PARTNERSHIP

1. Answer the following questions:

a. Under what circumstances will Section 26 of the Partnership Act 1961 will be
applied?
b. List any four items that are provided for under Section 26 of the Partnership Act
1961?
c. Define a partnership and list any three items that are usually included in the
partnership agreement.
d. List and explain three types of partners in a partnership business.
2. Afiq and Anas are partners of a trading firm sharing profits and losses in the ratio of 2:3.
The agreement between them includes the following terms.
i.
ii.
iii.

Afiq and Anas are entitled to salaries of RM3,000 and RM2,000 per annum,
respectively.
Interest on drawings is at 2% per annum.
Interest on capital is at 5% per annum

The capital and current accounts for the partners as at 1 January 2009 are as follows:

Afiq
Anas

Capital Account
RM
20,000
25,000

Current Account
RM
(2,110)
3,450

Drawings made by the partners are as follows:

Afiq
Anas

1 January 2009
RM
4,350
5,100

Net profit for the year ended 31 December 2009 was RM24,400.
Required:
a. Prepare the appropriation account
b. Prepare the capital and current account of the partners in a columnar form.

3. Amirul, Ammar, and Aiman are in partnership, sharing profits and losses in the ratio of
3:2:1. The partnership agreement provides that.
i.
ii.
iii.

Interest on capital is to be allowed to all partners at 20% per annum

Interest is to be charged on all drawings at 10% per annum
Salaries are as follows:
Amirul
Ammar
Aiman

iv.

The capital and current accounts for the partners as at 1 January 2009 are as
follows:

Amirul
Ammar
Aiman
v.

Capital Account
RM
40,000 Cr
30,000 Cr
40,000 Cr

Current Account
RM
6,000 Cr
4,000 Cr
3,000 Cr

Drawings made by the partners are as follows:

Amirul
Ammar
Aiman

vi.

RM6,000 per annum

RM4,000 per annum
RM2,000 per annum

1 January 2009
RM
3,000
2,000
1,600

The income statement for the year ended 31 December 2009 showed a profit of
RM60,500. This amount is before charging the partners salaries, interest on
capital and interest on drawings.

Required:
a. Prepare the appropriation account
b. Prepare the current and capital accounts of the partners in a columnar form

SUGGESTED SOLUTION
(Question 2)
Afiq and Anas
Appropriation account for the year ended 31 December 2009
RM
Net profit
ADD:
Interest on drawings
- Afiq (4,350 x 2%)
- Anas (5,100 x 2%)

RM
24,400

87
102
189
24,589

LESS:
Interest on capital
- Afiq (20,000 x 5%)
- Anas (25,000 x 5%)

1,000
1,250

Salaries
- Afiq
- Anas

3,000
2,000
(5,000)
17,339

NET PROFIT BEFORE APPROPRIATION

Share of profit: Current a/c
- Afiq (2/5 x 17,339)
- Anas (3/5 x 17,339)

6,935.6
10,403.4

Partners Capital Account

Afiq
Anas
Bal b/d
Bal c/d

20,000

25,000

20,000

25,000

Partners Current Account

Afiq
Anas
Bal b/d
Drawings
Interest on drawings
Bal c/d

(2,250)

2,110
4,350
87

Bal b/d
5,100 Share of profit
102 Interest on capital
Salary
4,388.6 11,901.4
10,935.6 17,103.4

Afiq

Anas

20,000

25,000

20,000

25,000

Afiq

Anas

3,450
6,935.6 10,403.4
1,000
1,250
3,000
2,000

10,935.6 17,103.4

Question 3
Amirul, Ammar, and Aiman
Appropriation account for the year ended 31 December 2009
RM
Net profit
ADD:
Interest on drawings
- Amirul (3,000 x 10%)
- Ammar (2,000 x 10%)
- Aiman (1,600 x 10%)

RM
60,500

300
200
160
660
61,160

LESS:
Interest on capital
- Amirul (40,000 x 20%)
- Ammar (35,000 x 20%)
- Aiman (40,000 x 20%)

8,000
7,000
8,000

Salaries
- Amirul
- Ammar
- Aiman

6,000
4,000
2,000
(12,000)
26,160

NET PROFIT BEFORE APPROPRIATION

Share of profit: Current a/c
- Amirul (3/6 x 26,160)
- Ammar (2/6 x 26,160)
- Aiman (1/6 x 26,160)

