsolete.
ii. The capital accounts in the new business are shown as follows:
The books of John, James, Jacob & Co.
Note:
6. Goodwill:
The total Goodwill for the business of John, James, Jacob & Co. is ₦14,800. This will be shared between John, James and Jacob in the profit or loss sharing ratio of the new business, which is 4:3:1.
4:3:1 implies 4+3+1
4+3+1 = 8
John will have 4/8 * 14,800 = ₦7,400
James will have 3/8 * 14,800 = ₦5,550
Jacob will have 1/8 * 14,800 = ₦1,850
iii. The opening statement of financial position as at 1 January 2018 is presented subsequently:
The books of John, James, Jacob & Co.
Note:
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