PastPaper.question 1 · Structured
30 PastPaper.marksGreen and Brown are in partnership, sharing profits and losses in the ratio of 3:2.
Their statement of financial position at 31 December 2023 was as follows:
$$\begin{array}{lrr}
\hline
& \$ & \$ \\
\hline
\textbf{Non-current assets} & & \\
\text{Premises} & & 120,000 \\
\text{Equipment (net book value)} & & 45,000 \\
\hline
& & 165,000 \\
\textbf{Current assets} & & \\
\text{Inventory} & 28,000 & \\
\text{Trade receivables} & 24,500 & \\
\text{Bank} & 6,500 & \\
\hline
& & 59,000 \\
\hline
\textbf{Total assets} & & \mathbf{224,000} \\
\hline
\textbf{Capital Accounts} & & \\
\text{Green} & & 120,000 \\
\text{Brown} & & 86,000 \\
\hline
& & 206,000 \\
\textbf{Current liabilities} & & \\
\text{Trade payables} & & 18,000 \\
\hline
\textbf{Total capital and liabilities} & & \mathbf{224,000} \\
\hline
\end{array}$$
On 1 January 2024, Milford PLC acquired the business of the partnership on the following terms:
1. Premises were valued at $150,000.
2. Equipment was valued at $38,000.
3. Inventory was valued at $25,000.
4. Trade receivables were taken over at book value less a 4\% allowance for doubtful debts.
5. Milford PLC assumed the trade payables at book value.
6. The bank balance was not taken over by Milford PLC.
7. The purchase consideration was agreed at $240,000. This was to be satisfied by the issue of 120,000 ordinary shares of $1.00 each in Milford PLC at a premium of $0.50 per share, with the balance to be paid in cash.
8. Dissolution expenses of $3,500 were paid from the partnership bank account.
9. Ordinary shares in Milford PLC were distributed to Green and Brown in their profit-sharing ratio. The remaining balances on the partners' capital accounts were settled in cash from the partnership's bank account.
\textbf{Required:}
(a) Calculate the purchase consideration paid by Milford PLC and state how it was settled. [4 marks]
(b) Prepare the Realisation Account in the books of the partnership of Green and Brown. [8 marks]
(c) Prepare the Partners' Capital Accounts, showing the final settlement of the partnership. [8 marks]
(d) Prepare the journal entry in Milford PLC's books to record the acquisition of the partnership business (a narrative is not required). [6 marks]
(e) State how purchased Goodwill should be treated in the financial statements of Milford PLC in subsequent years in accordance with IAS 38. [4 marks]
Their statement of financial position at 31 December 2023 was as follows:
$$\begin{array}{lrr}
\hline
& \$ & \$ \\
\hline
\textbf{Non-current assets} & & \\
\text{Premises} & & 120,000 \\
\text{Equipment (net book value)} & & 45,000 \\
\hline
& & 165,000 \\
\textbf{Current assets} & & \\
\text{Inventory} & 28,000 & \\
\text{Trade receivables} & 24,500 & \\
\text{Bank} & 6,500 & \\
\hline
& & 59,000 \\
\hline
\textbf{Total assets} & & \mathbf{224,000} \\
\hline
\textbf{Capital Accounts} & & \\
\text{Green} & & 120,000 \\
\text{Brown} & & 86,000 \\
\hline
& & 206,000 \\
\textbf{Current liabilities} & & \\
\text{Trade payables} & & 18,000 \\
\hline
\textbf{Total capital and liabilities} & & \mathbf{224,000} \\
\hline
\end{array}$$
On 1 January 2024, Milford PLC acquired the business of the partnership on the following terms:
1. Premises were valued at $150,000.
2. Equipment was valued at $38,000.
3. Inventory was valued at $25,000.
4. Trade receivables were taken over at book value less a 4\% allowance for doubtful debts.
5. Milford PLC assumed the trade payables at book value.
6. The bank balance was not taken over by Milford PLC.
7. The purchase consideration was agreed at $240,000. This was to be satisfied by the issue of 120,000 ordinary shares of $1.00 each in Milford PLC at a premium of $0.50 per share, with the balance to be paid in cash.
8. Dissolution expenses of $3,500 were paid from the partnership bank account.
9. Ordinary shares in Milford PLC were distributed to Green and Brown in their profit-sharing ratio. The remaining balances on the partners' capital accounts were settled in cash from the partnership's bank account.