13,080
8,720
4,360

Partners Capital Account

Amirul Ammar Aiman
Bal b/d
Bal c/d

(23,000)

40,000

35,000

40,000

40,000

35,000

40,000

Amirul

Ammar Aiman

40,000

35,000

40,000

40,000

35,000

40,000

Partners Current Account

Amirul Ammar Aiman

Drawings
Interest on drawings

Bal c/d

Bal b/d
1,600 Share of profit
160 Interest on capital
Salary

3,000
300

2,000
200

29,780

21,520

15,600

33,080

23,720

17,360

Amirul

Ammar Aiman

6,000
13,080
8,000
6,000

4,000
8,720
7,000
4,000

3,000
4,360
8,000
2,000

33,080

23,720

17,360

CHANGES IN PARTNERSHIP
1. Answer the following question.
a. What do you understand by goodwill? In the context of a partnership, when
will the goodwill be valued?
b. What is the purpose of revaluing assets before a partner retires from the
partnership?
c. Explain why adjustments are needed during a change in the partnership?
2. Any share of losses on revaluation arising from change in partnership is
a.
b.
c.
d.

Debited to old partners capital account in old profit sharing ratio

Debited to new partners capital account in new profit sharing ratio
Credited to old partners capital account in old profit sharing ratio
Credited to new partners capital account in new profit sharing ratio

3. Safwan, Zahid, and Hafiez are in partnership sharing profit and losses in ratio of
3:2:1. Profit for the year ended 31 December 2011 is RM28,500. Safwan had made a
loan of RM15,000 to the businesswith interest of 10% per annum. What is the correct
amount of profit sharing for Safwan?
a.
b.
c.
d.

RM14,250
RM13,500
RM9,167
RM12,750

4. The following items should be addressed in a written partnership agreement except

a.
b.
c.
d.

The procedures for adding new partners

The procedures for dissolution of business
The methods of sharing profits and losses among the partners
The rate of interest charged on drawings made by the partners.

5. The advantages of forming a partnership over sole proprietorship include all of the
following except
a. Partners can share their responsibility in managing the daily operation of the
business.
b. A partnership can raise more capital
c. Liability for partnership business is unlimited which means that if the business
is insolvent, the creditors have rights against the owners personal properties.
d. A partnership brings together the expertise of more than one person.
6. The purpose of preparing revaluation account when changes occur in partnership is:
a. To record the new amount of the revalued asset on the debit and credit side
of the account
b. To allow partners to determine current worth of their share of net assets by
revaluing the net assets
c. To record book values of all assets including cash and bank
d. To find out the amount of profit and loss on revaluation that should be
transferred to the old and new partner.

SHORT NOTES

Revaluation Account
When a partnership changes, it is appropriate to calculate the current value of the net assets.
This will allow each partner to know the current worth of their share of the net assets. The
current value of the net assets is arrived at by revaluing the net assets.
The book values (which is the net book values recorded in the statement of financial statement)
of the assets are reassessed to reflect their market value (also known as the revalued amount).
The assessment of the market value of the assets can be done internally by an employee of the
partnership business or externally by a professional valuer. The revalued amount may be higher
or lower than the book values. These differences are known as profit or loss on revaluation. The
profit or loss on revaluation of each asset is credited or debited accordingly to the revaluation
account. When all the assets have been revalued, the net profit or loss on revaluation of these
assets is transferred to the partners capital accounts according to their profit-sharing ratio. It
is also possible to transfer to the partners current account if it is required by the partnership
agreement.

Goodwill
In the previous section, a partner who retires or dies is given his share of tangible net assets
based on the revalued amount. In addition, he is entitled to a share of intangible assets known
as goodwill. Goodwill may be referred to as an excess amount of the value of the business as a
whole and the total value of the tangible assets. The value of the business as a whole is
normally arrived at by selling price of the business. Hence, the amount for goodwill can be
objectively calculated when the business is sold.
A buyer is willing to pay more than the amount of the tangible assets because of the existence
of goodwill. Goodwill might have existed due to various factors (refer handouts changes in
partnership that I distributed earlier in class)