4. On 1 January Year 1, Claire McKay and Sean Cahill went into a business partnership
with equity (capital) of £50,000 and £25,000 respectively.
(a) A Partnership Agreement with the following conditions was drawn up at the
commencement of their business.
• Interest on equity (capital) will be paid at 5% per annum.
• Each partner will take 20% of their equity (capital) invested each year as
drawings.
• Interest on drawings is 2% per annum.
• Claire McKay will be paid a salary of £5,000 per annum.
• Sean Cahill has provided the business with a long term loan of £20,000. He
will receive annual interest of 4%.
• Profits are to be shared in the ratio of equity (capital) invested.
For the year ended 31 December Year 1 the business earned a Profit for the Year
(Net Profit) of £35,000.
From the above information you are required, for year ended 31 December
Year 1, to prepare the:
(i) Partnership Appropriation Account;
(ii) Current Account of each partner.
(b) On 1 January Year 2, Claire and Sean decide to admit Rachael Young as a new
partner subject to the following conditions.
Prior to Rachael’s admission, assets of the existing partnership will be revalued
as outlined below.
Asset Old Value New Value
Property £19,400 £26,000
Machinery £18,000 £14,400
Delivery Vans £12,000 £10,000
Inventory (Stock) £28,000 £20,000
• Professional revaluation costs amount to £2,000.
• Goodwill is estimated at £12,000 and is to be written off against the Equity
(Capital) Accounts of the new partnership.
• Rachael will invest £25,000 as Equity (Capital) in the partnership.
• Rachael will receive 25% share of profits and Claire and Sean will continue to
share the remainder in the same proportions as before.
Calculate for the new partnership:
(i) the surplus/deficit on the revaluation of assets;
(ii) the new profit sharing ratios for all 3 partners;
(iii) the updated equity (capital) balances for Claire McKay, Sean Cahill and
Rachael Young
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