PARTNERSHIP ACCOUNTS AND COMPANY ACCOUNTS
IAS 22 Business Combinations) and IAS 38 (Intangible Assets)
These are the two main international standards relating to goodwill. Their requirements are broadly similar to those of FRS 10.
Learning outcomes
You should now have learnt:
1 That limited companies exist because of the disadvantages and constraints arising from partnerships.
2 That a fully paid-up shareholder’s liability is limited to the shares he or she holds in the company. Shareholders cannot then be asked to pay any other company debt from their private resources.
3 The difference between public and private companies.
4 That there are far more private companies than public companies.
5 The difference between a PLC and a company that is not a PLC.
6 That a limited company has a ‘separate legal entity’ from that of its members.
7 The difference between ordinary shares and preference shares.
8 How dividends are calculated.
9 The difference between shares and debentures.
10 The contents of and purpose of a company’s appropriation account.
11 That directors’ remuneration is charged to the main part of the profit and loss account.
12 That debenture interest is charged to the main part of the profit and loss account.
13 That transfers to reserves, dividends and taxation are charged to the appropriation part of the profit and loss account.
14 That any balance of profits unappropriated at the end of a period is carried forward as a balance to the next period.
15 How to prepare company profit and loss accounts for internal purposes.
16 How to prepare company balance sheets for internal purposes.
17 How goodwill is treated in company financial statements.
Answers to activities
45.1 Partnerships were not suitable for such businesses because:
l normally they cannot have more than twenty partners, not counting limited partners.
l if a partnership business fails, partners could lose part, or all, of their private assets to pay the debts of the business.
Limited companies do not have restrictions on the number of owners. Nor do the owners of limited companies generally run the risk of losing everything they own if the company fails.
45.2 There may be any number of explanations, including:
l they may not wish a wide ownership base l they may feel the costs of doing so are prohibitive
l they may feel there would not be sufficient demand for the shares to make it worthwhile l the directors may be concerned that it would make it easier for the company to be taken over l they may wish to wait until the Stock Market is at a higher level, i.e. they wish to wait until
they can maximise the amount they can sell the shares for when they first offer them for sale on the Stock Market
l the Stock Market may be very volatile, making choosing a price at which to sell the shares very difficult – if the company gets it wrong, they may not sell all the shares they wanted to sell or they may not receive as much for each share as they could have done had they waited for the Stock Market to stabilise.
45.3 There is less risk for the investor. The annual preference dividend is known and it will be paid before any funds left over are used to pay a dividend on the ordinary shares. Even when an ordi- nary dividend is paid, it is not known in advance how much this will be, as it depends on how profitable the business has been over the financial period. It could be more than the preference dividend (which is normally the case) or it could be less. Although the preference dividend will often be at a lower rate than an ordinary dividend (i.e. a preference shareholder will receive less of a dividend for the same investment as an ordinary shareholder) the reduced risk results in some people preferring to purchase preference shares.
45.4 The lender may require it or the company may offer secured debenture status in order to attract funds at a more favourable rate of interest.
Multiple choice questions: Set 5
Now attempt Set 5 of multiple choice questions. (Answers to all the multiple choice questions are given in Appendix 2 at the end of this book.)
Each of these multiple choice questions has four suggested answers, (A), (B), (C) and (D). You should read each question and then decide which choice is best, either (A) or (B) or (C) or (D).
Write down your answers on a separate piece of paper. You will then be able to redo the set of
questions later without having to try to ignore your answers. ‘
MC81 Given opening debtors of £11,500, Sales £48,000 and receipts from debtors £45,000, the closing debtors should total
(A) £8,500 (B) £14,500 (C) £83,500 (D) £18,500
MC82 In a Sales Ledger Control Account the Bad Debts written off should be shown in the account
(A) As a debit (B) As a credit
(C) Both as a debit and as a credit (D) As a balance carried down
MC83 If cost price is £90 and selling price is £120, then (i) Mark-up is 25 per cent
(ii) Margin is 331/3per cent (iii) Margin is 25 per cent (iv) Mark-up is 331/3per cent (A) (i) and (ii)
(B) (i) and (iii) (C) (iii) and (iv) (D) (ii) and (iv)
MC84 Given cost of goods sold £16,000 and margin of 20 per cent, then sales figure is (A) £20,160
(B) £13,600 (C) £21,000 (D) £20,000
MC85 If opening stock is £3,000, closing stock £5,000, sales £40,000 and margin 20 per cent, then stockturn is
(A) 8 times (B) 71/2times (C) 5 times (D) 6 times
MC86 If creditors at 1 January 20X3 were £2,500, creditors at 31 December 20X3 £4,200 and pay- ments to creditors £32,000, then purchases for 20X3 are
(A) £30,300 (B) £33,700 (C) £31,600 (D) £38,700
MC87 Given opening capital of £16,500, closing capital as £11,350 and drawings were £3,300, then
(A) Loss for the year was £1,850 (B) Profit for the year was £1,850 (C) Loss for the year was £8,450 (D) Profit for the year was £8,450
‘
MC88 A Receipts and Payments Account is one (A) Which is accompanied by a balance sheet (B) In which the profit is calculated
(C) In which the opening and closing cash balances are shown (D) In which the surplus of income over expenditure is calculated
MC89 Prime cost includes (i) Direct labour
(ii) Factory overhead expenses (iii) Raw materials consumed (iv) Direct expenses
(A) (i), (ii) and (iii) (B) (ii), (iii) and (iv) (C) (i), (iii) and (iv) (D) (i), (ii) and (iv)
MC90 Which of the following should be charged in the Profit and Loss Account?
