Question Tag: Profit Sharing

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  • 20 Marks

TAX – May 2015 – L2 – SB – Q4 – Taxation of Partnerships and Sole Proprietorships

Calculate the chargeable income of each partner before and after the admission of a new partner and determine the basis period.

The Managing Partner of Aarinola Sunkanmi & Co., a firm of Estate Surveyors and Valuers based in Lagos, has invited you to calculate the Chargeable income of each of the firm’s partners after the admission of Mariam in 2014.

The information relating to the Partnership are as follows:

(a) The firm makes up its accounts up to 31 December of each year.

(b) Extracts from the books of account for the year ended 31 December 2014, are listed below:

Description Amount (₦)
Net profit for the year 1,380,000
Depreciation 450,000
Capital Allowances for the year 366,300
Balancing Allowance 72,500
Balancing Charge 75,480
Profit on sale of fixed assets 77,500
Legal expenses for successfully defending one of the partners for professional misconduct 14,000

(c) Other information:

(i) The THREE partners are Aarinola, Olasunkanmi and Murphiefe.

(ii) Profit sharing ratio is as follows:

  • Aarinola: 2
  • Olasunkanmi: 1
  • Murphiefe: 1

(iii) Aarinola and Murphiefe received ₦15,000 each as interest on loan per annum.

(iv) Salaries paid to each partner are as follows:

  • Aarinola: ₦140,000 per annum
  • Olasunkanmi: ₦60,000 per annum
  • Murphiefe: ₦60,000 per annum

(v) Olasunkanmi ceased to be a partner on 30 June 2014. Mariam was admitted on 1 July 2014. Mariam’s salary was fixed at ₦60,000 per annum. She also received interest on capital of ₦10,000 per annum.

(vi) Included in travelling expenses is the sum of ₦12,000 paid towards the annual vacation of Aarinola, the Principal Partner.

(vii) On Mariam’s admission in July 2014, the profit sharing ratio was changed to:

  • Aarinola: 10
  • Murphiefe: 7
  • Mariam: 3

Required:

a. Compute the Chargeable Income of each partner: i. Prior to admission of Mariam (9 Marks)
ii. Post-admission of Mariam (9 Marks)

b. State the basis period for the existing partners. (2 Marks)

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  • 20 Marks

TAX – May 2022 – L2 – SA – Q2 – Personal Income Tax (PIT)

Compute the personal income tax assessable for each partner in a partnership, considering legal fees, capital allowances, and profit-sharing.

You attended an interview for employment as Assistant Manager (Tax) in a professional firm. The following were presented to you to proffer solutions:

Mariam, Ola, Jude and Co., a firm of quantity surveyors, makes up its accounts to December 31 of each year. The following details were extracted from the firm’s accounting books in respect of the year ended December 31, 2019:

Item Amount (N)
Net profit for the year 1,540,000
Legal expenses for successfully defending one of the partners for alleged professional misconduct 100,000
Depreciation 360,000
Profit on sale of property, plant and equipment 4,220
Balancing charge 10,400
Balancing allowance 6,900
Capital allowances for the year 300,000

Additional information:

  1. Profit sharing ratio agreed by the partners: Mariam 2, Ola 3, Jude 5
  2. Mariam, Ola, and Jude received N7,400 each per annum as interest on loan to the firm
  3. Salaries paid to each of the partners are:
    • Mariam: N240,000
    • Ola: N200,000
    • Jude: N220,000

Required:
Compute the personal income tax assessable for each partner for the relevant year of assessment.

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  • 15 Marks

BL – Nov 2011 – L1 – SB – Q5 – Partnership Law

Discussing the required minimum contents of a partnership agreement and legal considerations in a dispute.

(a) “It is not necessary for any two or more persons who intend to enter into a partnership to enter into any formal agreement. Where, however, they decide to do so, such agreements must have certain minimum contents.”

State any SIX of these minimum contents. (6 Marks)

(b) Femi and Solape entered into an agreement to contribute equal amounts to buy books. They purchased the books and shared them between themselves for sale. Subsequent to the initial purchase, however, Femi purchased books alone. Solape demanded that she share equally with Femi the profit made from the sale of the books, but Femi refused on the ground that Solape had not contributed towards the purchase of the books. Solape threatened to institute a court action for one half of the profit made on the sale of the books, claiming a partnership agreement. The written agreement between them was for sharing of the books purchased, not for sharing of the profit.

You are required to advise the parties. (9 Marks)

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  • 1 Marks

FA – Nov 2011 – L1 – SA – Q4 – Partnership Accounts

This question calculates the profit share between partners.

What is the profit to be shared by the partners for the year?
A. N104,000
B. N108,000
C. N114,400
D. N120,000
E. N126,000

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  • 5 Marks

FA – Nov 2020 – L1 – SB – Q6a – Partnership Accounts

Explain the general rules under articles of partnership.

