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FDN122 Partnerships And Budgets

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FDN122 Partnerships And Budgets

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Course Code: FDN122
University: Wentworth Institute Of Higher Education

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Country: Australia

Question:

Write a summary describing your business operation since formation and commencement of your business including the following:(YOU must make up the $ amount, where appropriate)
How long has your business been in operation?
What is the profit / loss sharing ratio of the Partnership?
Does your business make a profit or Loss? How much?
The Partnership Agreement provides for the following:
Capital Accounts are Fixed;
Profits / Losses to be allocated to Current Accounts;
Interest on fixed Capital at 5% per annum;
Interest on Drawings at 20% per annum;
Interest on loans by partners, to the partnership, to be credited at 6%;
Partners’salaries.
Prepare Journal Entries for the relevant above transactions;
Prepare the Profit & Loss Appropriation account for the year;
YOU are to create a story for the admission of a NEW Partner into your business using the following information:
What are the reasons for the admission of a new partner?
What does the New Partner contribute into the business?
What is the Date of Admission?
What is the new profit / loss sharing ratio for the partners?

Answer:

Formation of a partnership:
A partnership business has been formed by 3 people, John, Ricky and Harry. The name of the business is “Chilli chicken”. The trading address of the business would be 242 Arden St, Coogee NSW 2034, Australia. The contact number of the business would be + 61 2897548621. ABN of the business would be 2897548621. The business would be a partnership business. The business would be a restaurant business which offers various food products and the beverages to the company. The location of the business would be at the centre of the business.
The product and services list of the business has been prepared which would be offered to the target customers of the business. The competition of the business is average as the products and the services of the business would be competitive and delicious in the market.  All the partners of the business are qualified enough. John has masters’ degree in hospitality, Ricky is better in handling the marketing activities and the Harry has taken his degree in finance. All of the partners have contributed similar amount into the business.

 

Partner’s contribution

John

 $                     50,000

Ricky

 $                     50,000

Harry

 $                     50,000

The assets and the required equipment of the business have been bought from the contribution of the partner. The below equipment has been brought for the business.

Application of funds:

 

 

Capital expenditure:

Cost

Depreciation

Delivery van

 $    16,000

15.00%

Kitchen equipment

 $    12,000

15.00%

Land

 $    30,000

 

Building

 $    40,000

4.00%

Stock

 $      2,000

 

Formation expenses

 $      1,500

5 years

Wages for 3 months

 $      1,800

 

Electricity & water for 3 months

 $      1,500

 

Production cost for testing and trial run

 $      1,000

 

Advertisement

 $      1,000

 

 

 

106800.00

The business would be started at the beginning of the January.
Journal entries:

Journal Entries

Date

Particulars

LF

Debit

Credit

 

 

 

 

 

Jan-01

Bank a/c

 

150000

 

 

John’s Capital a/c

 

 

50000

 

Ricky’s capital a/c

 

 

50000

 

Harry’s capital a/c

 

 

50000

 

 

 

 

 

Jan-01

Delivery van

 

 $ 16,000

 

 

Kitchen equipment

 

 $ 12,000

 

 

Land

 

 $ 30,000

 

 

Building

 

 $ 40,000

 

 

Stock

 

 $   2,000

 

 

 
Creditors a/c
Bank a/c

 

 

 $ 30,000
$ 70,000

 

 

 

 

 

Jan-01

Formation expenses

 

 $   1,500

 

 

Wages for 3 months

 

 $   1,800

 

 

Electricity & water for 3 months

 

 $   1,500

 

 

Production cost for testing and trial run

 

 $   1,000

 

 

Advertisement

 

 $   1,000

 

 

Bank a/c

 

 

 $     6,800

(Kruth, 2013)
Balance sheet:

Balance Sheet

As on Jan, 1

Assets

 

Cash

 $   73,200

Advanced wages

 $     1,800

Advanced electricity

 $     1,500

Advanced production cost

 $     1,000

Advanced advertisement

 $     1,000

Current Assets

 $     5,300

Noncurrent assets

 