(A) Office rent (B) Work in progress (C) Direct materials
(D) Carriage on raw materials
MC91 In the Manufacturing Account is calculated (A) The production costs paid in the year
(B) The total cost of goods produced
(C) The production cost of goods completed in the period (D) The gross profit on goods sold
MC92 The recommended method of departmental accounts is (A) To allocate expenses in proportion to sales
(B) To charge against each department its controllable costs (C) To allocate expenses in proportion to purchases
(D) To charge against each department its uncontrollable costs
MC93 Where there is no partnership agreement then profits and losses (A) Must be shared in same proportion as capitals
(B) Must be shared equally
(C) Must be shared equally after adjusting for interest on capital (D) None of these
MC94 If it is required to maintain fixed capitals then the partners’ shares of profits must be (A) Debited to capital accounts
(B) Credited to capital accounts
(C) Debited to partners’ current accounts (D) Credited to partners’ current accounts
MC95 You are to buy an existing business which has assets valued at buildings £50,000, Motor vehicles £15,000, Fixtures £5,000 and Stock £40,000. You are to pay £140,000 for the business. This means that
(A) You are paying £40,000 for Goodwill
(B) Buildings are costing you £30,000 more than their value ‘
Review questions
45.1 Flyer Ltd started in business on 1 April 20X4. Its issued share capital was 200,000 ordinary shares of £1 each and 100,000 5 per cent preference shares of £1 each. The following information is available:
l Its net profits for the first two years of business were: 20X4/5 £90,200; 20X5/6 £84,600.
l Preference dividends were paid for each of these years, whilst ordinary dividends were pro- posed as 20X4/5 8 per cent and 20X5/6 6 per cent.
l Corporation tax, based on the profits of these two years, was: 20X4/5 £18,000; 20X5/6 £16,000.
l Transfers to general reserve took place: 20X4/5 £20,000; 20X5/6 £15,000.
(C) You are paying £30,000 for Goodwill (D) You have made an arithmetical mistake
MC96 Assets can be revalued in a partnership change because (A) The law insists upon it
(B) It helps prevent injustice to some partners (C) Inflation affects all values
(D) The depreciation charged on them needs to be reversed
MC97 Any loss on revaluation is
(A) Credited to old partners in old profit-sharing ratios (B) Credited to new partners in new profit-sharing ratios (C) Debited to old partners in old profit-sharing ratios (D) Debited to new partners in new profit-sharing ratios
MC98 In a limited company which of the following are shown in the Appropriation Account?
(i) Debenture interest (ii) Proposed dividend (iii) Transfers to reserves (iv) Directors’ remuneration (A) (i) and (ii)
(B) (ii) and (iii) (C) (i) and (iv) (D) (ii) and (iv)
MC99 The Issued Capital of a company is (A) Always the same as the Authorised Capital (B) The same as Preference Share Capital (C) Equal to the reserves of the company (D) None of the above
MC100 A company wishes to pay out all available profits as dividends. Net profit is £26,600. There are 20,000 8% Preference shares of £1 each, and 50,000 Ordinary shares of £1 each. £5,000 is to be transferred to General Reserve. What Ordinary dividends are to be paid, in percentage terms?
(A) 20 per cent (B) 40 per cent (C) 10 per cent (D) 60 per cent
‘
Draw up profit and loss appropriation accounts for each of the years ended 31 March 20X5 and 20X6.