In the absence of any express agreement between partners in a firm, outline
six general rules to be applied in resolving issues between the partners.
(5 Marks)

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  • 15 Marks

FA – Nov 2012 – L1 – SB – Q5 – Accounting Concepts

Prepare joint venture accounts between Taiwo and Kehinde and the memorandum joint venture account.

Taiwo and Kehinde entered into a joint venture to acquire packaging materials for table water production and to sell them to table water producers. They agreed to share joint venture profits or losses in the ratio 3:2, respectively.

At the outset, Taiwo sent Kehinde a cheque of N200,000 for his participation in the venture. They sold all the goods and recorded the following cash transactions:

Taiwo (N) Kehinde (N)
Revenue 320,000 210,000
Traveling expenses 32,700 46,300
Advertising 10,300 9,100
Stall rent 8,500 7,000
Wages of casual helper 4,800 –
Sundry expenses 5,900 2,900
Purchases 160,000 110,000

Settlement between the co-venturers took place by cheque.

Required:

a. Prepare the Joint Venture with Kehinde Account in the ledger of Taiwo. (5 Marks)
b. Prepare the Joint Venture with Taiwo Account in the ledger of Kehinde. (5 Marks)
c. Prepare the Memorandum Joint Venture Accounts. (5 Marks)

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  • 1 Marks

FA – Nov 2012 – L1 – SA – Q28 – Partnership Accounts

Identifying the new profit-sharing ratio when a new partner is admitted.

Sanni and Ajayi are in partnership, sharing profits or losses equally. If Kunle is admitted as a new partner to take one-fifth as his share, what is the new profit or loss sharing ratio?

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  • 1 Marks

BL – May 2013 – L1 – SA – Q13 – Partnership Law

This question tests the method of sharing profits where no agreement exists.

In a partnership, where there is no agreement on sharing of profits, how do the partners share the profit?

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  • 1 Marks

FA – May 2013 – L1 – SA – Q35 – Partnership Accounts

This question asks for a partner’s share of the profit or loss on realisation.

What is Hassan’s share of profit or loss on realisation?

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  • 1 Marks

BMF – May 2023 – L1 – SA – Q1 – Business and Organizational Structures and Choices

Identify an incorrect feature of an ordinary partnership business.

The following features describe an ordinary partnership business, EXCEPT:

A. There is an understanding that the partners’ liabilities are limited to capital contributions

B. There is the risk of disagreement between partners

C. Partners bear the risk that decisions taken may turn out bad

D. A sleeping partner must be made personally liable for any unpaid debts of the business

E. Each partner’s share of the profits is treated as an income for the purpose of calculating personal income tax

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  • 20 Marks

FA – May 2023 – L1 – SB – Q4 – Partnership Accounts

Preparation of profit or loss appropriation accounts, partners’ current accounts, and statement of financial position for the partnership of Lag and Kase.

Lag and Kase were in partnership. Their first year of operation ended on December 31, 2018. On January 01, 2018, Lag made a cash contribution of N96,000,000 and a motor car valued at N28,000,000. The car cost N45,000,000 few years ago when it was purchased. Kase contributed N84,000,000 cash. The partnership constitution spelt out the following:

  1. Profit or loss sharing ratio shall be Lag 3, Kase 2.
  2. Interest on capital shall be 8% per annum.
  3. Interest on drawings shall be 6% per annum.
  4. A salary of N16,000,000 per annum shall be paid to Kase, who is an active partner.

During the year ended December 31, 2018, the business made a net profit of N58,000,000 before any appropriation and interest on a 10% N40,000,000 loan advanced by Lag to the business.

Drawings during the year were Lag N15,000,000 and Kase N18,000,000.

Required:

a. Prepare the profit or loss appropriation accounts for the year ended December 31, 2018. (8 Marks)

b. The partners’ current accounts for the year ended December 31, 2018. (5 Marks)

c. The partners’ capital accounts for the year ended December 31, 2018. (4 Marks)

d. The statement of financial position (extract) as at December 31, 2018. (3 Marks)

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  • 1 Marks

FA – May 2023 – L1 – SA – Q11 – Partnership Accounts

Calculating the share of profit for a partner with a guaranteed minimum share.

Saka, Bako and Sule are in partnership sharing profits or losses in the ratio 3:2:1. During the year, the partnership divisible profit was N17,730,000. Saka, but not Bako, guaranteed Sule a minimum share of profit of N3,800,000. Calculate the share of profit of Saka.

A. N5,850,900

B. N6,965,000

C. N8,000,000

D. N8,020,000

E. N8,865,000

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  • 20 Marks

FA Nov 2019 – L2 – SB – Q5 – Partnership Accounts

This question involves the preparation of a profit and loss account and a statement of financial position for a partnership firm based on the given partnership agreement and trial balance.

