Self-test Doris and Eric have been trading in partnership for many years, preparing accounts to 31 March each year and sharing profits or losses in the ratio 2:1. As from 1 October 2008, they agree to amend the partnership agreement as follows:

(i) Each partner will be entitled to a monthly salary. This will be £800 per month for Doris and £1,000 per month for Eric;

(ii) Any remaining profits or losses will be shared between the partners equally.

The partnership’s trial balance at 31 March 2009 is as follows:

£ £

Capital accounts – Doris 20,000

– Eric 15,000 Current accounts at 1/4/08 – Doris 14,110

– Eric 1,060 Drawings – Doris 11,500

– Eric 13,600 Purchases and sales 132,760 203,170 Carriage inwards 2,050 Returns inwards and outwards 5,550 3,330 Inventory at 1/4/08 31,440 Operating expenses 68,200 Discounts allowed and received 4,230 3,740 Bad debts written off 2,900 Allowance for doubtful receivables at 1/4/08 750 Equipment, at cost 56,000 Allowance for depreciation at 1/4/08 32,570 Disposal of equipment 4,000 Trade receivables and payables 22,400 33,760 Bank balance 21,260 351,690 351,690 The following information is also available:

1. The partnership’s equipment is depreciated on the reducing balance basis at a rate of 30% per annum. A full year’s depreciation charge is made in the year of acquisition but no depreciation is charged in the year of disposal. Equipment which had cost £10,000 in June 2005 was sold for £4,000 in February 2009. The proceeds of £4,000 were debited to the bank account and credited to a disposal account but no other entries were made in relation to this disposal.

2. Closing inventory (at cost) on 31 March 2009 was £28,560. This included an item with a cost of £1,400 and an estimated selling price of £1,500. Further costs of £250 would have to be incurred so as to make this item saleable.

3. Prepaid operating expenses of £3,150 and accrued operating expenses of

£1,430 at 31 March 2009 have not yet been accounted for.

4. The allowance for doubtful receivables is to be 2.5% of trade receivables.

5. It may be assumed that net profits or losses are spread evenly over the year.

Requirement for question

(a) Prepare the partnership’s income statement for the year to 31 March 2009.

(b) Prepare an appropriation account for the year to 31 March 2009.

(c) Write up the partners’ current accounts for the year to 31 March 2009.

(d) Prepare a statement of financial position (balance sheet) as at 31 March 2009.

(e) Explain the significance of the Partnership Act 1890 in the absence of a partnership agreement. (Financial Accounting CIPFA Certificate Stage June 2009)

Note: this question contains terms used internationally. They are discussed in Chapter 41.