Delivery van

 $   16,000

Kitchen equipment

 $   12,000

Land

 $   30,000

Building

 $   40,000

Stock

 $     2,000

Noncurrent assets

 $ 100,000

total Assets

 $ 105,300

Liabilities and Equity

 

Creditors

 $   30,000

Total liabilities

 $   30,000

Owner’s contribution

 $   75,300

Total liabilities and equity

 $ 105,300

(Krantz, 2016)
Partnership agreement:
Refer to other file.
Part B: Operation of a partnership:
Business operations:
The business would follow the going concern concept as long as the partners are willing to run the business, it would be in operations. The business would be a limited liability business where the profit and loss would be shared in equal proportions. The business planning explains that the business would be able to reach over the $ 10000 net profit (Kinsky, 2011).
The partnership agreement explains that the capital of the partners is fixed. It could not be withdrawn or additionally invited by the partners in the business. The profit and losses would be allocated to capital account and 5% and 20% would be charged on fixed capital and the drawings of the partners. The partners would also be eligible to get fixed salary of $ 800 annually (Kaplan and Atkinson, 2015).
Journal entries:

Journal Entries

Date

Particulars

LF

Debit

Credit

31-Dec-18

Interest on capital a/c

 

 $   7,500

 

 

John’s current account

 

 

 $ 2,500

 

Ricky’s current account

 

 

 $ 2,500

 

Harry’s current account

 

 

 $ 2,500

 

 

 

 

 

31-Dec-18

Profit and loss appropriation a/c

 

 $   7,500

 

 

Interest on capital a/c

 

 

 $ 7,500

 

 

 

 

 

31-Dec-18

Partner’s salary a/c

 

 $   2,400

 

 

John’s current account

 

 

 $    800

 

Ricky’s current account

 

 

 $    800

 

Harry’s current account

 

 

 $    800

 

 

 

 

 

31-Dec-18

Profit and loss appropriation a/c

 

 $   2,400

 

 

Partner’s salary a/c

 

 

 $ 2,400

 

 

 

 

 

31-Dec-18

John’s current account

 

 $   1,000

 

 

Ricky’s current account

 

 $   1,000

 

 

Harry’s current account

 

 $   1,000

 

 

Interest on drawings a/c

 

 

 $ 3,000

 

 

 

 

 

31-Dec-18

Interest on drawings a/c

 

 $   3,000

 

 

Profit and loss appropriation a/c

 

 

 $ 3,000

 

 

 

 

 

31-Dec-18

Profit and loss a/c

 

 $      600

 

 

Interest on loan

 

 

 $    600

 

 

 

 

 

31-Dec-18

Interest on loan

 

 $      600

 

 

John’s current a/c

 

 

 $    600

 

 

 

 

 

31-Dec-18

Profit and loss appropriation a/c

 

2500

 

 

John’s current account

 

 

833.33

 

Ricky’s current account

 

 

833.33

 

Harry’s current account

 

 

833.34

(Ross, Westerfield And Jaffe, 2007)
Profit and loss appropriation account:

Profit and loss appropriation account

For the year ended 31 Dec 2018

To interest on capital

 

By profit and loss a./c

9400

John

 $      2,500

By interest on drawings

 

Ricky

 $      2,500

John

 $      1,000

Harry

 $      2,500

Ricky

 $      1,000

To parner’s salary

 

Harry

 $      1,000

John

 $         800

 

 

Ricky

 $         800

 

 

Harry

 $         800

 

 

To profit’s transfer to:

 

 

 

John’s current account

 $    833.33

 

 

Ricky’s current account

 $    833.33

 

 

Harry’s current account

 $    833.34

 

 

 

 

 

 

 

 $    12,400

 

 $    12,400

(Ross, Westerfield, kakani And Jaffe, 2008)
Working note:

Profit and loss a/c

Interest on loan

 

Net Profit

10000

John

600

 

 

Net profit transferred to P&L appropriation a/c

9400

 

 

 

10000

 

10000

 

Partner’s current account

 

 

 

 

 

 

 

 

 

John

Ricky

Harry

 