Three brothers; Wa, Zo, and Bia are in partnership, trading under the name and style WaZoBia. The partnership agreement provides for:

% N’000
i. Annual commission payable to:
– Wa 4,000
– Bia 8,000
ii. Annual salary payable to:
– Wa 5,000
– Zo 8,000
iii. Interest on partners’ fixed capital 5%
iv. Interest on partners’ drawings 5%
v. Equal share of profit or loss (1:1:1)

The extract of the partnership balances for the period under review is as follows:

WaZoBia Trial Balance for the year ended October 31, 2019 Debit (N’000) Credit (N’000)
Partners’ capital as at November 1, 2018:
– Wa 60,000
– Zo 60,000
– Bia 50,000
Partners’ drawings:
– Wa 5,000
– Zo 4,000
– Bia 2,000
Gross profit for the year 116,000
Trade receivables 55,000
Trade payables 27,560
Irrecoverable debt 1,000
Utility 8,600
Postage and communication 3,200
Allowances for bad debt at November 1, 2018 6,000
Property, plant and machinery 270,400
Staff cost 18,360
Distribution cost 5,000
Other income 4,000
Finance cost 1,000
5% Loan notes 50,000
Inventory at October 31, 2019 6,000
Accumulated depreciation on freehold properties 16,720
Accumulated amortisation of leasehold property 2,000
Rent and rates 3,360
Cash and cash equivalent 9,360
Total 392,280 392,280

The following information is also relevant for the preparation of the financial statements:

  1. Allowances for doubtful debts should be adjusted to 10% of trade receivables.
  2. Accrued expenses for the period:
    • Utility N400,000;
    • Postage and communication N200,000.
  3. Prepaid expenses for the period:
    • Rent and rates N600,000;
    • Staff cost N300,000.
  4. PPE includes a leasehold property of N20,000,000, which is amortised over 10 years. Depreciation charge for the year on freehold PPE has been estimated to be N5,000,000.
  5. Finance cost in the trial balance includes interest paid on 5% loan notes amounting to N500,000.

Required:

a. Prepare the statement of profit or loss for the year ended October 31, 2019. (12 Marks)

b. Prepare the statement of financial position as at October 31, 2019. (8 Marks)

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  • 1 Marks

FA – Nov 2019 – L1 – SA – Q19 – Partnership Accounts

Determine Obi’s share of profit in the partnership.

What is Obi’s share of profit for the year?

The extract from the partnership books for the period ended September 30, 2019, is as follows:

  • Obi and Ora are partners, trading under the name, Obiora & Co.
  • The profit-sharing ratio is equal.
  • Profit for the period amounted to N240,000.
  • Interest on capital is 10%.
  • Other details:
    • Obi: N200,000 (opening capital), N40,000 (current account balance)
    • Ora: N100,000 (opening capital), N80,000 (current account balance)

A. N20,000
B. N28,000
C. N39,000
D. N79,000
E. N89,000

 

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  • 7 Marks

PT – May 2020 – L2 – Q3a – Scope and computation of income tax for partnerships

Assessable income computation for partners in a partnership business.

a) During the year ended 31 December 2018, the partnership of David, Stella, and Percy reported an adjusted profit of GH¢951,000 before charging partners’ salaries, interest on capital, and cost of traveling for leave.

David Stella Percy
Profit/loss sharing ratio 3 2 1
Salaries GH¢48,000 GH¢72,000 GH¢96,000
Interest on Capital GH¢30,000 GH¢20,000 GH¢10,000
Cost of traveling for leave GH¢20,000 GH¢30,000 GH¢25,000
Required:
Compute the assessable income for each partner.
(7 marks)

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  • 10 Marks

FA – Mar 2024 – L1 – Q2b – Preparation of Partnership accounts

Prepare the capital accounts for Armah, Siameh, and Benya following the admission of a new partner.

Armah and Siameh were in partnership and shared profits and losses in the ratio of 3:2 respectively. The balances on the partners’ capital accounts at July 1, 2022, were: Armah GH¢187,500, Siameh GH¢300,000.

Due to expansion of their business, Benya was admitted as a partner on October 1, 2022, under the following arrangements:

i) The new profit-sharing ratio between Armah, Siameh, and Benya would be 35%, 35%, and 30% respectively.

ii) Benya was to introduce capital of GH¢375,000 but was unable to bring cash into the business immediately. Instead, he contributed his share of goodwill of GH¢180,000.

iii) Goodwill was valued at GH¢450,000 and was to be written off immediately after Benya’s admission. The existing partners agreed that goodwill should not be retained in the books of the partnership.