45.2 Trainsign Ltd has an authorised capital of £500,000, consisting of 350,000 ordinary shares of
£1 each and 150,000 7 per cent preference shares of £1 each. Of these, 260,000 ordinary shares and 90,000 preference shares had been issued when the company first started trading. The following information is available:
l The company has a financial year end of 31 December. The first three years of business resulted in net profit as follows: 20X2 £62,400; 20X3 £81,900; 20X4 £114,190.
l Dividends were paid each year on the preference shares. Dividends on the ordinary shares were proposed as follows: 20X2 6 per cent; 20X3 8 per cent; 20X4 12 per cent.
l Corporation tax, based on the profits of each year, was: 20X2 £12,000; 20X3 £16,000; 20X4
£22,000.
l Transfers to reserves were: general reserve 20X2 £10,000, 20X3 £18,000, and foreign exchange reserve 20X4 £15,000.
You are to show the profit and loss appropriation accounts for each of the years 20X2, 20X3 and 20X4.
45.3 A balance sheet is to be drawn up from the following information as at 30 September 20X2:
£
Issued share capital: ordinary shares £1 each 200,000
Authorised share capital: ordinary shares of £1 each 500,000
6 per cent debentures (repayable 30 September 20X6) 40,000
Buildings at cost 330,000
Motor vehicles at cost 74,000
Fixtures at cost 9,200
Profit and loss account 12,000
Fixed assets replacement reserve 30,000
Stock 21,400
Debtors 10,300
General reserve 50,000
Creditors 13,700
Proposed dividend 20,000
Depreciation to date: Buildings 40,000
Motor vehicles 41,000
Fixtures 5,100
Bank (balancing figure for you to ascertain) ?
45.4 The following balances remained in the ledger of OK Ltd after preparation of the profit and loss account for the year ended 31 March 20X6
£000s
Stock 52
Debtors 24
Ordinary share capital 100
8% preference share capital 50
Creditors 37
Balance at bank 14
General reserve 30
Profit and loss account balance 20X5 11 Net profit for the year to 31 March 20X6 29
Fixed assets at cost, less depreciation 167 ‘
The directors propose:
(i) a transfer to general reserve of £10,000;
(ii) payment of the preference dividend and a 12% dividend on the ordinary shares.
Required:
(a) Prepare a profit and loss appropriation account for the year ended 31 March 20X6.
(b) Prepare a balance sheet as at 31 March 20X6, showing clearly the ordinary shareholders’
equity, the total shareholders’ funds and the working capital.
45.5A Developing Ltd has an authorised capital of 50,000, 10% preference shares of £1 each and 200,000 ordinary shares of 50p each. After preparation of the profit and loss account for 20X4, the following balances remained in the ledger
£000s Share capital: fully paid-up:
Preference 30
Ordinary 80
Debentures 20
Share premium account 4
General reserve 7
Unappropriated profit 20X3 3
Net profit for 20X4 27
Fixed assets 140
Current assets 50
Creditors 19
The directors recommend:
(i) that £10,000 be transferred to general reserve, (ii) payment of the preference dividend,
(iii) an ordinary dividend of 15%.
Required:
Prepare the appropriation account for 20X4 and a balance sheet as at 31 December 20X4.
45.6 Select Ltd is registered with an authorised capital of 300,000 ordinary shares of £1. The fol- lowing trial balance was extracted from the books of the company on 31 March 20X1, after the preparation of the trading account:
Dr Cr
£ £
Ordinary share capital, fully paid 200,000
Land and buildings at cost 170,000
Sundry debtors 38,300
Furniture and fittings at cost 80,000
VAT 3,800
Sundry Creditors 25,000
Stock at 31 March 20X0 42,000
Bank 12,000
Trading account: gross profit 98,050
Office salaries and expenses 25,000
Accumulated provision for depreciation on furniture and fittings 32,000
Share premium account 20,000
Advertising and selling expenses 5,000
Bad debts 250
Provision for doubtful debts 600
Profit and loss account 12,000
Directors’ fees 11,300
387,650 387,650
‘
Required:
Prepare the profit and loss account of the company for the year ending 31 March 20X1, and bal- ance sheet as at that date, after taking into account the following adjustments:
(i) The provision for doubtful debtors is to be adjusted to £700.
(ii) Depreciation is to be provided in respect of furniture and fittings at 10% per annum on cost.
(iii) £25,000 is to be transferred from profit and loss to general reserve.
(iv) Provide for a proposed dividend on share capital at 10%.