John

Ricky

Harry

 

 

 

 

 

 

 

 

Interest on drawings a/c

1000

1000

1000

Interest on capital a/c

2500

2500

2500

To balance c/d

3733.33

3133.33

3133.33

Partner’s salary

800

800

800

 

 

 

 

Interest on loan

 $    600

 

 

 

 

 

 

Profit and loss appropriation a/c

833.33

833.33

833.33

 

 

 

 

 

 

 

 

 

4733.33

4133.33

4133.33

 

4733.33

4133.33

4133.33

(Moles, Parrino and Kidwekk, 2011)
Trial balance:

Trial Balance

 

Debit

Credit

Cash

 $  123,200

 

Debtors

 $    27,200

 

Advanced wages

 $      1,800

 

Advanced electricity

 $      1,500

 

Advanced production cost

 $      1,000

 

Advanced advertisement

 $      1,000

 

Delivery van

 $    16,000

 

Kitchen equipment

 $    12,000

 

Land

 $    30,000

 

Building

 $    40,000

 

Stock

 $      2,000

 

Partner’s salary a/c

 $      2,400

 

Interest on capital

 $      7,500

 

Interest on Drawings

 

 $          3,000

Interest on loan

 $          600

 

Loan

 

 $        10,000

Accumulated depreciation

 

 $          5,800

Creditors

 

 $        84,400

Owner’s contribution

 

 

John’s current account

 

 $    4,733.33

Ricky’s current account

 

 $    4,133.33

Harry’s current account

 

 $    4,133.33

John’s capital account

 

 $        50,000

Ricky’s capital account

 

 $        50,000

Harry’s capital account

 

 $        50,000

 

266200

266200

(Higgins, 2012)
Introduction of a new partner:
Cover story:
The business required new technology. And for cope up with the new technology, it has been decided by the partners to offer partnership to one of their common friend who would invest $ 50,000 in the company and will manage all the technological operations of the business. 25% of the profits would be shared with the partner named by Daniel. The partner would join the business on 1st Jan 2019 (Hillier, Grinblatt and Titman, 2011).
Journal entry:
 

Journal Entries

Date

Particulars

LF

Debit

Credit

 

 

 

 

 

Jan-01

Bank a/c

 

50000

 

 

Daniel’s Capital a/c

 

 

50000

(Gapenski, 2008)
Balance sheet:
 

Balance sheet

As on Jan 1, 2019

Liabilities and equity

 

Assets

 

John’s capital account

 $    50,000

Land

 $      30,000

Ricky’s capital account

 $    50,000

Building

 $      40,000

Harry’s capital account

 $    50,000

Delivery van

 $ 16,000.00

Daniel’s capital account

 $    50,000

Kitchen equipment

 $ 12,000.00

John’s current account

 $ 4,733.33

Advanced wages

 $   1,800.00

Ricky’s current account

 $ 4,133.33

Advanced electricity

 $   1,500.00

Harry’s current account

 $ 4,133.33

Advanced production cost

 $   1,000.00

Creditors

 $    84,400

Advanced advertisement

 $   1,000.00

Accumulated depreciation

 $      5,800

Debtors

 $ 27,200.00

Loan

10000

Stock

 $   2,000.00

 

 

Cash

 $    180,700

 

 $  313,200

 

 $    313,200

(Lee and Lee, 2006)
Part D: Budgets for your business:
Cash Budget:

Collections budget for the quarter to end 31 December

 

 

 

%

August

September

Jan

Feb

Mar

Sales   (net)   

 

 

 

55,000

60,000

70,000

Sales plus GST

 

 

 

 

 

 

Credit sales

 

 

 

31,500

35,000

38,500

 

 

 

 

 

 

 

Collections

 

 

 

 

 

 

Same month

 

 

 

22,050

24,500

26,950

1 month

 

 

 

 

6,300

7,000

2 months

 

 

 

 

 

3,150

Total Receivable

 

 

 

22,050

30,800

37,100

Cash sales

 

 

 

23,500

25,000

31,500

Total collected

 

 

 