Required:

Prepare the partners’ capital accounts to reflect the admission of Benya into the partnership. (10 marks)

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  • 20 Marks

FA – July 2023 – L1 – Q2 – Preparation of Partnership accounts

Prepare a ledger account for rental income and a partnership's profit and loss appropriation account with related partners' current accounts.

a) A company owns a number of properties which are rented to tenants. The following information is available for the year ended 30 June 2021:

Date Rent in advance (GHȼ) Rent in arrears (GHȼ)
30 June 2020 140,500 5,200
30 June 2021 148,200 9,200

Cash received from tenants for the year ended 30 June 2021 was GHȼ820,400. All rent in arrears was subsequently received.

Required:

Prepare the ledger account for rental income showing the transfer to the Statement of Profit and Loss, for the year ended 30 June 2021. (5 marks)

b) Awuni, Adjetey, and Kwame are in partnership, running an evening school, and sharing residual profits and losses in the ratio 4:3:3 respectively. At 1 October 2021 their capital and current account balances were:

By formal agreement, the partners are entitled to receive interest at 5% on capital. In addition, Adjetey is paid an annual salary of GHȼ5,455 for his part in running the business.

On 1 April 2022, by mutual agreement, Kwame increased his capital by paying a further GHȼ4,000 into the partnership bank account. Awuni reduced his capital by GHȼ5,000, but kept this in the partnership as a loan bearing interest at 10% per annum. Interest on the loans, by agreement, is credited to Awuni’s current account.

The partners are allowed to take out drawings at any time during the year, but they have agreed to charge interest on such drawings. The date of taking out the drawings, the amount drawn out by each partner, and the interest payable, were as follows during the year to 30 September 2022:

Required:

i) Prepare the profit and loss appropriation account for the year ended 30 September 2022. (8 marks)
ii) Prepare the partners’ current accounts for the year ended 30 September 2022. (7 marks)

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  • 20 Marks

FA – Aug 2022 – L1 – Q2 – Non-current assets and depreciation | Preparation of Partnership accounts

Preparation of ledger accounts for office equipment and disposal, calculation of profit due to a partner, and preparation of an appropriation account and current accounts for partners.

a) The following Statement of Financial Position extract has been taken from the accounts of Yamfo Ltd as at 31 December 2020:

Non-current Assets Cost (GHȼ) Accumulated Depreciation (GHȼ) Net Book Value (GHȼ)
Office Equipment 172,800 92,100 80,700

During the year ended 31 December 2021, the following transactions took place in relation to Office Equipment.

Disposals:

Equipment Disposal Date Purchase Date Original Cost (GHȼ) Disposal Proceeds (GHȼ)
Equipment 1 31 March 2021 1 January 2018 22,000 4,000
Equipment 2 30 June 2021 1 January 2017 30,000 5,100

Additions:

Equipment Date of Addition Cost (GHȼ)
Equipment 3 1 October 2021 35,000

Depreciation for Office Equipment is charged using the straight-line method based on a five-year life and an estimated residual value of 10% of the original cost. Depreciation is applied from the date the Office Equipment was bought until it was sold. All transactions were by cheque.

Required:
i) Prepare the Office Equipment ledger account for the year ended 31 December 2021.
(2 marks)

ii) Prepare the Disposal of Office Equipment ledger account for the year ended 31 December 2021.
(4 marks)

b) The following balances are in the books of a partnership as at 31 December 2021:

Account Amount (GHȼ)
Capital accounts Badu, as at 1 January 2021 500,000
Tawiah, introduced 1 July 2021 300,000
Drawings Amount (GHȼ)
Badu 220,000
Tawiah 100,000

Additional information:

  1. Until 30 June 2021, Badu had run the business as a sole trader. Tawiah joined him on 1 July 2021, introducing capital of GHȼ300,000.
  2. Under the partnership agreement, the balance of profit is to be shared between Badu and Tawiah in the ratio 3:2. No interest is to be charged on drawings. Both partners are to receive interest on their capital account balances at 5% per annum. Tawiah is to receive a salary of GHȼ40,000 per annum, but no salary is to be paid to Badu.
  3. The profit for the year ended 31 December 2021 was GHȼ330,000. It was agreed that this profit had accrued one-third in the six months ended 30 June 2021 and two-thirds in the six months ended 31 December 2021, except for an irrecoverable debt of GHȼ30,000 charged in arriving at the profit, which was to be regarded as occurring in the six months ended 30 June 2021.

Required:
i) Calculate the amount of profit due to Badu for the six months to 30 June 2021.
(2 marks)

ii) Prepare the Appropriation Account for Badu and Tawiah for the six months ended 31 December 2021.
(6 marks)

iii) Prepare the Current Accounts for Badu and Tawiah for the year ended 31 December 2021.
(6 marks)

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