Question

After an extremely painful year working with Hoang, Phuong has received some good news. Hoang has met his soul mate and will be leaving for Vietnam within the month to be with them. While Phuong is excited for the life opportunity for his cousin, and the fact he will be out of the country and no longer involved in the business, the business cannot afford to pay out Hoang’s capital balance and continue to function and Phuong is not in a position to buy out Hoang’s share of the business with his own funds.

Phuong has also been discussing his business ideas with two of his other cousins, Linh and Thu from his mother’s side of the family and who are much more sensible, and they can also see this is a great opportunity. They are not really interested in being involved in the business on a day to day basis but do have some funds they would like to invest. They also understand that Phuong deserves the majority of the profits if he does most of the work.

Despite the loss of Hoang’s “expertise” the business is growing in reputation and now has a strong client base. In order to ensure his contribution to the business is properly recognised he has asked for the assets of the business to be re-valued before he begins his overseas adventure so that he can get what he is owed. Phuong has agreed to this to pay out cash equal to his capital share when he leaves.

The Balance Sheet for the end of the last financial year showed Phuong’s Fantastic Foods had the following assets and liabilities

Assets

Cash                                        24,000

Accounts Receivable               16,000

Inventory                                   3,600

Equipment                               36,200

Motor Vehicles                       38,000

Warehouse                              14,560

Land                                        31,824

Goodwill                                 13,386

                                               

177,570

Liabilities

Accounts Payable        1,350

Accrued Expenses           650

Loans                          34,700

                                                36,700

Equity

Phuong                        77,600

Hoang                         63,270

                                                140,870

177,570

Following an independent revaluation the following new asset values were established

• Inventory                                4,500
• Motor Vehicles                       32,000
• Warehouse                              9,000
• Land                                        46,000
• Goodwill                                 Nil

1. Show the journal entries to record the revaluations and adjust the capital balances appropriately. Then show the journal entry to account for Hoang’s retirement.

Answer 1

Journal entry

Entry	Amount
DR: Inventory	900
CR: Revaluation Account/Profit & loss Adjustment account	900
(Being Profit on revaluation of Inventory)
DR: Revaluation Account/Profit & loss Adjustment account	6000
CR: Motor Vehicles	6000
(Being Loss on revaluation of Motor Vehicles)
DR: Revaluation Account/Profit & loss Adjustment account	5560
CR: Warehouse	5560
(Being Loss on revaluation of Warehouse)
DR: Land	14176
CR: Revaluation Account/Profit & loss Adjustment account	14176
(Being Profit on revaluation of Land)
DR: Revaluation Account/Profit & loss Adjustment account	13386
CR: Goodwill	13386
(Being Loss on revaluation of Goodwill)
DR: Phuong Capital Account	5437
DR: Hoang Capital Account	4433
CR: Revaluation Account/Profit & loss Adjustment account	9870
(Being Loss on Revalaution transferred to Partners Capital in old capital ratio)
DR: Hoang Capital Account	58837
CR: Cash	58837
(Being Payout for Hoang Capital share on retirement)

Workings:

Dividing Revaluation Account/Profit & Loss adjustment account balance to Partners in old ratio
Balance Loss in Revaluation Account/Profit & loss Adjustment account	9870

	Old Capital	Ratio	Loss in Revaluation account bifurcation	Revised Capital balance
Equity of Phuong	77600	0.550862	5437.012849	72162.99
Equity of Hoang	63270	0.449138	4432.987151	58837.01
Total Equity	140870	1	9870	131000

Assumptions:

Assumed that partners divide the profit in capital ratio