Present the balance sheet in a form which shows the shareholders’ equity and the working capital.
45.7A
£000
Fixed assets, at cost 160
Stock 40
Bank overdraft 30
Ordinary share capital 100
Creditors 45
Unappropriated profit 22
Accumulated depreciation 50
Debtors 47
Required:
(a) From the above information, prepare the balance sheet of Budgie Limited indicating clearly the shareholders’ funds and working capital.
(b) Comment on the capital position disclosed by the balance sheet you have prepared.
45.8 The trial balance extracted from the books of Tailor Times Ltd at 31 December 20X3 was as follows:
£ £
Share capital 200,000
Profit and loss account 31 December 20X2 27,500
Freehold premises at cost 271,000
Provision for depreciation on freehold premises
at 31 December 20X2 54,000
Machinery at cost 84,000
Provision for depreciation on machinery account as
at 31 December 20X2 21,000
Purchases 563,700
Sales 925,300
General expenses 14,600
Wages and salaries 179,400
Business rates 6,100
Electricity 4,800
Bad debts 1,400
Provision for doubtful debts at 31 December 20X2 1,200
Debtors 74,200
Creditors 68,300
Stock in trade 31 December 20X2 81,900
Bank balance 16,200
1,297,300 1,297,300 ‘
You are given the following additional information:
(i) The authorised and issued share capital is divided into 400,000 ordinary shares of 50p each.
(ii) Stock in trade at 31 December 20X3, £94,300.
(iii) Wages and salaries due at 31 December 20X3 amounted to £1,800.
(iv) Business rates paid in advance at 31 December 20X3 amounted to £700.
(v) A dividend of £20,000 is proposed for 20X3.
(vi) The provision for doubtful debts is to be increased to £1,500.
(vii) A depreciation charge is to be made on freehold premises of £25,000 and machinery at the rate of 20 per cent per annum on cost.
Required:
A trading and profit and loss account for 20X3 and a balance sheet as at 31 December 20X3.
45.9A The following is the trial balance of Tully Ltd as on 31 December 20X5:
Dr Cr
£ £
Share capital issued: ordinary shares 20p 375,000
Debtors and creditors 169,600 74,900
Stock 31 December 20X4 81,300
Bank 17,900
Premises at cost 265,000
Machinery at cost 109,100
Motor vehicles at cost 34,700
Depreciation provisions at 31.12.20X4:
Premises 60,000
Machinery 41,400
Motor vehicles 18,200
Sales 975,600
Purchases 623,800
Motor expenses 4,300
Repairs to machinery 3,600
Sundry expenses 2,900
Wages and salaries 241,500
Directors’ remuneration 82,600
Profit and loss account as at 31.12.20X4 31,200
General reserve 60,000
1,636,300 1,636,300 Given the following information, you are to draw up a trading and profit and loss account for the year ending 31 December 20X5, and a balance sheet as at that date:
(i) Authorised share capital: £500,000 in ordinary shares of 20p.
(ii) Stock at 31 December 20X5 £102,400.
(iii) Motor expenses owing £280.
(iv) Ordinary dividend proposed of 5 per cent.
(v) Transfer £7,500 to general reserve.
(vi) Provide for depreciation: motor vehicles and machinery 20% on cost; premises 5% on cost.
‘
45.10 You are to draw up a trading and profit and loss account for the year ending 31 December 20X2, and a balance sheet as at that date from the following trial balance and details of Partido Ltd:
Dr Cr
£ £
Bank 8,100
Debtors 321,219
Creditors 237,516
Stock at 31 December 20X1 290,114
Buildings at cost 800,000
Equipment at cost 320,000
Profit and loss account as at 31 December 20X1 136,204
General reserve 120,000
Foreign exchange reserve 20,000
Authorised and issued share capital 800,000
Purchases 810,613
Sales 1,606,086
Carriage inwards 2,390
Carriage outwards 13,410
Salaries 384,500
Business rates 14,800
Office expenses 9,100
Sundry expenses 2,360
Provisions for depreciation at 31 December 20X1:
Buildings 80,000
Equipment 96,000
Directors’ remuneration 119,200
3,095,806 3,095,806 Notes at 31 December 20X2:
(i) Stock £317,426.
(ii) Business rates owing £1,700; Office expenses owing £245.
(iii) Dividend of 15 per cent proposed.
(iv) Transfers to reserves: General £70,000; Foreign exchange £30,000.
