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Increasing Partnership Capital Strategies

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9 views19 pages

Increasing Partnership Capital Strategies

Uploaded by

sherco sdiq
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Chapter Six

Increase of Partnership Capital

- :We are Going to Study in this Chapter the Following Topics

.Increase the capital by adding cash .1

.Increase the capital by adding kinks (Non-cash) .2

.Increase the capital by capitalizing the credit partners current accounts .3

.Increase the capital by capitalizing the non distributed profit .4

.Increase the capital by capitalizing General Reserve .5

.Increase the capital by capitalizing partner's loan .6

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

1
An Increase of Partnership Capital: - The partners can increase their capital of the
partnership by one of the following ways:

1. Increase the Capital by adding cash:

Note: - Before increasing the capital the partners must pay all their debit current first.

Example: - A, B, and C partners in a partnership. they agreed to increase their capital


of each of them by I.D 50,000, their capital was A. I.D 200,000, B. I.D 150,000, C.
I.D 100,000.

B. had debit current a/c of 20,000. They must pay cash in partnership bank a/c.

.Required: - 1. Journal Entries

.Capital Account .2

- :Solution

From: Bank a/c 50,000

To: A. Capital a/c 50,000

..………………………………………………

From: Bank a/c 70,000

To: B. debit Current a/c 20,000

B. capital a/c 50,000

…………………………………………………………

From: Bank a/c 50,000

To: C. Capital a/c 50,000

Capital Account

Data A B C Data A B C

Balance b/f 200,000 150,000 100,000

Bank a/c 50,000 50,000 50,000

Balance c/f 250,000 200,000 150,000

150,000 200,000 250,000 150,000 200,000 250,000


.....................……………………………………………………………………………

2
Example: - X and Y partners in a partnership with capital of I.D 300,000 divided
between them at ratio 2: 1.

At 1/1/2016 agreed to increase the capital to be I.D 450,000 divided between them at
the same ratio. The cash must be paid in the partnership bank account.

.Required: - 1. Journal Entries

.Prepare a Capital Account .2

- :Solution

Data Total X Y

New Capital (2: 1) 450,000 300,000 150,000

Old Capital (2: 1) (300,000) (200,000) (100,000)

Cash Added into Bank 150,000 100,000 50,000

- :Journal Entries .1

From: Bank a/c 150,000

To: X. Capital a/c 100,000

Y. Capital a/c 50,000

Capital Account .2

Data Y X Data Y X

Balance b/F 200,000 100,000

Bank a/c 100,000 50,000

Balance c/f 300,000 150,000

150,000 300,000 150,000 300,000

3
.Capital Increase By Kinds (Non-cash) .2

Example: - K, L, and M partners in partnership share the profit and loss at ratio 5: 3:
2, and the partnership balance sheet was:

Balance Sheet at 31/12/2016

Fixed Asset 120,000 K. Capital 100,000

Stocks 60,000 C. capital 60,000

Debtors 80,000 M. Capital 40,000 200,000

Bills Receivable 20,000 Creditors 40,000

Bank 120,000 Bank Loan 140,000

Bills Payable 20,000

400,000 400,000

At 1/1/2016 the partners agreed to increase the capital to be 300,000 divided between
them equally. (L) paid his part by stocks, (M) paid his part by Cars.

.Required: - 1. Journal Entries

.New Balance Sheet .2

- :Solution

Data Total K L M

New Capital (Equally) 300,000 100,000 100,000 100,000

Old Capital (200,000) (100,000) (60,000) (40,000)

Increase 100,000 Zero 40,000 60,000

/ Stock (40,000) / (40,000)

Cars (60,000) / / (60,000)

Zero Zero Zero Zero

:Journal Entries .1

From: Stocks a/c 40,000

To: L. Capital a/c 40,000

…………………………………………………………

4
From: Fixed Assets a/c 60,000

To: M. Capital a/c 60,000

..…………………………………………………………

:New Balance Sheet .2

Balance Sheet

Fixed Assets 180,000 K. Capital 100,000

Stocks 100,000 L. Capital 100,000

Debtors 80,000 M. Capital 100,000 300,000

Bills Receivable 20,000 Creditors 140,000

Bank 120,000 bank loan 40,000

Bills Payable 20,000

500,000 500,000

.......................................................................................................................................

