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Unit 1: June 2017, Question# 2(a)

5/21/2018

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No. 2(a) (i): Preparing the Revaluation Account of Audrey, Camille and Robert:
Workings:
Please note that no general journal entries were required as part of the solution for this question, however the general entries necessary to record the retiring of Audrey from the partnership and the related revaluation exercise are shown below for teaching purposes. 
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​*Note that the revaluation exercise resulted in a revaluation gain of $180,000 this gain will be split among the partners using the old profit sharing ratio:
Therefore: Debit: Audrey’s capital account (3/6 x $180,000) = $90,000
                    Debit: Camille’s capital account (2/6 x $180,000) = $60,000
                    Debit: Robert’s capital account (1/3 x $180,000) = $30,000.
Below is the revaluation account of Audrey, Camille and Robert:
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No. 2(a) (ii): Preparing the Capital Accounts of Audrey, Camille and Robert for the old and new partnerships:
Please note that no general journal entries were required as part of the solution for this question, however the general entries necessary to prepare the capital account for the old and the new partnerships are shown below for teaching purposes. 
Picture
​*Goodwill is always recorded initially on the books of a partnership in the old profit sharing ratio. The old profit sharing ratio (OPSR) is 3:2:1:
Therefore: Debit: Goodwill account with $600,000
                    Credit: Audrey’s capital account (3/6 x $600,000) = $300,000
                    Credit: Camille’s capital account (2/6 x $600,000) = $200,000
                    Credit: Robert’s capital account (1/6 x $600,000) = $100,000
                   
**As goodwill is not to be kept on the books of the new partnership it must be taken off the books using the new profit sharing ratio (NPSR) of 2:1:
Therefore: Debit: Camille’s capital account (2/3 x $600,000) = $400,000
                    Debit: Robert’s capital account (1/3 x $600,000) = $200,000
                    Credit: Goodwill account with $600,000.          
Now that all the necessary entries have been identified the Capital Account of the partnership can be prepared.
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*The partners have decided that the balance due to Audrey upon leaving the partnership will be recorded as a loan until the remaining partners have injected more capital into the new partnership. As a result the balance due to Audrey will be credited to her loan account to reflect the new balance due to her. She will have no balance carried forward on her capital account.
I hope that you found this proposed solution helpful! If you did please share it! Also, feel free to ask any questions or to comment below. Best of luck!
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    Author

    The author holds a Bsc (Hons) Degree in Applied Accounting from Oxford Brookes University, England and enjoys a successful career as an Accounting Supervisor and a private tutor.

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