Folake Adeyemi and Chuka Eze hold the catering contract for a secondary school in Ikeja, Lagos, Nigeria. They serve breakfast and lunch and bill the school ...
Question 1 Report
Folake Adeyemi and Chuka Eze hold the catering contract for a secondary school in Ikeja, Lagos, Nigeria. They serve breakfast and lunch and bill the school monthly. Interest on capital is 5% a year, Folake takes a salary of $7 200 for running the kitchen, and the remaining profit is shared equally.
| Account | Debit $ | Credit $ |
|---|---|---|
| Inventory at 1 August 2024 | 5 600 | |
| Carriage inwards | 2 450 | |
| Accumulated depreciation: kitchen equipment | 17 600 | |
| Trade receivables | 9 400 | |
| Office costs | 1 820 | |
| Cleaning materials | 3 460 | |
| Accumulated depreciation: refrigerated van | 8 400 | |
| Refrigerated van at cost | 21 000 | |
| Kitchen building at cost | 42 500 | |
| Revenue | 243 400 | |
| Kitchen wages | 38 200 | |
| Current account: Folake | 3 600 | |
| Trade payables | 8 350 | |
| Capital account: Chuka | 28 000 | |
| Current account: Chuka | 2 200 | |
| Allowance for irrecoverable debts | 470 | |
| Bank | 7 240 | |
| Insurance | 2 640 | |
| Capital account: Folake | 42 000 | |
| Cash | 680 | |
| Gas and water | 9 800 | |
| Kitchen equipment at cost | 44 000 | |
| Purchases | 118 600 | |
| Repairs | 2 280 | |
| Kitchen rent | 12 000 | |
| Drawings: Folake | 15 400 | |
| Drawings: Chuka | 12 800 | |
| Transport | 4 150 | |
| Total | 354 020 | 354 020 |
The partners give you these additional notes.
- Food and drink in the store at 31 July 2025 was valued at $6 180.
- Folake took provisions costing $1 450 for her own family; charge this to her current account.
- Kitchen wages of $1 640 and a water account of $720 were unpaid, while insurance of $440 had been paid for August 2025.
- Equipment is depreciated at 10% of cost and the refrigerated van at a quarter of its carrying amount. The kitchen building is not written down. Assets held on 31 July 2025 bear a full year of depreciation.
- A school owing $600 for an outside function has not paid and the amount is irrecoverable. After writing it off, provide an allowance of 5% against the receivables that are left.
- Prepare an income statement for the year ended 31 July 2025. (13)
- Divide the profit between the partners in accordance with the agreement. (5)
- Prepare the current account of each partner in columnar form. (4)
- Folake has been offered paid employment elsewhere at $14 000 a year. Calculate the total credited to her in the appropriation and state whether she is better off staying in the partnership. (3)
Answer Details
A catering partnership with four parts to answer. The one adjustment that behaves differently from a sole trader question is the food Folake took home: the question directs it to her current account, so it is removed from cost of sales and charged to her personally rather than being shown as a general drawings figure.
| Adjustment | Working | Income statement | Statement of financial position |
|---|---|---|---|
| Closing inventory | $6 180 | Deducted in cost of sales | Current asset $6 180 |
| Provisions taken by Folake | $1 450 | Deducted in cost of sales | Debited to Folake's current account |
| Kitchen wages accrued | $38 200 + $1 640 = $39 840 | Wages $39 840 | Other payables $1 640 |
| Water accrued | $9 800 + $720 = $10 520 | Gas and water $10 520 | Other payables $720 |
| Insurance prepaid | $2 640 - $440 = $2 200 | Insurance $2 200 | Other receivables $440 |
| Depreciation: kitchen equipment | 10% x $44 000 = $4 400 | Expense $4 400 | Accumulated depreciation $17 600 + $4 400 = $22 000 |
| Depreciation: refrigerated van | 25% x ($21 000 - $8 400) = 25% x $12 600 = $3 150 | Expense $3 150 | Accumulated depreciation $8 400 + $3 150 = $11 550 |
| Irrecoverable debt | $9 400 - $600 = $8 800 | Irrecoverable debts $600 | Trade receivables $8 800 |
| Allowance for irrecoverable debts | 5% x $8 800 = $440; opening $470 | Decrease of $30 added to income | Allowance $440 |
The kitchen building is not depreciated, so the $42 500 stays at cost. The allowance is set on the receivables that survive the write off, and because the required $440 is less than the $470 already carried, the $30 difference is released back into income rather than charged as an expense.
