Chen, Devi, and Elsa are partners. The following information relates to the year ended 30 June 2025. Capital account balances at 1 July 2024 Partner $ Chen ...
Question 1 Report
Chen, Devi, and Elsa are partners. The following information relates to the year ended 30 June 2025.
Capital account balances at 1 July 2024
| Partner | $ |
|---|---|
| Chen | 50 000 |
| Devi | 40 000 |
| Elsa | 30 000 |
During the year:
- On 1 October 2024, Devi introduced additional capital of $10 000
- On 1 January 2025, Elsa withdrew $5 000 capital with the agreement of the other partners
- Chen made no changes to her capital
Profits and losses are shared equally. The profit for the year before appropriation was $54 000. Interest on capital is allowed at 8% per annum on the balance at the start of the year. There are no partnership salaries.
(a) Calculate the interest on capital for each partner. [3]
(b) Prepare the profit and loss appropriation account. [7]
(c) Prepare the partners' capital accounts in columnar format for the year ended 30 June 2025. [6]
(d) Explain the difference between a partner's capital account and current account. [4]
Answer Details
(a) Interest on capital for each partner
Interest on capital is calculated on the opening balance at the start of the year, at 8% per annum.
Chen: 8% x $50 000 = $4 000 [1]
Devi: 8% x $40 000 = $3 200 [1]
Elsa: 8% x $30 000 = $2 400 [1]
The interest is calculated on the opening balances regardless of any capital changes during the year (Devi's additional capital on 1 October and Elsa's withdrawal on 1 January). The question specifies interest is on the balance at the start of the year.
(b) Profit and Loss Appropriation Account
| Profit and Loss Appropriation Account for the year ended 30 June 2025 | |
|---|---|
| Profit for the year (before appropriation) | $54 000 [1] |
| Less: Interest on capital | |
| Chen | $4 000 |
| Devi | $3 200 |
| Elsa | $2 400 [1] |
| Total interest on capital | ($9 600) |
| Residual profit | $44 400 [1] |
| Share of residual profit (equal, 1:1:1): | |
| Chen | $14 800 [1] |
| Devi | $14 800 [1] |
| Elsa | $14 800 [1] |
| Total shared | $44 400 |
Correct format. [1]
(c) Partners' Capital Accounts (columnar format)
| Chen ($) | Devi ($) | Elsa ($) | |
|---|---|---|---|
| Credit side | |||
| Balance b/d (1 July 2024) | 50 000 | 40 000 | 30 000 [1] |
| Additional capital (1 Oct 2024) | - | 10 000 [1] | - |
| Debit side | |||
| Capital withdrawal (1 Jan 2025) | - | - | 5 000 [1] |
| Balance c/d (30 June 2025) | 50 000 [1] | 50 000 | 25 000 [1] |
Correct columnar format. [1]
Chen's capital is unchanged at $50 000. Devi's increased from $40 000 to $50 000 with the additional $10 000 introduced. Elsa's decreased from $30 000 to $25 000 after withdrawing $5 000.
(d) Difference between capital account and current account
The capital account records the long-term investment of each partner in the business. [1] It is not normally changed unless capital is specifically introduced or withdrawn by agreement. [1]
The current account records the day-to-day transactions between each partner and the business. [1] It includes the partner's share of profit, interest on capital, salary (if any), and drawings. It fluctuates regularly and can have either a credit or debit balance. [1]
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