Prepare the capital accounts of the partners in the general ledger in order to calculate the amount that must be paid to each partner upon the dissolution of the partnership.

Kim Dash and Kanye East are partners in a business called K&K, a classy dog parlor in one of the upmarket suburbs of Cape Town. K&K has a December year-end. Up to recently Kim and Kanye were not only business partners, but also madly in love and engaged to be married. However, a few weeks ago Kanye realized that Kim is having an affair with the shop owner across the street from K&K. This broke his heart and he broke off the engagement immediately. Kim and Kanye then decided to dissolve K&K, as they found it difficult to see each other at work after this ordeal. K&K’s last day of business was 30 June 2019.

Kim & Kanye’s partnership agreement states the following terms and conditions:

  • Kim & Kanye share profits and losses in the ratio of 6:4;
  • Capital accounts earn interest at 12% per annum and are calculated on opening balances;
  • Current accounts do not earn interest;
  • Kim is a specialist dog hairstylist, so she earns a salary of N$20 000 per month while Kanye earns N$10 000 per month;
  • Interest is charged on drawings at 15% per annum.

The trial balance for the previous financial year ended 31 December 2018 is given below:

  Note debit (N$) Credit (N$)
Capital account: Kim     140 000
Capital account: Kanye 1   160 000
Current account: Kim     16 000
Current account: Kanye     19 000
General reserve     20 000
Land and buildings - cost 2 350 000  
Equipment - cost 1 30 000  
Equipment- Accumulated depreciation 1   30 000
Bank   145 500  
Loan: Bankned Ltd 3   160 000
Debtors   32 500  
Consumable stock   12 000  
Creditors     25 000
TOTAL   570 000 570 000

Additional information:

  1. During the year, Kanye inherited money from his uncle and he used his inheritance to contribute an additional N$150 000 capital to K&K on 1 March 2019. The partnership used the full amount of the additional capital contribution to buy state-of-the-art equipment which enabled them to wash and cut dogs’ hair faster and more efficiently than before.

    The equipment was delivered on 15 March 2019 but was only fully installed and ready for use on 31 March 2019.

    Equipment is depreciated over 5 years using the straight-line method. The residual value for this equipment was estimated to be N$15 000. All old equipment was sold for N$5 000 on 1 May 2019.
  2. As per K&K’s policy, land and buildings are not depreciated.
  3. The loan from Bankned earns interest at 10% per annum (payable monthly). Annual capital repayments of N$10 000 are made on 1 May of each year. All payments and interest have been correctly accounted for up to 30 June 2019.
  4. The draft financial statements for the period ended 30 June 2019 show a preliminary profit of N$132 750, however, this includes salary withdrawals by Kim of N$40 000 on 1 February 2019 and N$30 000 by Kanye on 1 April 2019. Furthermore, none of the events noted in note 1 above were accounted for in this preliminary profit.
  5. It was decided to transfer the balances of the current accounts to the respective capital accounts of the partners before the dissolution entries were passed.

Dissolution of the partnership (30 June 2019):

  • Debtors amounted to N$22 000 at the end of June. The partners offered a 5% discount to all debtors if they settled their accounts by 30 June 2019. All debtors took up this offer except for one of the older clients who’s account will not be recovered, amounting to N$3 000.
  • All creditors and the loan to the bank were settled by 30 June 2019. Creditors amounted to N$14 000.
  • The inventory on hand on 30 June 2019 at the cost price amounted to N$13 500. All inventories were bought by a competitor of K&K for N$9 400.
  • Land and buildings were sold for N$1 million before estate agent fees. The lawyers deducted the estate agent fees of 7.5% before transferring the proceeds to K&K’s bank account.
  • The recently installed equipment was sold for N$130 000.

Prepare the capital accounts of the partners in the general ledger in order to calculate the amount that must be paid to each partner upon the dissolution of the partnership. You may assume that there were enough cash funds available to settle outstanding capital balances.

Balance Sheet 1 Answer Anonymous(s) Post