:Increase the Capital by Capitalizing Credit Partners Current Account .3

Example: - A, B, and C partners in partnership with a balance sheet at 31/12/2016 as


follows:

Balance Sheet

Fixed Assets 80,000 A. Capital 100,000

Stocks 160,000 B. Capital 100,000

Debtors 60,000 C. Capital 100,000 300,000

Bills Receivable 70,000 B. Current a/c 50,000

Bank 30,000 C. Current a/c 20,000 70,000

Creditors 30,000

400,000 400,000

5
At 1/1/2016 they decided to increase the capital to be I.D 400,000 divided between
them at ratio 2: 3: 3, they will use the credit current accounts and the rest will be paid
by cash in a partnership bank account.

.Required: - 1. Journal Entries

.Capital Account .2

.New Balance Sheet .3

- :Solution

Data Total A B C

New Capital (2: 3: 3) 400,000 100,000 150,000 150,000

Old Capital 300,000 100,000 100,000 100,000

Increase 100,000 Zero 50,000 50,000

Partners Credit current a/c (70,000) / (50,000) (20,000)

Zero Zero 30,000 30,000

Cash in Bank a/c (30,000) / / (30,000)

Zero Zero Zero Zero

:Journal Entries .1

From: B. Current a/c 50,000

C. Current a/c 20,000

To: B. Capital a/c 50,000

C. Capital a/c 20,000

.………………………………………………………………

From: Bank a/c 30,000

To: C. Capital a/c 30,000

…………………………………………………………………

6
Capital Account .2

Data A B C Data A B C

Balance B/f 100,000 100,000 100,000

Current a/c / 50,000 20,000

Bank / / 30,000

Balance c/f 100,000 150,000 150,000

150,000 150,000 100,000 150,000 150,000 100,000

:New Balance Sheet .3

Balance Sheet

Fixed Assets 80,000 A. Capital 100,000

Stocks 160,000 B. Capital 150,000

Debtors 60,000 C. Capital 150,000 400,000

Bills Receivable 70,000 Creditors 30,000

Bank 60,000

430,000 430,000

.………………………………………………………………………………………

:Increase Capital by Capitalizing Non-distributed Profit .4

:Example: - X, Y, and Z Balance Sheet at 31/12/2016 was as the following

Fixed Assets 60,000 X. Capital 90,000

Stocks 340,000 Y. Capital 180,000

Debtors 90,000 Z. Capital 130,000 400,000

Bills Receivable 40,000 Profit 90,000

Bank 20,000 Creditors 60,000

550,000 550,000

At 1/1/2016 they agreed to increase the capital to be I.D 550,000 divided between
them at ratio 2: 5: 3. The profit and loss distributed between the partners at ratio 1: 3:
2. They will used the non distributed profit and the rest will be paid cash in the
partnership bank account.

7
.Required: - 1. Journal Entries

.Capital Account .2

.New Balance Sheet .3

- :Solution

Data Total X Y Z

New Capital (2: 5: 3) 550,000 110,000 275,000 165,000

Old Capital 400,000 90,000 180,000 130,000 -

Increase 150,000 20,000 95,000 35,000

Profit (1: 3: 2) (90,000) (15,000) (45,000) (30,000)

Rest 60,000 5,000 50,000 5,000

Cash in Bank (60,000) (5,000) (50,000) (5,000)

