Ernie, Retief and Tiger are in a partnership and share profits or losses in the ratio 5:4:1. Ernie, Retief and Tiger received salaries of N$120 000, N$100 000 and N$80 000 respectively as well as 10% interest on the opening balance of their capital. Ernie received an entertainment allowance of N$20 000. Sergio is the general manager.
ERNIE, RETIEF AND TIGER PARTNERSHIP
Statement of financial position as at 31 December 20.4
ASSETS N$ N$
Land and building 420 000
Vehicles 100 000
Total non-current assets 520 000
Inventories 10 000
Receivables 50 000
Cash and cash equivalents 110 000
Total current assets 170 000
Total assets 690 000
EQUITY AND LIABILITIES
Capital: 420 000
Ernie 200 000
Retief 120 000
Tiger 100 000
Current account: 58 750
Ernie 45 000
Retief (10 000)
Tiger 23 750
Total equity 478 750
Payables 211 250
Total equity and liabilities 690 000
On 31 December 20.4, Ernie, Retief, and Tiger decide to admit Sergio as a partner on the following conditions:
(i) Admission of Sergio will be effective as from 1 January 20.5
(ii) Sergio’s contribution consists of a vehicle with a carrying amount of N$50 000, inventories N$50 000 and cash N$104 000.
(iii) The partners of the partnership, Ernie, Retief and Tiger, receive the same salaries and interest on capital as previously but Sergio’s salary is reduced to N$40 000, and no bonus or others allowances are allowed in the partnership Ernie, Retief, Tiger and Sergio. Sergio receives 5% interest on capital.
(iv) The abridged statement of income for the year ended 31 December 20.5
Services rendered 794 000
Salary: Sergio (120 000)
Bonus: Sergio (72 000)
Other expenses (60 000)
Profit 542 000
(v) Sergio will receive 1/5 of the profit or losses and the profit sharing ratio of Ernie, Retief and Tiger will remain the same.
On the same day Tiger decides to withdraw from the partnership under the following conditions:
(i) Tiger’s share must be divided amongst Ernie, Retief and Sergio in the ratio 1:1:3.
(ii) Land and buildings are valued at N$780 000 only for the purpose of Tiger’s withdrawal.
(iii) Tiger receives a cheque for his share of the partnership.
(iv) The new partners Ernie, Retief and Sergio’s capital accounts must be in profit sharing ratio by using Sergio’s capital as basis. Surplus capital shall be paid back to partners and shortfall shall be paid in.
YOU ARE REQUIRED TO:
(a) Calculate the profit sharing ratio of Ernie, Retief, Tiger and Sergio after the admission of Sergio. (5 marks)
(b) Calculate and journalise the adjustments to correct the profit distribution in the partnership Ernie, Retief, Tiger and Sergio. (10 marks)
(c) Prepare the capital account of the partners in column form. (20 marks)
(d) Prepare the statement of financial position of Ernie, Retief and Sergio as at 31 December 20.5. (10 marks)