Topic 11tutorial answers.docx

Topic 11tutorial answers.docx

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Topic11tutorialanswers

UNIVERSITYOFADELAIDESCHOOLOFCOMMERCE

MASTEROFCOMMERCE（ACCOUNTING）

ACCTING7019ACCOUNTINGCONCEPTSANDMETHODS（M）

Topic11:

Accountingforpartnershipsandcompanies

TUTORIALQuestionsandProblems

1.Text,page356,Discussionquestions5and6.

5.‘Theaccountingtreatmentofapartner’sdrawingsdifferswhenseparateRetainedEarningsaccountsarekeptforeachpartnerasopposedtonothavingRetainedEarningsaccounts.Choiceofmethodisimmaterial.’Discuss.

▪Ifeachpartner’scapitalaccountisusedtoreflecthisorhershareofprofitsorlosses,andnoretainedearningsaccountiskept（Method1asinthebook）,anywithdrawalsarerecordedbydebitingthedrawingsaccountofthepartnerconcernedandcreditingcashatbank.Thedrawingsaccountisthenclosedtocapitalattheendoftheperiod.UnderMethod2（asinthebook）,whichconsistsofcapitalaccountswithfixedbalancesandretainedearningsaccounts,aftertheinitialcapitalcontributionveryfewentriesaremadetothefixedcapitalaccount.Withdrawalsinanticipationofprofitsaredebitedtothedrawingsaccountwhichiseventuallyclosedofftotheretainedearningsaccount.Onlywithdrawalsofcapitalaredebitedtothecapitalaccount.Method2closelyfollowscompanyaccountingproceduresandisinlinewithrelevantaccountingstandards.

▪Thechoiceofaccountingtreatmentisinfluencedbyhowpartnerswantequityandchangesinequityrecordedanddisclosedand,particularly,whethertheywishtomaintain“fixed”capitalaccountswhichonlyreflectcapitalinvestedunaffectedbyprofitshare,interestoncapital,drawings,andsalaryarrangementsforpartners.However,althoughthereisgreaterdisclosureunderMethod2,thetotalofeachpartner’sequityinterestisultimatelythesameundereithermethod.

6.Astudentofaccountingwasheardtoremark:

‘YoureallydonotneedaProfitDistributionaccountwhenaccountingforprofitdistributioninapartnership.EverythingcanbedonethroughtheProfitandLossSummaryaccount.’Discuss.

▪Thestatementiscorrectfromastrictlyaccountingviewpoint.

▪IfnoDistributionaccountisused,theProfitandLossSummaryaccountcontainsincome/revenues,expenses,andcapitaladjustmentsasamongstthepartnerssuchasdrawings,interestoncapitalanddrawings,andotherarrangementssuchassalaryadjustments.

▪UseofaDistributionaccountclearlyseparatesitemsofoperatingincomeandexpenseswhichappearintheProfitandLossSummaryfromitemswhichconstitutecapitaladjustmentsandprofitsharing.TheDistributionaccountclearlyshowshowprofitsareshared,andprovidesasummaryofadjustmentstopartners’equity.Discussioncouldconcentrateonwhetherthisarrangementisusefulornot.

2.Text,page357,Exercise8.2.

Exercise8.2

Partnershipformation

BECKERANDDICKSON

Required:

Prepareseparatejournalentriestorecordtheinitialinvestmentofeachpartner,assumingassetsarerecordedbythebusinesstoreflecttheirpurchaseprice,andthearrangementisGST-free.

CashatBank

$6200

AccountsReceivable

12800

Inventory

21500

Equipment

48000

AccountsPayable

13400

Becker,Capital

75100

CashatBank

5800

AccountsReceivable

11400

Inventory

18300

Equipment

32000

AccountsPayable

12800

Dickson,Capital

54700

3.Text,page358-359,Exercise8.7.

Exercise8.7

Allocationofprofit

MILLERANDMONTEROSA

Required:

A.Preparethejournalentriestorecordtheallocationofprofitundereachofthefollowingassumptions,usingmethod1procedures:

1.MillerandMonterosaagreetoa60:

40sharingofprofits.

2.Thepartnersagreetoshareprofitsintheratiooftheiroriginalcapitalinvestments.

3.Thepartnersagreetorecognisea$12000peryearsalaryallowancetoMilleranda$8000peryearsalaryallowancetoMonterosa.Eachpartnerisentitledto8%interestonheroriginalinvestment,andanyremainingprofitistobesharedequally.

B.RepeatrequirementA3aboveassumingthepartnershiphasaprofitof$30000forthefirstyear.

A.

1

2

3

Profit&LossSummary

$72000

$72000

$72000

ProfitDistribution

$72000

$72000

$72000

ProfitDistribution

72000

72000

72000

Miller,Capital

43200

39600

38800*

Monterosa,Capital

28800

32400

33200*

1.$72000x0.6=$43200

$72000x0.4=$28800

2.Miller$110000110/200x$72000=$39600

Monterosa$9000090/200x$72000=$32400

$200000$72000

3.

