FAC1601 Introduction to the preparation of Statement of profit or loss and other comprehensive income

Financial Statements ABC TRADERS (name of entity)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPRH INCOME FOR THE YEAR ENDED 28 Feb 2013
Types of statements (description and date)
1. Financial Position FP (shows financial standing at Specific
date) R Paul & Shark are in partnership
2. Profit or loss and other comprh. income PL & OCI EXAMPLE trading as Paul&Shark Traders.
Revenue (Sales – settl disc granted) x Following were extracted on 31
(difference between income and expenditure for a
Cost of Sales (x) Dec 2013
specific period)
Gross Profit x
3. Change in equity CiE (how equity change during
Other income x
financial period) 1 Sales R668 800
profit on sales x Cost of Sales R236 100
4. Cash flows CF( how cash was generated and used
Distribution, admin and other expenses (x) Settlement Disc granted R 23 100
during the year) Allowance for SDG R 15 000
credit losses x
5. Notes (include accounting policies, information and
bank charges x
additional explanatory information) • Prepare trading section in PL & OCI
salaries and wages x
Financial Instrument: Any contract that gives rise to a depreciation (x)
Finance cost x 2 Investment at cost R100 000
financial asset for one entity and a financial liability or Rental income R 22 000
equity for another entity. interest on long term loan x other info:
Profit for the year x Investment consists of 12 000 shares in
Other comprehensive income for the year x Puma Ltd. Purchased for R70 000.
Financial asset held for:
Total Comprehensive income for the year x Market value: R77 500 (held for trading
1. Trading at fair value though profit or loss purposes)
e.g. shares held for speculative purposes (listed investment)
2. At fair value through other comprehensive income
Salaries & Wages R214 900 3 5 000 shares in Zoo Ltd, purchased for
Drawings R10 500 R30 000
e.g. investment in equity instrument (unlisted investment) Other info: * Calculate the amount to be
Each partner is entitled to R5 000 salary per month. Only R80 000 has bee disclosed as other income in PL & OCI
Establishment and financial statements of partnership paid to both partner as salaries, this is incl. in the salaries and wages
figure above.
Debtors control R20 000 4
Allow. For credit loss R 1 000
* Should comply with requirements of IFRS * Calculate the amount to be disclosed as distribution, admin and other
Other info:
* Partnership = accounting entity, not legal entity expenses in PL & OCI
Debtor was declared insolvent, on this
* Does not pay tax, partners pay tax individually in personal
capacity
Land & buildings R800 000 5 date debtor had recorded balance of
Vehicles at cost R168 000 R5 000. amount incl. in the R20 000
Statement of changes in equity: Equipment at cost R 48 000 above (was not written off). On 30 Dec
• Salaries Accum. Depreciation: Vehicles (01 Jan 13) R 27 900 the business received 20% of the
Accum. Depreciation: Equipment (01 Jan 13) R 15 500 amount. This was not recorded in the
• Bonuses & commissions to partners
Depreciation – 31 Oct 13 R 1 500 cash receipt journal. After this
• Interest on capital and current accounts Paul&Shark decided to increase credit
Other info:
• Drawings * On 30 June 13 new vehicle was purchased = R68 000 losses to R1 500
* On 31 Oct 13 equipm of cost price R15 000 was sold for R1 000. at this * Calculate the amount to be disclosed
Under OTHER INCOME (PL & OCI) date the accum. Depreciation was R9 000 as credit losses in PL & OCI
• Interest on loan to partner * Depreciation for the year was not yet provided for
Vehicles = straight line method (20% per annum) Long term loan from Paul R150 000 6
Under FINANCE COST (PL & OCI) Equipment = diminishing balance method (25% per annum) Interest on bank overdraft R15 000
• Interest on loan from partner * Calculate the amount to be disclosed as depreciation in PL & OCI Other info:
Paul granted the loan on 31 Jul 13,
NOTE: if no agreement on how profit / losses will be shared interest is 15% per annum
then this should be calculated via capital contribution ratio. * Calculate the amount to be disclosed
as finance cost in PL & OCI

