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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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