Zero Zero Zero Zero

:Journal Entries .1

From: Profit a/c 90,000

To: X. Capital a/c 15,000

Y. Capital a/c 45,000

Z. Capital a/c 30,000

………………………………………………………

From: Bank a/c 60,000

To: X. Capital a/c 5,000

Y. Capital a/c 50,000

Z. Capital a/c 5,000

.…………………………………………………………

8
Capital Account .2

Data X Y Z Data X Y Z

Balance b/f 90,000 180,000 130,000

Profit a/c 15,000 45,000 30,000

Bank a/c 5,000 50,000 5,000

Balance c/f 110,000 275,000 165,000

165,000 275,000 110,000 165,000 275,000 110,000

:New Balance Sheet .3

Balance Sheet

Fixed Assets 60,000 X. Capital 110,000

Stocks 340,000 Y. Capital 275,000

Debtors 90,000 Z. Capital 165,000 550,000

Bills Receivable 40,000 Creditors 60,000

Bank 80,000

610,000 610,000

……………………………………………………………………………………

9
5. Increase the Capital by Capitalizing General Reserve:

Example: - A, B, and C sharing profit and loss at ratio 2: 3: 5. The Balance Sheet at
1/7/2016 was as the following:

Fixed Assets 90,000 A. Capital 100,000

Stocks 300,000 B. Capital 150,000

Debtors 175,000 C. Capital 250,000 500,000

Bills Receivable 50,000 Creditors 50,000

Bank 35,000 General Reserve 100,000

650,000 650,000

At 1/8/2016 they agree to increase the capital to be 910,000 divided between them at
ratio 1: 2: 4 by using the general reserve and the rest will be paid in the partnership
bank account.

.Required: - 1. Journal Entries

.Capital Account .2

.New Balance Sheet .3

- :Solution

Data Total A B C

New Capital (1: 2: 4) 910,000 130,000 260,000 520,000

Old Capital (500,000) (100,000) (150,000) (250,000) -

Increase 410,000 30,000 110,000 270,000

General Reserve (2: 3: 5) (100,000) (20,000) (30,000) (50,000)

Rest 310,000 10,000 80,000 220,000

Paid in Bank (310,000) (10,000) (80,000) (220,000)

Zero Zero Zero zero

10
:Journal Entries .1

From: General Reserve a/c 100,000

To: A. Capital a/c 20,000

B. Capital a/c 30,000

C. Capital a/c 50,000

..………………………………………………………………………

From: Bank a/c 310,000

To: A. Capital a/c 10,000

B. Capital a/c 80,000

C. Capital a/c 220,000

....…………………………………………………………………

Capital Account .2

Data A B C Data A B C

Balance b/f 100,000 150,000 250,000

G. R. a/c 20,000 30,000 50,000

Bank a/c 10,000 80,000 220,000

Balance c/f 130,000 260,000 520,000

520,000 260,000 130,000 520,000 260,000 130,000

11
Balance Sheet 1/8/2016 .3

Fixed Assets 90,000 A. Capital 130,000

Stocks 300,000 B. Capital 260,000

Debtors 175,000 C. Capital 520,000 910,000

Bills Receivable 50,000 Creditors 50,000

Bank 345,000

960,000 960,000

………………………………………………………………………………………

.Increase the capital by capitalizing partner's loan .6

:Example: - At 31/12/2014 the A and B balance sheet was as follows

Fixed Assets 30,000 A. Capital 80,000

Stocks 80,000 B. Capital 40,000 120,000

Debtors 30,000 B. Loan 30,000

Bills Receivable 50,000 Creditors 40,000

Bank 10,000 Bills Payable 10,000

200,000 200,000

At 1/1/2015 they agreed to increase the capital to be I.D 210,000 in the same ratio as
before. Also, they agreed that partner B. Will use his loan and partner A. Will pay his
part cash in partnership bank account.

.Required: - 1. Journal Entries

.Capital Account .2

New Balance Sheet .3

12
- :Solution

Data Total A B

New Capital (2: 1) 210,000 140,000 70,000

- Old Capital 120,000 80,000 40,000

Increase 90,000 60,000 30,000

B. Loan (30,000) / (30,000)

Balance 60,000 60,000 Zero

/ A. Bank (60,000) (60,000)