\textbf{Required:}
(a) Calculate the purchase consideration paid by Milford PLC and state how it was settled. [4 marks]
(b) Prepare the Realisation Account in the books of the partnership of Green and Brown. [8 marks]
(c) Prepare the Partners' Capital Accounts, showing the final settlement of the partnership. [8 marks]
(d) Prepare the journal entry in Milford PLC's books to record the acquisition of the partnership business (a narrative is not required). [6 marks]
(e) State how purchased Goodwill should be treated in the financial statements of Milford PLC in subsequent years in accordance with IAS 38. [4 marks]
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
**(a) Calculation and Settlement of Purchase Consideration**
$$\begin{array}{lr}
\text{Total Purchase Consideration} & \$240,000 \\
\hline
\textbf{Settled by:} & \\
\text{Ordinary Shares in Milford PLC } (120,000 \times \$1.50) & \$180,000 \\
\text{Cash (Balance)} & \$60,000 \\
\hline
\text{Total} & \$240,000 \\
\hline
\end{array}$$
---
**(b) Realisation Account**
$$\begin{array}{lr|lr}
\hline
\textbf{Debit} & \$ & \textbf{Credit} & \$ \\
\hline
\text{Premises} & 120,000 & \text{Trade payables (assumed)} & 18,000 \\
\text{Equipment} & 45,000 & \text{Milford PLC (Purchase consideration)} & 240,000 \\
\text{Inventory} & 28,000 & & \\
\text{Trade receivables} & 24,500 & & \\
\text{Bank (dissolution expenses)} & 3,500 & & \\
\text{Profit on Realisation:} & & & \\
\text{ - Green (3/5)} \quad 22,200 & & & \\
\text{ - Brown (2/5)} \quad 14,800 & 37,000 & & \\
\hline
& \mathbf{258,000} & & \mathbf{258,000} \\
\hline
\end{array}$$
---
**(c) Partners' Capital Accounts**
$$\begin{array}{lrr|lrr}
\hline
\textbf{Debit} & \text{Green (\$)} & \text{Brown (\$)} & \textbf{Credit} & \text{Green (\$)} & \text{Brown (\$)} \\
\hline
\text{Shares in Milford PLC }^1 & 108,000 & 72,000 & \text{Balance b/d} & 120,000 & 86,000 \\
\text{Bank (final settlement)} & 34,200 & 28,800 & \text{Realisation profit} & 22,200 & 14,800 \\
\hline
& \mathbf{142,200} & \mathbf{100,800} & & \mathbf{142,200} & \mathbf{100,800} \\
\hline
\end{array}$$
*Workings:*
$^1$ **Distribution of Shares (Profit Sharing Ratio 3:2):**
- Green: $120,000 \text{ shares} \times 3/5 = 72,000 \text{ shares} \times $1.50 = $108,000$
- Brown: $120,000 \text{ shares} \times 2/5 = 48,000 \text{ shares} \times $1.50 = $72,000$
---
**(d) Journal Entry in Milford PLC's Books**
$$\begin{array}{lrr}
\hline
\textbf{Account Details} & \textbf{Debit (\$)} & \textbf{Credit (\$)} \\
\hline
\text{Premises} & 150,000 & \\
\text{Equipment} & 38,000 & \\
\text{Inventory} & 25,000 & \\
\text{Trade Receivables } (24,500 \times 0.96) & 23,520 & \\
\text{Goodwill }^2 & 21,480 & \\
\quad \text{Trade Payables} & & 18,000 \\
\quad \text{Ordinary Share Capital } (120,000 \times \$1.00) & & 120,000 \\
\quad \text{Share Premium } (120,000 \times \$0.50) & & 60,000 \\
\quad \text{Bank / Cash} & & 60,000 \\
\hline
\mathbf{Total} & \mathbf{258,000} & \mathbf{258,000} \\
\hline
\end{array}$$
*Workings:*
$^2$ **Calculation of Goodwill:**
$$\begin{array}{lr}
\text{Purchase Consideration} & \$240,000 \\
\text{Less: Fair Value of Net Assets Acquired} & \\
\quad \text{Premises} & 150,000 \\
\quad \text{Equipment} & 38,000 \\
\quad \text{Inventory} & 25,000 \\
\quad \text{Trade Receivables} & 23,520 \\
\quad \text{Less: Trade Payables} & (18,000) \\
\quad \text{Net Assets Acquired} & (218,520) \\
\hline
\textbf{Goodwill} & \mathbf{\$21,480} \\
\hline
\end{array}$$
---
**(e) Treatment of Goodwill (IAS 38)**
1. Goodwill has an indefinite useful life.
2. In accordance with IAS 38, goodwill is not amortised.
3. Instead, it must be tested annually for impairment (or more frequently if events/changes indicate it might be impaired).