45,550

55,800

68,600

Cash Discount  = 3%

2,400

Payments budget (includes GST where applicable)

 

 

 

 

 

 

Jan

Feb

Mar

Purchases

 

 

 

44000

36,000

40,000

 

 

 

 

43,120

35,280

39,200

Paid same month

 

 

 

32,340

26,460

29,400

Paid in 1 month

 

 

 

 

10,780

8,820

Total pmts to creditors

 

 

 

32,340

37,240

38,220

Discount received =

 

 

 

880

720

800

 

 

 

 

 

 

 

Cash payments budget for the months January to June

 

 

 

 

 

 

Jan

Feb

Mar

Accounts Payable

 

 

 

 

 

 

Wages and Salaries

 

 

 

10,780

-1,960

980

Interest

 

 

 

500

500

500

Other Gen & Admin exp (inc GST)

 

800

800

800

GST (Sep Qtr)

 

 

 

12,080

-660

2,280

Total payments

 

 

 

44,420

36,580

40,500

Cash budget for the months January to June

 

 

 

 

 

 

 

Jan

Feb

Mar

Opening cash bal

 

 

 

0

1,130

20,350

Add: Receipts

 

 

 

45,550

55,800

68,600

Less: Payments

 

 

 

44,420

36,580

40,500

Ending cash bal

 

 

 

1,130

20,350

48,450

(Lumby and Jones, 2007)
Budgeted income statement:

Budgeted Income Statement for the 3 months to end 31 March

 

 

 

 

$

$

Sales

 

 

 

185,000

Less: Cost of Goods Sold

 

 

Opening Inventory

0

 

Add: Purchases

120,000

 

Less: Discount received

 

-2,400

 

Goods available for sale

117,600

 

Less: Ending Inventory

16,000

101,600

Gross profit

 

 

83,400

Less: Expenses

 

 

 

Wages and salaries

 

 

9,800

Interest

 

 

 

1,500

Depreciation

 

 

2,400

Other General and Admin

 

 

13,700

 

 

 

27,400

Net profit

 

 

 

56,000

(Damodaran, 2011)
Budgeted balance statement:

Budgeted Balance Sheet as at 31 March

Current Assets

 

 

Cash at Bank

 

 

48,450

 

Short Term Investment

 

5,000

 

Accounts Receivable

10,535

 

Inventories

 

16,000

 

 

 

 

 

79,985

Non-Current Assets

 

 

Investment in Gov Bond

 

8,000

 

Equipment

 

5,000

 

 

Accumulated depreciation

300

4,700

 

Motor Vehicle

 

3,500

 

 

Accumulated depreciation

300

3,200

15,900

Total Assets

 

 

95,885

Current Liabilities

 

 

Accounts Payable

 

9,800

 

GST Collected

 

0

 

GST Paid

 

 

0

9,800

Non-Current Liabilities

 

 

Long Term Loan

 

 

12,000

Total Liabilities

 

21,800

Net Assets

 

74,085

Owner’s Equity

 

 

Balance at start

 

 

18,085

RE at start

 

 

 

0

Add: Net Profit

 

 

56,000

Owner’s equity at end of period

 

74,085

References:
Damodaran, A, 2011, Applied corporate finance. 3rd edition, John Wiley & sons, USA.
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley & Sons.
Krantz, M. 2016. Fundamental Analysis for Dummies. London: John Wiley & Sons.
Kurth, S. 2013. Critical Review about Implications of the Efficient Market Hypothesis. GRIN Verlag.
Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance. Springer science, new York.
Lumby,S and Jones,C,.2007, Corporate finance theory & practice, 7th edition, Thomson, London.
Moles, P. Parrino, R and Kidwekk, D,.2011. Corporate finance. European edition, John Wiley &sons, United Kingdom.
Ross, A,. Westerfield, R,W,. Jaffe,J,.and Kakani,R,K,.2008. Corporate Finance. 8th edition, Tata McGraw hill education private limited, New Delhi, India
Ross, S, A,. Westerfield, R, W,. And Jaffe, J,.2007. Corporate Finance. the McGraw-hill, India

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