Zero Zero Zero

:Journal Entries .1

From: B. Loan a/c 30,000

To: B. Capital a/c 30,000

……………………………………………………

From: Bank a/c 60,000

To: A. Capital a/c 60,000

……………………………………………………

Capital Account .2

Data A B Data A B

Balance b/f 80,000 40,000

B. Loan a/c / 30,000

/ B. Bank a/c 60,000

Balance c/f 140,000 70,000

70,000 140,000 70,000 140,000

13
.………………………………………………………………………………………

:New Balance Sheet .3

Balance Sheet

Fixed Assets 30,000 A. Capital 140,000

Stocks 80,000 B. Capital 70,000 210,000

Debtors 30,000 Creditors 40,000

Bills Receivable 50,000 Bills Payable 10,000

Bank 70,000

250,000 250,000

.………………………………………………………………………………………

14
General Example

X, Y, and Z sharing profit and Loss @ ratio 5: 3: 2, the balance sheet at 30/9/2016
was as follows:

Balance Sheet at 30/9/21016

Fixed Assets 60,000 X. Capital 100,000

Stocks 140,000 Y. Capital 60,000

Debtors 60,000 Z. Capital 40,000 200,000

Bills Receivable 40,000 Profit 40,000

Z. Current a/c 10,000 General Reserve 30,000

Bank 20,000 Y. Current a/c 10,000

X. Loan 15,000

Creditors 35,000

330,000 330,000

At 1/10/2016 they agreed on following: -

1. Increase capital to be I.D 360,000 at ratio 2: 1: 1.

2. They will use the profit, X. Loan, Y. Current account and General Reserve account
to increase the capital.

3. The rest of the increase will be paid by cash in the partnership bank account from X
and Y, Z, will use his car, the value of the car I.D 10,000 and the rest will be paid by
stocks.

.Required: - 1. Journal Entries

.Capital Account .2

.New Balance Sheet .3

15
- :Solution

Data Total X Y Z

New Capital (2: 1: 1) 360,000 180,000 90,000 90,000

Old Capital 200,000 100,000 60,000 40,000 -

Increase 160,000 80,000 30,000 50,000

Profit (5: 3: 2) (40,000) (20,000) (12,000) (8,000)

42,000 18,000 60,000 120,000

G. R. (5: 3: 2) (30,000) (15,000) (9,000) (6,000)

Rest 90,000 45,000 9,000 36,000

/ / X. Loan (15,000) (15,000)

36,000 9,000 30,000 75,000

Current a/c 1,000 / (9,000) 10,000

Zero 46,000 30,000 76,000

/ / Bank (30,000) (30,000)

Rest 46,000 Zero Zero 46,000

Car (F. A.) (10,000) Zero Zero (10,000)

Zero Zero 36,000 36,000

Stocks (36,000) / / (36,000)

Zero Zero Zero Zero

:Journal Entries .1

16
From: Profit a/c 40,000

To: X. Capital a/c 20,000 5/10 * 40,000

Y. Capital a/c 12,000 3/10 * 40,000

Z. Capital a/c 8,000 2/10 * 40,000

..………………………………………………………

From: General Reserve a/c 30,000

To: X. Capital a/c 15,000 5/10 * 30,000

Y. Capital a/c 9,000 3/10 * 30,000

Z. Capital a/c 6,000 2/10 * 30,000

……………………………………………………………

From: X. Loan a/c 15,000

To: X. Capital a/c 15,000

.……………………………………………………

From: Y. Current a/c 9000

To: Y. Capital a/c 9000

..………………………………………………………

From: Z. Capital a/c 10,000

To: Z. Current a/c 10,000

..………………………………………………………

From: Bank a/c 30,000

To: X. Capital a/c 30,000

..………………………………………………………

From: Fixed Asset (Car) a/c 10,000

17
Stocks a/c 36,000

To: Z. Capital a/c 46,000

..…………………………………………………………

Capital Account .2

Data X Y Z Data X Y Z

Z. Current a/c 10,000 Balance b/f 100,000 60,000 40,000

Profit 20,000 12,000 8,000

G. R. 15,000 9,000 6,000

X. Loan a/c 15,000

Y. Current a/c 9,000

Bank a/c 30,000

F. A. a/c 10,000

Stocks a/c 36,000

New Balance 180,000 90,000 90,000

100,000 90,000 180,000 100,000 90,000 180,000

.......