Miller

Monterosa

Total

SalaryAllowance

$12000

$8000

$24000

InterestonCapitals（8%）

8800

7200

16000

20800

15200

36000

Remainder

18000

18000

36000

$38800

$33200

$72000

*Totalprofit（includingsalary,interest）

B.

ProfitandLossSummary

$30000

ProfitDistribution

$30000

ProfitDistribution

30000

Miller,Capital

17800*

Monterosa,Capital

12200*

Miller

Monterosa

Total

SalaryAllowance

$12000

$8000

$24000

InterestonCapitals（8%）

8800

7200

16000

20800

15200

36000

Excessallocation（loss）

（3000）

（3000）

（6000）

*Totalprofit（inc.salary,interest）

$17800

$12200

$30000

4.Text,pages406,Discussionquestions1,8and10.

1.Twopartnersinabusinessarediscussingthepossibilityofincorporatingtheirbusinessasaproprietarycompany.Discusstheadvantagesanddisadvantagesthatthismovewouldpotentiallybringtothem.BrieflydiscusstheimpactthattheCorporationsActwouldhaveontheirdecision.

▪Advantagesofformingaproprietarycompanyarediscussedatthebeginningofthischapter.SpecificbenefitsforaproprietarycompanyoftheCorporationsActwilldependonwhethertheproprietarycompanyisclassifiedaslargeorsmall.Iflarge,thecompanywillhavemoreonerousreportingrequirements,（asprovidedinaccountingstandards）,andtherequirementsforaudit（assuranceservices）ofthecompany’saccountsarealsomoreonerous.

▪Themainadvantagesofincorporatingabusinessasaproprietarycompanyare:

（a）limitedliabilityofshareholders

（b）thecontinuityoflegalexistence;

（c）theeasytransferabilityofshares;

（d）potentialtaxbenefitsifpersonalincometaxratesexceedcompanytaxrates.

▪Disadvantagesare:

（a）companies（includingproprietarycompanies）aregenerallysubjecttogreatergovernmentalregulation;

8.‘Preferencesharescanoffersecurityofdividendsandotheradvantagesoverordinaryshares,andarethereforethebestequitytohaveinacompany.’Doyouagree?

Explain.

Whatisthemotiveforholdingshares?

Ifthemotiveistotakeagreaterriskwiththepotentialofachievingsignificantcapitalgainsinshareprices,andpotentiallyhigherdividendsthanthefixedamountpayabletopreferenceshares,thenordinarysharesarethebetterequitytohold.Arethepreferencesharesparticipatingornot?

Discussthepotentialbenefitsofpreferencesharesbeingcumulativeandparticipating,andthefactthatcertainpreferencesharesmaybemoreakintolong-termdebt,inwhichcasetheyshouldbetreatedasliabilitiesratherthanequity.

10.‘Acompanymusthavemadesufficientprofitsbeforeitcanpaydividendstoitsshareholders.’Discuss.

AsaresultofchangesintheCorporationsActin2010,acompanyisnolongerrequiredtohaveanyprofitsinordertopaydividends.TherequirementsoftheActarethatacompanymustnotpayadividendunless:

（a）thecompany’sassetsexceeditsliabilitiesimmediatelybeforethedividendisdeclaredandtheexcessissufficientforthepaymentofthedividend;and

（b）thepaymentofthedividendisfairandreasonabletothecompany’sshareholdersasawhole;and

（c）thepaymentofthedividenddoesnotmateriallyprejudicethecompany’sabilitytopayitscreditors.Thepaymentofadividendisconsideredtomateriallyprejudicethecompany’sabilitytopayitscreditorsifthecompanybecomesinsolventasaresultofthepayment.

Assetsandliabilitiesin（a）abovearetobecalculatedinaccordancewithaccountingstandardsinforceattherelevanttime.

Inessence,theActnowusesasolvencytestforthepaymentofdividendsasopposedtoa“profits”testinthepast,whichspecifiedthatdividendscouldonlybepaidoutof“profits”.

UndertheapproachadoptedinJune2010,itappearsthatdividendscanbepaidoutofcapitalaswellasoutofretainedearningsorotherreserves,solongas（a）,（b）and（c）abovearesatisfied.

5.Text,page406,Exercise9.1.

Exercise9.1

Issueofsharespayableinfull

ECUADORLTD

Required:

A.Preparejournalentries（ingeneraljournalform）torecordtheissueofsharesasaprivateplacementtoGoodTimesLtdfor$15persharepayableinfull.

B.Preparejournalentries（ingeneraljournalform）torecordtheissueofsharestothepublicat$18persharepayableinfull.

A.

CashatBank1500000

ShareCapital1500000

Privateplacementofshares.

B.

CashTrust1800000

Application1800000

Cashreceivedonapplication.

Application1800000

ShareCapital1800000

Issueofsharesat$18.

CashatBank1800000

CashTrust1800000

Transferofcash.

6.Text,page407,Exercise9.3.

Exercise9.3

Issueofsharesbyinstalments

ARGENTINALTD

Required:

Preparejournalentries（ingeneraljournalformat）torecordtheshareissueuptocollectionofallotmentm