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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