(a) Income statement for the year ended 31 July 2025 [13]
| Meal charges | 243 400 | |
| Cost of sales | ||
| Inventory at 1 August 2024 | 5 600 | |
| Purchases | 118 600 | |
| Carriage inwards | 2 450 | |
| less Goods taken for own use | (1 450) | |
| less Inventory at 31 July 2025 | (6 180) | |
| Cost of sales | (119 020) | |
| GROSS PROFIT | 124 380 | |
| Decrease in allowance for irrecoverable debts | 30 | |
| Total income | 124 410 | |
| Expenses | ||
| Kitchen wages ($38 200 + $1 640) | 39 840 | |
| Kitchen rent | 12 000 | |
| Gas and water ($9 800 + $720) | 10 520 | |
| Depreciation: kitchen equipment | 4 400 | |
| Transport | 4 150 | |
| Cleaning materials | 3 460 | |
| Depreciation: refrigerated van | 3 150 | |
| Repairs | 2 280 | |
| Insurance ($2 640 - $440) | 2 200 | |
| Office costs | 1 820 | |
| Irrecoverable debts | 600 | |
| Total expenses | (84 420) | |
| PROFIT FOR THE YEAR | 39 990 | |
(b) Division of the profit [5]
| Profit for the year | 39 990 | |
| less Interest on capital at 5% | ||
| Folake: 5% x $42 000 | 2 100 | |
| Chuka: 5% x $28 000 | 1 400 | |
| Total interest on capital | (3 500) | |
| less Partnership salary: Folake | (7 200) | |
| Residual profit | 29 290 | |
| Share of residual profit: Folake (one half) | 14 645 | |
| Share of residual profit: Chuka (one half) | 14 645 | |
The residual is split equally even though the capitals are unequal, because the agreement has already dealt with the difference in capital through the 5% interest, and with Folake's extra work through the salary.
(c) Current accounts at 31 July 2025 [4]
| Folake $ | Chuka $ | |
|---|---|---|
| Balance at 1 August 2024 (credit) | 3 600 | 2 200 |
| Add Interest on capital | 2 100 | 1 400 |
| Add Partnership salary | 7 200 | |
| Add Share of residual profit | 14 645 | 14 645 |
| Subtotal | 27 545 | 18 245 |
| less Drawings | (15 400) | (12 800) |
| less Goods taken for own use | (1 450) | |
| Balance carried down (credit) | 10 695 | 5 445 |
The $1 450 of provisions appears here, in Folake's column only, which is the matching half of taking it out of cost of sales. Chuka's account is untouched by it, which is exactly why the question specified her current account rather than a shared drawings figure.
(d) Folake's reward compared with the $14 000 post [3]
| Interest on capital | 2 100 |
| Partnership salary | 7 200 |
| Share of residual profit | 14 645 |
| Total credited to Folake in the appropriation | 23 945 |
On these figures she is better off staying in the partnership: $23 945 exceeds the $14 000 salary on offer by $9 945. Even setting aside the $2 100 interest on capital, which is a return on the $42 000 she has invested rather than a reward for her work, the salary and profit share alone come to $21 845, still $7 845 more than the job pays. Chuka, by comparison, is credited with $1 400 + $14 645 = $16 045.
Two qualifications belong in a full answer. A partner's reward depends on the profit actually earned, so it varies from year to year, while an employer's $14 000 is contractual and certain; and the $42 000 of capital would have to stay invested and at risk in the business. The figures favour staying, but they are one year's figures.
Download The App On Google Playstore
Everything you need to excel in your exams
