Q1 Discussion question

The big disadvantage of a sole trader business is that the personal liability of the owner is unlimited the owner could lose everything. I think I will take on a partner and convert my business to a partnership. That way I will certainly reduce the chances of losing my personal assets if the business fails. Discuss.

Q2 Partnership profit distribution capital balances

Penny and Lane formed a partnership on 1 July 2021 with initial capital balances of $180 000

and $120 000 respectively. For the year ended 30 June 2022, the Profit or Loss Summary account dis- closed a final credit balance of $160 000.

Required

A. Prepare the closing entry to transfer the profit disclosed in the Profit or Loss Summary account to the Profit Distribution account under method 1 and method 2.

B. Prepare the closing general journal entry to distribute the profit to Penny and Lane, assuming they have agreed to share profits in the ratio of 3:2.

C. Show how the partners equity accounts would appear in the balance sheet of the partnership at 30 June 2022.

Q3 Formation and allocation of profits method 1

Francine Steele and Shaun Dunn formed a partnership on 1 July 2022. Some of Steeles business assets and liabilities were assumed by the partnership, and these are listed below at both carrying amounts and fair value.

Cash at bank Accounts receivable Inventory Equipment Accounts payable Loan

$

Carrying amount 62 000 34 000 98 600 320 000 24 000 80 000

Fair value

$ 62000 34 000 96 000 360 000 24 000 80 000

Dunn contributed a commercial property to the partnership that had a fair value of $460 000 which was financed by a mortgage of $280 000. They agreed to share profits and losses evenly. During the first year of the partnership, Steele invested $80 000 in the business and withdrew $20 000. Dunn invested $82 000 and withdrew $24 000. The partnership had a profit of $132 800. Retained Earnings accounts are not used.

Required

A. Prepare the journal entries to record the initial investments of both partners. (Assume no GST.)

B. Prepare a balance sheet as at 1 July 2022.

C. Prepare a statement of changes in partners equity for the year ended 30 June 2023.