18
...............................................................................................................................................................

:New Balance Sheet .3

F. A a/c Stocks a/c

Balance 60,000 Balance 140,000

To: Z. Capital a/c 10,000 To: Z. Capital a/c 36,000

New Bal. 70,000 New Bal. 176,000

176,000 176,000 70,000 70,000

Bank a/c Y. Current a/c

Balance 20,000 To: Y. Capital a/c 9,000 Bal. 10,000

To: Y. Capital 30,000 New Bal. 50,000 New Bal. 1,000

10,000 10,000 50,000 50,000

Balance Sheet

Fixed Assets 70,000 X. Capital 180,000

Stocks 176,000 Y. Capital 90,000

Debtors 60,000 Z. Capital 90,000 360,000

Bills Receivable 40,000 Creditors 35,000

Bank 50,000 Y. Current 1,000

396,000 396,000

..…………………………………………………………………………………………

19

Common questions

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Partners can increase capital by adding cash, adding non-cash items such as stocks or cars, capitalizing credit partners' current accounts, capitalizing non-distributed profits, capitalizing the general reserve, and capitalizing partner's loans. Each method requires specific journal entries to adjust the capital accounts and ensure the balance sheet reflects these changes .

Journal entries for non-cash capital contributions include debiting the appropriate asset account (e.g., Stocks or Fixed Assets) and crediting the partner's capital account to reflect the new equity contribution. For example, when L and M contributed stocks and cars, respectively, the entries credited their capital accounts by the value of the non-cash assets, with corresponding debits to asset accounts .

Key considerations include asset valuation, ensuring fair market value is used to prevent inequities, tax implications where asset transfers might be taxed differently than cash, and long-term impacts on personal versus partnership asset ownership. Accurate asset valuation and clear documentation prevent disputes and ensure transparency among partners .

Capitalizing non-distributed profits involves reallocating profits already within the partnership to increase capital, affecting the equity section of the balance sheet without requiring external cash flow. Conversely, adding cash involves external funds increasing both asset and equity sections. Capitalization of profits maintains existing liquidity, while cash contributions increase available operational funds .

A mixed approach of using existing funds and cash deposits offers several strategic advantages: it balances immediate cash flow needs with long-term equity growth, minimizes external financing by efficiently utilizing available resources, and strengthens the partnership's financial base without burdening partners with significant upfront cash requirements. This method optimizes financial stability and resource allocation .

To capitalize a general reserve, the journal entries require debiting the General Reserve account and crediting each partner's capital accounts in the agreed ratio. The impact on each partner's account reflects their share of the reserve, resulting in an increased capital balance without the need for cash contribution. Specifically, increases in capital are recorded as follows: A's capital increases by 20,000, B's by 30,000, and C's by 50,000 .

Increasing partnership capital using profits affects the equity section by reallocating retained earnings or non-distributed profits to individual capital accounts, thus boosting equity without affecting liabilities. This transfer strengthens the firm's capital base and does not change liabilities, contributing to a more favorable equity ratio and improving financial health .

The sharing ratio determines the proportion of new capital each partner receives when using reserves or profits. This proportion must reflect their investment or agreement. For instance, if partners' new capital is set at a 2:5:3 ratio, each partner's capital increase will align with these figures, ensuring the equity contributions maintain proportional ownership and acknowledge past agreements. This ensures fairness and continuity in profit-sharing .

Utilizing credit partners' current accounts affects financial statements by effectively converting short-term obligations into long-term equity, thus reducing liquid liabilities. The current accounts are reduced, which lowers immediate cash outflows, allowing the partnership to retain more operational cash while boosting partners' capital accounts. This strategically strengthens the firm's liquidity positioning while increasing equity .

Increasing capital by capitalizing a partner's loan reduces the loan liability on the balance sheet and simultaneously increases the partner's capital account, reflecting the conversion of debt into equity. This action strengthens the partnership's financial position by decreasing liabilities and retaining funds within the partnership. For example, partner B's capital was increased by converting a loan of 30,000 into capital, thus eliminating the loan liability .

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