Question

Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively. The balance sheet for the partnership as at 30 June 20X6 is as follows:

Charles decides to retire from the business on 30 June 20X6, and Don is admitted as a partner on that date. The following matters are agreed: 

    (a) Certain assets were revalued: Premises £120,000; Plant £35,000; Stock £54,179. 

    (b) Provision is to be made for doubtful debts in the sum of £3,000. 

    (c) Goodwill is to be recorded in the books on the day Charles retires in the sum of £42,000. The partners in the new firm do not wish to maintain a goodwill account so that amount is to be written back against the new partners’ capital accounts. 

    (d) Alan and Bob are to share profits in the same ratio as before, and Don is to have the same share of profits as Bob. 

    (e) Charles is to take his car at its book value of £3,900 in part payment, and the balance of all he is owed by the firm in cash except £20,000 which he is willing to leave as a loan account. 

    (f) The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned. Don is to contribute cash to bring his capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business. 

The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

(1) Account for the above transactions, including goodwill and retiring partners’ accounts

(2) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 20X6.

(3) Explain what debit balance on the capital account indicate and the action need to be taken to resolve upon winding up a partnership.