Answers to the examples on next page

Paul&Shark Traders (name of entity) Paul & Shark are in partnership trading as Paul&Shark Traders. Following were
STATEMENT OF PROFIT OR LOSS AND OTHER COMPRH INCOME FOR THE YEAR ENDED extracted on 31 Dec 2013
31 Dec 2013 (description and date)
Capital: Paul R62 500 1
R Capital: Shark R75 000
Current Account: Paul (dr) 1 Jan 13 R 2 500
Revenue (Sales – settl disc granted) 624 700
Current Account: Shark (cr) 1 Jan 13 R 6 000
Cost of Sales (provided) 1 (236 100) Total Comprehensive income for year R231 025
Gross Profit (Revenue – cost of sales) 409 600
Other income (Investment + rental income) 29 500 Total Comprehensive income for year R231 025 2
Gain on financial asset at fair value through profit or loss Salaries & Wages R214 900
Held for trading: Listed investment (market value – purchase price) 7 500
2 Other info:
Rental income (provided) 22 000 Each partner entitled to R5 000 salary per month
Distribution, admin and other expenses (add all expenses) (182 700) Drawings: Paul R4 500 3
salaries and wages (Salaries – what was already received) 3 134 900 Drawing: Shark R6 000
Credit Losses (credit loss + increase amount on credit loss) 4 500 4 Salaries & Wages R214 900
Other info:
Loss on sale of Equip. (purch price – depreciation – sales cost) 5 5 000
Each partner entitled to R5 000 salary per month,
Depreciation 38 300
Finance cost (interest on LT loan + bank overdraft) (24 375) only R40 000 has been paid to each partner, this is
incl. in the above figure (Salaries & Wages)
interest on LT loan (total amount x percentage per annum x total months) 9 375 6
interest on bank overdraft (provided) 15 000 Capital: Paul R62 500 4
Profit for the year (Gross profit + other income – expenses – fin costs) 232 025 Capital: Shark R75 000
Other comprehensive income for the year x Current account: Paul (DR) R2 500
Total Comprehensive income for the year x Current account: Shark (CR) R6 000
Other info:
ABC TRADERS (name of entity)
Partnership agreement:
STATEMENT OF CHANGE IN EQUITY FOR THE YEAR ENDED 28 Feb 2013 (description and Interest on capital rate = 10% per annum
date) Interest on opening balances of current accounts =
5% per annum
Capital Current accounts Appr. Total
equity Appropriation account
Partner A Partner B Partner A Partner B

Balances at (date, this year) R R R R R R TOTAL COMPREHENSIVE INCOME

Total comprh. income for

+ / - transactions with partners
the year

Minus transfers to reserves

Salaries to partners

Drawings
Apportion
Interest on Capital Between
accounts partners
Interest on Current acc.

Partners’ share

Balance as at (date, next

year)
 Capital Current accounts Appr. Total Statement of Financial Position as at (date)
equity
ASSETS
Partner A Partner B Partner A Partner B Non-current assets x
Paul Shark Paul Shark Property, Plant & Equipment x
Balances at 1 Jan 13 R R R R R R Financial assets x
(date, this year) 1 62 500 75 000 (2500) 6 000 - 141 000 Current Assets x
Prepayments x
Total comprh. income for the 232 025 232 025 other financial assets x
year Total Assets x

EQUITY & LIABILITIES

Total Equity x
Capital x
Current account x
Salaries to partners 2 60 000 60 000 (120 000) Other components of equity x
Total Liabilities x
Drawings 3 (44 500) (46 000) (90 500)
Non-current liabilities x
long term borrowings x
Interest on Capital accounts 6 250 7500 (13 750)
Current Liabilities x
4 trade and other payables x
Interest on Current acc. (125) 300 (175) current portion of long-term borrowings x
Other financial liabilities x
Partners’ share 58 860 39 240 (98 100) Total equity and liabilities x

