Elena Quispe and Julio Paredes each keep a stall in the covered market at Arequipa, Peru. She sells alpaca knitwear, he sells leather bags and belts, and th...
Question 1 Report
Elena Quispe and Julio Paredes each keep a stall in the covered market at Arequipa, Peru. She sells alpaca knitwear, he sells leather bags and belts, and they have agreed to trade together from 1 January 2026. Each drew up the position of her or his own stall on 31 December 2025.
| Elena Quispe | $ |
|---|---|
| Stall fittings at carrying amount | 6 400 |
| Inventory | 9 200 |
| Trade receivables | 2 800 |
| Bank | 4 100 |
| Trade payables | 3 700 |
| Capital | 18 800 |
| Julio Paredes | $ |
|---|---|
| Van at carrying amount | 11 000 |
| Stall fittings at carrying amount | 3 600 |
| Inventory | 6 800 |
| Trade receivables | 1 500 |
| Bank | 900 |
| Trade payables | 2 900 |
| Loan from his brother | 5 000 |
| Capital | 15 900 |
They have settled these terms.
- Elena's fittings are to come in at $5 800, her inventory at $8 700.
- Julio's van is to come in at $12 500, his fittings at $3 000, his inventory at $7 100.
- An allowance for irrecoverable debts of 5% is to be raised against each of the amounts owed to them.
- Julio will settle the loan from his brother from his own pocket before the first day, so the partnership takes none of it over. Everything else each of them holds or owes is taken over.
- Each partner's opening capital is whatever the partnership takes over from that partner.
- Calculate the capital each partner starts the partnership with (10)
- Set out the opening statement of financial position of the new firm on 1 January 2026 (9)
- Elena fears that Julio's larger capital will hand him the larger share of everything. Explain how an agreement can answer that, and name two further matters it should settle (3)
- Give two gains and one drawback of trading together rather than each staying alone (3)
Answer Details
Two sole traders are combining into a partnership. The rule that governs part (a) is that a partner's opening capital equals the net value of what the partnership actually takes over from that partner: the agreed values of the assets less the liabilities it accepts. The book figures each has been carrying are only a starting point.
Check first that each set of figures is internally consistent. Elena: $6 400 + $9 200 + $2 800 + $4 100 - $3 700 = $18 800, her stated capital. Julio: $11 000 + $3 600 + $6 800 + $1 500 + $900 - $2 900 - $5 000 = $15 900, his stated capital. Both foot, so the revaluations can be applied with confidence.
(a) The opening capital of each partner [10]
Two points decide the marks. The allowance for irrecoverable debts is 5% of each partner's own receivables and reduces that partner's capital: Elena 5% x $2 800 = $140, Julio 5% x $1 500 = $75. And Julio's brother's loan is settled from his own pocket before the first day, so the partnership never takes it over and it does not reduce his capital.
| Elena $ | Julio $ | |
|---|---|---|
| Van at agreed value | 12 500 | |
| Stall fittings at agreed value | 5 800 | 3 000 |
| Inventory at agreed value | 8 700 | 7 100 |
| Trade receivables | 2 800 | 1 500 |
| Less allowance for irrecoverable debts at 5% | (140) | (75) |
| Bank | 4 100 | 900 |
| Less trade payables taken over | (3 700) | (2 900) |
| Opening capital | 17 560 | 22 025 |
Elena's capital falls from $18 800 to $17 560 because her fittings and inventory were written down by $600 and $500 and an allowance of $140 was raised, a total of $1 240. Julio's rises from $15 900 to $22 025, partly because his van was revalued upward by $1 500 and his inventory by $300, but mostly because the $5 000 loan he clears himself is no longer deducted.
(b) Opening statement of financial position at 1 January 2026 [9]
Every figure is the sum of the two partners' agreed amounts. Only assets and liabilities actually taken over appear, so there is no loan.
| Statement of financial position at 1 January 2026 | $ | $ |
|---|---|---|
| Van | 12 500 | |
| Stall fittings (5 800 + 3 000) | 8 800 | |
| Total non-current assets | 21 300 | |
| Inventory (8 700 + 7 100) | 15 800 | |
| Trade receivables (2 800 + 1 500) | 4 300 | |
| Less allowance for irrecoverable debts (140 + 75) | (215) | |
| 4 085 | ||
| Bank (4 100 + 900) | 5 000 | |
| Total current assets | 24 885 | |
| Total assets | 46 185 | |
| Capital account: Elena | 17 560 | |
| Capital account: Julio | 22 025 | |
| Total capital | 39 585 | |
| Trade payables (3 700 + 2 900) | 6 600 | |
| Total capital and liabilities | 46 185 |
Both sides come to $46 185. There are no current accounts yet: they open at nil and begin to fill only when the first year's interest, salaries, profit shares and drawings are recorded.
(c) Elena's fear about the unequal capitals [3]
A partnership agreement separates the reward for capital from the reward for work and from the share of the residual profit, so a larger capital need not carry a larger share of everything. The usual device is interest on capital at an agreed rate, which pays Julio for the extra $4 465 he has put in, after which the remaining profit can be divided in whatever ratio the two agree, including equally. Elena's concern is answered by writing that in: Julio is compensated for his capital, and the trading profit, which the two of them earn together, is split on terms they both accept.
Two further matters the agreement should settle:
- The salary each partner is credited with for the work done, so that a partner who puts in longer hours or runs a particular part of the stall is rewarded for it.
- What happens on the death, retirement or admission of a partner, including how goodwill is to be valued and how the outgoing partner's capital is to be paid out.
Other matters worth settling are the rate of interest charged on drawings, a limit on drawings, and how disputes are to be resolved. If nothing is agreed in writing, the default rules apply: no interest on capital, no salaries, and profits shared equally regardless of what each partner contributed, which is unlikely to satisfy either of them.
(d) Gains and a drawback of trading together [3]
Two gains:
- More capital and a wider range of goods. The combined capital of $39 585 is more than either could raise alone, and knitwear alongside leather bags on one stall gives customers a reason to stop, so each partner's goods help sell the other's.
- The work, the risk and the losses are shared. Neither has to open the stall alone every market day, illness or a holiday no longer closes the business, and a bad year is borne by two people rather than one. Julio's van also becomes available to the whole business.
One drawback: a partnership has no separate legal identity and no limited liability. Each partner is personally liable for the debts of the firm, including those the other partner runs up, so Elena's private assets are now at risk from decisions Julio makes. Beyond that, choices that used to be one person's, over prices, inventory and opening hours, must now be made jointly, which takes time and can lead to disagreement.
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