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Orion and Pegasus are two sole traders who decide to amalgamate their businesses into a partnership as from 1 January 2001. Their balance sheets at 31 December...

      

Orion and Pegasus are two sole traders who decide to amalgamate their businesses into
a partnership as from 1 January 2001.
Their balance sheets at 31 December 2000 are as follows:
orionandpegasus24808.png
(1) Goodwill, which does not appear in the records of either business, is valued at:
Sh.‟000
Orion 200
Pegasus 180
Goodwill is not to appear in the opening balance sheet of the partnership.
(2) Profit-sharing ratios in the partnership are agreed as :
Orion 60%
Pegasus 40%
(3) Land included in Orion.s non-current assets at Sh.100,000 to be revalued to Sh.130,000.
(4) Orion and Pegasus did not transfer their motor cars to the new business but retained
them personally. The motor cars are currently included in their non-current assets at
their book value as follows:
Sh.‟000
Orion 18
Pegasus 16
(5) Orion's loan from Nimrod was repaid by Orion on 31 December 2000.
(6) The remaining balance of Orion's cash, and the overdraft of Pegasus,
were combined into a single bank account for the partnership.
(7) All other assets and liabilities of the businesses were brought into the partnership at
their stated book value.
Required:
(a) Show the capital accounts of the two traders to record the closure of their businesses.
(b) Prepare the opening balance sheet of the new partnership of Orion and Pegasus as at 1
January 2001.
(c) Explain why asset revaluations and a goodwill adjustment may be needed when a partner
retires or dies, a new partner is admitted or there is a change in profit-sharing ratios.

  

Answers


Mutiso
orionandpegasus24808i.png
b)
orionandpegasus24808ii.png
(c)
Asset revaluations and a goodwill adjustment are necessary when partnership personnel change or
there is a change in profit-sharing ratios in order to reflect the interests of the partners fairly. If a partner gives up profit share, he or she is also giving up a share in unrecorded goodwill or
unrecorded increase in value of partnership assets. By crediting the partner?s accounts
in their old profit sharing ratios with their shares in goodwill or asset revaluations, they are given the value that has accrued to them up to the date of the change. New partners entering the
partnership, or partners with an increased profit share, will participate in their profit sharing
ratio in the growth in value of the assets since their entry or since the date of the change in
profit sharing ratios.
Mutiso answered the question on November 24, 2018 at 17:16


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