Balance as at 31 Dec 13 62 500 75 000 77 985 67 040 - 282 525 Paul & Shark are in partnership trading as Paul&Shark
(date, next year) Traders. Following were extracted on 31 Dec 2013
Administrative Expenses R15 000 4 Land & Buildings R800 000
1
Other info: Vehicles at cost R168 000
R6 500 (insurance expense) included in the administrative expense above Equipment at cost R 48 000
The premiums are payable in advance, Jan 14 premium is incl. in the figure Acc. Depreciation: vehicle (01 Jan 13) R 27 900
Acc. Depreciation: equipment (01 Jan 13) R 15 500
Paul&Shark traders Depreciation – 31 Oct 13 R 1 500
Statement of Financial Position as at 31 Dec 13 (date) Other info:
* 30 June 13: business purchased a new vehicle at cost R68 000
ASSETS * 31 Oct 13: Equipment with cost price R15 000 was sold for R1 000,
Non-current assets 973 300 depreciation on that date was R9 000
Property, Plant & Equipment 1 943 300 * Depreciation yet to be calculated:
Financial assets 2 30 000 1. VEHICLES straight line method, 20% per annum
2. EQUIPMENT diminishing balance method, 25% per annum
Current Assets 92 300
Trade and other receivables (debt contr – written off – allowance for CL+ acc income)14 300 3 Investment at cost 2 & 5 R100 000
Other info:
Prepayments 4 500 • 12 000 shares from Puma Ltd, R70 000 cost price, market value: R77 500
Other fin. Assets (share for trading purposes, current value) 5 77 500 (trade purposes)
Total Assets (Non Curr Ass + Current Ass) 1 065 600 • 5 000 shares from Zoo Ltd, R30 000 cost price
Debtors control R20 000 3
Allowance for credit losses R 1 000
Accrued Income R 800
Other info:
Equity & Liability portion on next page R5 000 owed by debtor must be written off
Allowance for credit losses to be adjusted to R1 500
 Paul&Shark traders
Statement of Financial Position as at 31 Dec 13 (date)
ASSETS
Non-current assets 973 300
Property, Plant & Equipment 943 300
Financial assets 30 000
Current Assets 92 300
Trade and other receivables (debt contr – written off – allowance for CL+ acc income)14 300
Prepayments 500
Other fin. Assets (share for trading purposes, current value) 77 500
Total Assets (Non Curr Ass + Current Ass) 1 065 600
Equity & Liabilities
Total Equity (capital + current accounts) 282 525
Capital (Paul + Shark) 137 500
Get from statement of CiE
Current Accounts (Paul + Shark) 145 025
Total Liabilities (Current + non-current) 783 075
Non Current Liabilities 640 000
Long term borrowings 640 000 Long term borrowing (info given)
Current Liabilities 143 075
Trade & other payables 143 075 Creditors Control (R149 075) – allowance for settlement
Total Equity & Liabilities 1 065 600 discount (R6 000) (info given)

Changes in ownership structure of partnerships

Recording Valuation Adjustments

Valuation account & Existing Partners

Capital accounts

Valuation Example on
adjustments
next page

DR: Decrease in value of assets Appropriate the balancing figure of the

CR: Increase in value of assets “VALUATION ACCOUNT” to partners
according to their profit-sharing-ratio
 Recording Valuation Adjustments A & B were in partnership trading as AB traders, profit sharing is 3:1. RECORDING of Goodwill
Examples they decided to admit C from 01 Jan 2013. following appeared in the
accounting records of AB Traders at 31 Dec 2012 DR Goodwill CR
R DR CR R R
Capital A 126 500 Valuation
Capital B 42 000 account Capital A 76 500
Total Assets 168 000
(equip: R111 000, inventory R57 000) R R Capital B 25 500
Other info:
AB Traders agreed that equipment be valued at Inventory 5 000 Equipment 15 000
R126 000 and Inventory at R52 000 57 000 – 52 000 126 000 - 111 000 102 000
Question: Prepare the valuation account
Capital A 7 500
Goodwill (3/4 xR10 000)
DR Capital A CR
A sound reputation of a business, influenced Capital B 2 500
by factors such as (1/4 xR10 000) R R
• Quality of service rendered
15 000 15 000 Balance b/d 126 000
• Efficient management
• Valuable patent right and trade marks
Goodwill represents the value attached to A & B were in partnership trading as AB traders, profit sharing Valuation 7 500
factors that enable a business to increase is 3:1. they decided to admit C from 01 Jan 2013. C will pay account
turnover beyond industry norm EXAMPLE R30 000 cash and contribute equipment to the value of Goodwill 76 500
R40 000 for his 20% interest in the fair value of the net assets
Calculation of Goodwill acquired of the new partnership. The following appeared in the
accounting records of AB Traders at 31 Dec 2012 210 000
The capital contribution of the incoming
partner R
Capital A 126 500
Capital B 42 000 DR Capital B CR
Inverse of the incoming partner’s share in net Total Assets 168 000
asset value (equip: R111 000, inventory R57 000) R R
Other info:
Balance b/d 42 000
Total Equity of a NEW partnership AB Traders agreed that equipment be valued at R126 000 and
Inventory at R52 000
Goodwill Question: Calculate goodwill of the partnership on Dec 13 Valuation 2 500
account
subtract Equity of A, B and C (new partnership) :
Capital contribution of C x inverse of Cs Shares: Goodwill 25 500
A:126 000 + 7 500; B: 42 000 + 2 500; C: 30 000 + 40 000
R(30 000 + 40 000) x 5/1 = R350 000
= a + b + c = R248 000
70 000
Goodwill : R 102 000
 Liquidation of Partnership (2 types) Mark and Fish are in partnership, sharing profits and losses in 2:1 ratio. They
decide to dissolve the partnership simultaneously at the end of the current
TYPE 1. Simultaneous liquidation
EXAMPLE
year. The following was extracted from the accounts:
• Assets of partnership are sold
• Liabilities settled over a short period of time R Other info:
Capital: Mark 330 000 * Land & Buildings were sold for R45 000 cash
• Remaining cash is distributed to partners (capital
Capital: Fish 280 000 * Long term loan were paid in full
contribution ratios) Land and building at cost 330 000 * Furniture were sold for cash, profit of R3000
Furniture at cost 45 000 * 95% of debtors settled their accounts at
Liquidation Bank Account Partners Accum. Depreciation 10 000 discount of 10%, outstanding balance of 5%
capital Goodwill 135 000 were regarded as irrecoverable
Account
accounts Asset replacement reserve 105 000 * Liquidation cost amounted to R6 000, were
Debtor control 160 000 paid in cash
Bank (dr) 140 000 Required: Prepare accounts in General
Cash received Assets and Long term loan (abc bank) 85 000 Ledger to dissolve partnership
All asset
on sale of liabilities taken
(except Bank) DR Liquidation account CR
assets and cash over by partners
and liabilities
paid in R R
are transferred
settlement of Share of profit / Land & Building at cost 330 000 Accum. Depreciation: Furniture 10 000
to this account
liabilities loss from
Furniture at cost 45 000 Long term loan 85 000
liquidation
Note: Asset replacement reserves and account Debtors control 160 000 Bank (land and building) 450 000
goodwill accounts are NOT transferred to Bank (long term loan) 85 000 Bank (Furniture) 38 000
the Liquidation account. It is closed off to Bank (liquidation cost) 6 000 Bank (Debtors control) 136 800
partners’ capital accounts
Capital account: Mark 62 533