4. If the carrying value of goodwill exceeds its recoverable amount, an impairment loss is recognised in profit or loss.
$$\begin{array}{lr}
\text{Total Purchase Consideration} & \$240,000 \\
\hline
\textbf{Settled by:} & \\
\text{Ordinary Shares in Milford PLC } (120,000 \times \$1.50) & \$180,000 \\
\text{Cash (Balance)} & \$60,000 \\
\hline
\text{Total} & \$240,000 \\
\hline
\end{array}$$
---
**(b) Realisation Account**
$$\begin{array}{lr|lr}
\hline
\textbf{Debit} & \$ & \textbf{Credit} & \$ \\
\hline
\text{Premises} & 120,000 & \text{Trade payables (assumed)} & 18,000 \\
\text{Equipment} & 45,000 & \text{Milford PLC (Purchase consideration)} & 240,000 \\
\text{Inventory} & 28,000 & & \\
\text{Trade receivables} & 24,500 & & \\
\text{Bank (dissolution expenses)} & 3,500 & & \\
\text{Profit on Realisation:} & & & \\
\text{ - Green (3/5)} \quad 22,200 & & & \\
\text{ - Brown (2/5)} \quad 14,800 & 37,000 & & \\
\hline
& \mathbf{258,000} & & \mathbf{258,000} \\
\hline
\end{array}$$
---
**(c) Partners' Capital Accounts**
$$\begin{array}{lrr|lrr}
\hline
\textbf{Debit} & \text{Green (\$)} & \text{Brown (\$)} & \textbf{Credit} & \text{Green (\$)} & \text{Brown (\$)} \\
\hline
\text{Shares in Milford PLC }^1 & 108,000 & 72,000 & \text{Balance b/d} & 120,000 & 86,000 \\
\text{Bank (final settlement)} & 34,200 & 28,800 & \text{Realisation profit} & 22,200 & 14,800 \\
\hline
& \mathbf{142,200} & \mathbf{100,800} & & \mathbf{142,200} & \mathbf{100,800} \\
\hline
\end{array}$$
*Workings:*
$^1$ **Distribution of Shares (Profit Sharing Ratio 3:2):**
- Green: $120,000 \text{ shares} \times 3/5 = 72,000 \text{ shares} \times $1.50 = $108,000$
- Brown: $120,000 \text{ shares} \times 2/5 = 48,000 \text{ shares} \times $1.50 = $72,000$
---
**(d) Journal Entry in Milford PLC's Books**
$$\begin{array}{lrr}
\hline
\textbf{Account Details} & \textbf{Debit (\$)} & \textbf{Credit (\$)} \\
\hline
\text{Premises} & 150,000 & \\
\text{Equipment} & 38,000 & \\
\text{Inventory} & 25,000 & \\
\text{Trade Receivables } (24,500 \times 0.96) & 23,520 & \\
\text{Goodwill }^2 & 21,480 & \\
\quad \text{Trade Payables} & & 18,000 \\
\quad \text{Ordinary Share Capital } (120,000 \times \$1.00) & & 120,000 \\
\quad \text{Share Premium } (120,000 \times \$0.50) & & 60,000 \\
\quad \text{Bank / Cash} & & 60,000 \\
\hline
\mathbf{Total} & \mathbf{258,000} & \mathbf{258,000} \\
\hline
\end{array}$$
*Workings:*
$^2$ **Calculation of Goodwill:**
$$\begin{array}{lr}
\text{Purchase Consideration} & \$240,000 \\
\text{Less: Fair Value of Net Assets Acquired} & \\
\quad \text{Premises} & 150,000 \\
\quad \text{Equipment} & 38,000 \\
\quad \text{Inventory} & 25,000 \\
\quad \text{Trade Receivables} & 23,520 \\
\quad \text{Less: Trade Payables} & (18,000) \\
\quad \text{Net Assets Acquired} & (218,520) \\
\hline
\textbf{Goodwill} & \mathbf{\$21,480} \\
\hline
\end{array}$$
---
**(e) Treatment of Goodwill (IAS 38)**
1. Goodwill has an indefinite useful life.
2. In accordance with IAS 38, goodwill is not amortised.
3. Instead, it must be tested annually for impairment (or more frequently if events/changes indicate it might be impaired).