(v) Depreciation on cost: Buildings 5 per cent; Equipment 15 per cent. ‘
45.11A Here is the trial balance of Falta Ltd as at 30 April 20X5:
Dr Cr
£ £
Share capital: authorised and issued 200,000
Stock as at 30 April 20X4 102,994
Debtors 227,219
Creditors 54,818
8% debentures 40,000
Fixed assets replacement reserve 30,000
General reserve 15,000
Profit and loss account as at 30 April 20X4 12,411
Debenture interest 1,600
Equipment at cost 225,000
Motor vehicles at cost 57,200
Bank 4,973
Cash 62
Sales 880,426
Purchases 419,211
Returns inwards 18,400
Carriage inwards 1,452
Wages and salaries 123,289
Rent, business rates and insurance 16,240
Discounts allowed 3,415
Directors’ remuneration 82,400
Provision for depreciation at 30 April 20X4:
Equipment 32,600
Motor vehicles 18,200
1,283,455 1,283,455 Given the following information as at 30 April 20X5, draw up a profit and loss account and balance sheet for the year to that date:
(i) Stock £111,317.
(ii) The share capital consisted of 300,000 ordinary shares of 50p each and 50,000 12 per cent preference shares of £1 each. The dividend on the preference shares was proposed to be paid as well as a dividend of 18 per cent on the ordinary shares.
(iii) Accrued: rent £802; Directors’ remuneration £6,000.
(iv) Debenture interest 1/2year’s interest owing.
(v) Depreciation on cost: Equipment 20 per cent; Motor vehicles 25 per cent.
(vi) Transfers to reserves: General reserve £5,000; Fixed assets replacement reserve £10,000.
45.12 Burden PLC has an authorised capital of 500,000 ordinary shares of £0.50 each.
(a) At the end of its financial year, 31 May 20X9, the following balances appeared in the company’s books:
£
Issued capital: 400,000 shares fully paid 200,000
Freehold land and buildings at cost 320,000
Stock in trade 17,800
10% debentures 30,000
Trade debtors 6,840
Trade creditors 8,500
Expenses prepaid 760
Share premium 25,000
General reserve 20,000
Expenses outstanding 430
Profit and loss account balance (1 June 20X8) 36,200
Bank overdrawn 3,700
Fixtures, fittings and equipment at cost 54,000
provision for depreciation 17,500
‘
The company’s trading and profit and loss accounts had been prepared and revealed a net profit of £58,070. However, this figure and certain balances shown above needed adjustment in view of the following details which had not been recorded in the company’s books.
(i) It appeared that a trade debtor who owed £300 would not be able to pay. It was decided to write his account off as a bad debt.
(ii) An examination of the company’s stock on 31 May 20X9 revealed that some items shown in the accounts at a cost of £1,800 had deteriorated and had a resale value of only £1,100.
(iii) At the end of the financial year some equipment which had cost £3,600 and which had a net book value of £800 had been sold for £1,300. A cheque for this amount had been received on 31 May 20X9.
Required:
1 A statement which shows the changes which should be made to the net profit of £58,070 in view of these unrecorded details.
(b) The directors proposed to pay a final dividend of 10% and to transfer £50,000 to general reserve on 31 May 20X9.
Required:
For Burden PLC (taking account of allthe available information)
2 The profit and loss appropriation account for the year ended 31 May 20X9.
3 Two extractsfrom the company’s balance sheet as at 31 May 20X9, showing in detail:
(i) the current assets, current liabilities and working capital (ii) the items which make up the shareholders’ funds.
(c) The directors are concerned about the company’s liquidity position.
Required:
4 THREEtransactions which will increase the company’s working capital. State which balance sheet items will change as a result of each transaction and whether the item will increase or decrease in value.
(Southern Examining Group: GCSE)
45.13A The accountant of Fiddles PLC has begun preparing financial statements but the work is not yet complete. At this stage the items included in the trial balance are as follows:
£000
Land 100
Buildings 120
Plant and machinery 170
Depreciation provision 120
Share capital 100
Profit and loss balance brought forward 200
Debtors 200
Creditors 110
Stock 190
Operating profit 80
Debentures (16%) 180
Provision for doubtful debts 3
Bank balance (asset) 12
Suspense 1
Notes (i) to (vii) below are to be taken into account:
(i) The debtors control account figure, which is used in the trial balance, does not agree with the total of the debtors ledger. A contra of £5,000 has been entered correctly in the individual ledger accounts but has been entered on the wrong side of both control accounts.
A batch total of sales of £12,345 had been entered in the double entry system as £13,345,
although individual ledger account entries for these sales were correct. The balance of £4,000 ‘