DR Bank CR Capital account: Fish 31 267

719 800 719 800
R R
Balance b/d 140 000 Liquidation account: 85 000
Long term loan
DR Capital: Mark CR
Liquidation account: 450 000 Liquidation account: 6 000
Land and building Liquidation costs R R
Liquidation account: 38 000 Capital account: Mark 372 533 Goodwill b/d 140 000 Balance b/d 330 000
Furniture
Bank 372 533 Asset replacement reserve 70 000
Liquidation account: 136 800 Capital account: Fish 301 267
Debtors control Liquidation account 62 533

764 800 764 800 462 533 462 533

Goodwill allocation: Furniture Sale Calculations DR Capital: Fish CR

Mark: 135 000 x 2/3 = R90 000 Balance (cost) –
Fish: 135 000 x 1/3 = R45 000 accum. Depreciation = Cash from debtors
45K – 10K = 35K R R
Debtors balance = R16k
Asset replacement reserve Add profit on sale + Debtors that settled Goodwill b/d 45 000 Balance b/d 280 000
allocation: 3K account = 160k x 95%
= proceeds on sale of Bank 301 267 Asset replacement reserve 35 000
Mark: 105 000 x 2/3 = R70 000 = R125 000
Fish: 105 000 x 1/3 = R35 000 furniture R38 000 Amount receivable after Liquidation account 31 267
10% discount = 152k x
90% = R136 800 346 267 346 267
K = short for thousand rand
 TYPE 2. Piecemeal liquidation
• Assets are sold in piecemeal fashion
• Available cash is used to settle liabilities
• Once liabilities are paid, cash is paid to partners
(capital contribution ratios)
GOLDEN RULES:
• Open the applicable accounts in column form with balances
• Close off “Reserves and Goodwill” accounts to partners capital accounts
• Apportion profits or losses from each realisation of assets and capital
accounts
• When cash becomes available, ALL LIABILITIES must be paid until they are
fully settled.
• Once liabilities are fully settled, a calculation is done to determine how
INTERIM REPAYMENTS must be made to partners
• If cash is available (after liability payments):
- Commence with balances at the date when cash is available for
distribution
- Assume unsold assets are worthless and apportion the potential deficit to
partners’ capital accounts according to ratios
- If partners’ capital account results deficit assume partner is insolvent and
transfer the deficit to the other partners according to ratios
- The sum of the balances of the solvent partners’ capital accounts should
equal the cash available to distribution to the solvent partners

End of Partnership