4. If the carrying value of goodwill exceeds its recoverable amount, an impairment loss is recognised in profit or loss.
PastPaper.markingScheme
**(a) [Total: 4 marks]**
- State purchase consideration of $240,000 (1)
- Settlement by Ordinary Shares: $180,000 (2) [1 mark for 120,000 shares, 1 mark for the premium valuation of $1.50]
- Settlement by Cash: $60,000 (1)
**(b) [Total: 8 marks]**
- Debit: Premises ($120,000) (1), Equipment ($45,000) (1), Inventory ($28,000) (1), Trade receivables ($24,500) (1)
- Debit: Bank - dissolution expenses ($3,500) (1)
- Credit: Trade payables ($18,000) (1), Milford PLC ($240,000) (1)
- Credit/Transfer: Realisation profit split to Green $22,200 and Brown $14,800 (1 for both correct, or 1/2 mark each)
**(c) [Total: 8 marks]**
- Balances b/d (Green $120,000, Brown $86,000) (1 for both)
- Realisation Profit (Green $22,200, Brown $14,800) (2) [1 mark each]
- Shares in Milford PLC (Green $108,000, Brown $72,000) (2) [1 mark each]
- Bank final settlement (Green $34,200, Brown $28,800) (3) [1 mark each + 1 mark for correct balancing method]
**(d) [Total: 6 marks]**
- Debit: Premises $150,000 (1)
- Debit: Equipment $38,000 (1)
- Debit: Inventory $25,000 (1)
- Debit: Trade Receivables $23,520 (1)
- Debit: Goodwill $21,480 (1) [O/F from calculated net assets]
- Credits: Trade payables $18,000 (0.5), Share capital $120,000 (0.5), Share premium $60,000 (0.5), Bank $60,000 (0.5) (Combined credits: 2 marks total, or 0.5 marks each)
**(e) [Total: 4 marks]**
- Indefinite useful life (1)
- Not amortised (1)
- Tested for impairment annually (or when indicators arise) (1)
- Impairment losses are written off to profit or loss (1)
- State purchase consideration of $240,000 (1)
- Settlement by Ordinary Shares: $180,000 (2) [1 mark for 120,000 shares, 1 mark for the premium valuation of $1.50]
- Settlement by Cash: $60,000 (1)
**(b) [Total: 8 marks]**
- Debit: Premises ($120,000) (1), Equipment ($45,000) (1), Inventory ($28,000) (1), Trade receivables ($24,500) (1)
- Debit: Bank - dissolution expenses ($3,500) (1)
- Credit: Trade payables ($18,000) (1), Milford PLC ($240,000) (1)
- Credit/Transfer: Realisation profit split to Green $22,200 and Brown $14,800 (1 for both correct, or 1/2 mark each)
**(c) [Total: 8 marks]**
- Balances b/d (Green $120,000, Brown $86,000) (1 for both)
- Realisation Profit (Green $22,200, Brown $14,800) (2) [1 mark each]
- Shares in Milford PLC (Green $108,000, Brown $72,000) (2) [1 mark each]
- Bank final settlement (Green $34,200, Brown $28,800) (3) [1 mark each + 1 mark for correct balancing method]
**(d) [Total: 6 marks]**
- Debit: Premises $150,000 (1)
- Debit: Equipment $38,000 (1)
- Debit: Inventory $25,000 (1)
- Debit: Trade Receivables $23,520 (1)
- Debit: Goodwill $21,480 (1) [O/F from calculated net assets]
- Credits: Trade payables $18,000 (0.5), Share capital $120,000 (0.5), Share premium $60,000 (0.5), Bank $60,000 (0.5) (Combined credits: 2 marks total, or 0.5 marks each)
**(e) [Total: 4 marks]**
- Indefinite useful life (1)
- Not amortised (1)
- Tested for impairment annually (or when indicators arise) (1)
- Impairment losses are written off to profit or loss (1)