Financial Accounting 1A : Assignment 1

Question 1          (30 Marks)

Martin Moodley and Leigh Lawrence are in partnership business, sharing profits and losses in the ratio 3:2. Their statement of financial position at 30 June 2022 was as follows:

On 01 July 2022, Ruby is admitted to the partnership on the following conditions:

1. Ruby is to pay N$90 000 for a quarter share of the business which Moodley and Lawrence give up equally.
2. Land and buildings are valued at N$120 000.
3. Equipment is valued at N$33 000.
4. The cashflow from accounts receivable is expected to be N$57 000.
5. Inventory has a net realisable value of N$111 000.

YOU ARE REQUIRED TO:

1. Calculate the new profit-sharing ratio after the admission of Ruby.          (3 marks)
2. Calculate the amount of goodwill recognised when the new partner was admitted. (7 marks)
3. Prepare the journal entries to record the admission of Ruby into the partnership. (8 marks)
4. Prepare the statement of financial position for Moodley, Lawrence and Ruby as at 01 July 2022.

(12 marks)

Question 2          (20 Marks)

Malthus Limited was incorporated on 1 March 2010 with an authorized share capital of 5 000 000 ordinary shares of N$10 each with an issued capital of 2 000 000 ordinary shares.

Relevant balance as at 1 March 2022:     N$

• Ordinary share capital:                20 000 000
• Retained earnings:        4 556 256
• Share premium:             3 300 000
• Bank:  568 137

On 1 April 2022, the directors approved a capitalisation issue of 1 shares for every 5 ordinary shares held at par. This was done so that there was a minimum impact on retained earnings.

On 10 May 2022, 1 000 000 of the shares were offered to the public at a premium of N$2.50 per share. The full Public issue is underwritten by Finesse Limited for a 2.5% underwriter’s commission. The closing date for the share application was 30 June 2022.

The public subscribed for 950 000 shares and the full amounts were received on or before the closing date. All the shares were allotted on 20 July 2022.

Share issue expenses of N$7 500 were paid and all transactions with the underwriter were concluded by 31 July 2022. All expenses regarding the share issue must be written off against the Share Premium Account.

On 28 February 2023:

1. Profit for the period amounted N$950 650. Tax assessed on the business amounted to N$256 893.
2. Land valued at N$650 000 was revalued to N$1 000 000.

The directors proposed:

1. To write of the share issue expenses and use share premium account for this purpose.
2. To transfer N$500 000 to general reserve.
3. An ordinary shares dividend of 35 cents per share to be paid on 1 March 2023.

REQUIRED:

1. Record the transactions for the period in the General Journal of Malthus Limited. Journal narrations are not required.           (20 marks)

Question 3          (25 Marks)

Delta Limited is a company listed on the Namibian Stock exchange; It is undergoing internal restructuring of its operations and needs to raise capital for this purpose. This can be done by issuing equity shares, preference shares and/or debentures to the public. The company has 31 March as the year end.

Authorised capital:

• Ordinary equity shares 20 000 000 with par value of N$2.50 per share.
• 15% Preference shares 2 000 000 with par value of N$2 per share.

Issued capital:

• Ordinary equity shares 8 000 000
• 15% Preference shares Nil

Some of the balances on 01 April 2022 were as follows:

• Retained earnings:        N$5 556 080
• Share premium:             N$2 400 000
• Preliminary expenses:  N$ 25 500

The transaction during the period:

On 1 May 2022 the directors of Delta Limited decided to issue 4 500 000 shares of the remaining authorised shares. InnerCore Underwriters guaranteed the issue in return for 2.5% underwriting commission. These shares would be offered at N$3 per share.

On 31 July 2022, the closing date for the application, N$15 000 000 had been received from applicants for ordinary shares. The maximum number of shares was duly allotted on 31 August 2022 and InnerCore underwriters was paid. The accounting policy of the business is to maximize distributable reserves whenever it writes off preliminary and related other expenditure. Flotations cost amounting N$18 500 were paid.

An issue of 300 000, 15% preference shares was made and all the shares were taken up immediately on 31 August 2022 at par. This was the first issue of this class of shares with dividend payable annually on 28 February every year, if declared. This issue was however, not underwritten as the subscribers were institutional investors who had declared interest to take the shares.

On 15 September 2022 Delta Limited’s board of directors decided to distribute profits. It was proposed that to offer ordinary shareholders a dividend of N$0.15 per share including new shareholders. This was paid on 30 September 2022.

Delta made a profit of N$6 750 255 for the year ended 31 March 2023 before taking into account any of the information provided above. The directors decided to write off the preliminary and flotation expenses.

YOU ARE REQUIRED TO:

1. Journalise the above transactions. Narrations are not required. (20 marks)
2. Prepare an extract of statement of changes in equity showing retained earnings column only. (5 marks)

Question 4          (25 Marks)

African Stars, Chula Chula and UNAM FC were in partnership selling soccer gear and accessories. They shared profits and losses in the ratio 3:5:2. On 01 January 2022, they decided to dissolve the partnership as Chula Chula was personally insolvent. The partnership’s post- closing trial balance at that date was.

The realisation transactions are summarised as follows:

1. African Stars agreed to take over the land and buildings for N$20 000 and assume liability for the mortgage bond.
2. The equipment and accounts receivable were disposed of for N$7 400 cash.
3. Inventory was sold by public auction for N$6 350.
4. Paid auctioneer’s fee of N$100.
5. As the tangible assets have been disposed of separately, the goodwill has no value.
6. Paid payables N$8 400 in full settlement of their claims.
7. Divided the loss on realisation amongst the partners.
8. Paid UNAM FC N$2 000 for his loan.
9. Divided Chula Chula’s deficiency amongst African Stars and UNAM FC in the ratio 5:3 (applying the rule in Garner vs Murray).
10. Distributed the remaining cash to the partners.

YOU ARE REQUIRED TO:

1. Assuming that the partnership makes use of a realisation account, record the appropriate entries for dissolving the partnership by preparing the following ledger accounts:
   • Bank account  (5 marks)
   • Land and building account         (2.5 marks)
   • Realisation account      (5 marks)
   • Partners’ capital accounts in columnar format   (12.5 marks)

NB: All accounts should be properly balanced and closed off.