Eyes and Mouth started an accounting firm on January 1, 2018. Each partner brought GHC15,000 but Eyes made an additional payment of GHC10,000 to the firm. The profit for the first year was GHC8,500, and during the course of the year each partner had taken GHC2,400 from the firm for personal use.

Requirement One: Prepare

i. The partners appropriation account for the first year (January 1 to December, 2018)

ii. Partners current accounts for the first year (January 1 to December, 2018)

iii. The extract of the statement of financial position as at December 31, 2018.

During the second year of operations (2019), Eyes and Mouth admitted Nose who brought GHC5,000 as capital to improve the finances of the firm. An agreement was reached which provides that Eyes receive a commission of 5% of the profit. Nose is allowed a salary of GHC600. Interest is allowed on capital and charged on drawings at 6% per annum. Interest on the loan was raised to 8% per annum.

Profit are shared equally for the first GHC3,000, and any profit above GHC3,000 is to be shared in the ratios 4:4:1 respectively. Profit for the year 2019 before any adjustments above were GHC22,000 and the drawings were GHC3,600 each for Eyes and Mouth and GHC2,400 for Nose. It is assumed that funds were drawn out regularly throughout the year.

Requirement Two: Prepare the appropriation account for the year ended 2019. If Arms and Legs are in partnership on December 31, 2019; sharing profits and losses in the ratios of 3:2 respectively; when they agree to admit Head into the partnership on the following terms: Assets are to be revalued as follows: Premises GHC9,500; Machinery GHC2,500; Inventory GHC4,500; Goodwill GHC1,000. A provision for Bad debts of GHC300 is to be created.

The statement of financial position prior to the admission of Head, and the adjustments given above, was as follows:

Head was to bring in GHC5,000 as his capital contribution for a quarter share of the future profits; Arms and Legs as between themselves continuing to share profit profits in the same ratios as previously. The goodwill is to be written off immediately following the introduction of the new partner.

Requirement Three: Prepare

i. The Revaluation Account,

ii. The Capital Accounts of the partners immediately after the introduction of the new partner and

iii. The Statement of Financial Position of the new firm Arms, Legs and Head as it will appear January 1, 2020.

Head was to bring in GHC5,000 as his capital contribution for a quarter share of the future profits; Arms and Legs as between themselves continuing to share profit profits in the same ratios as previously. The goodwill is to be written off immediately following the introduction of the new partner.

Requirement Three: Prepare

i. The Revaluation Account,

ii. The Capital Accounts of the partners immediately after the introduction of the new partner and

iii. The Statement of Financial Position of the new firm Arms, Legs and Head as it will appear January 1, 2020.