ACCT 301 Lecture Slides FR

University of Ghana Business School
ACCT 301: Financial Reporting 1
Lecture 1: Overview of Module and Basics of Partnership Accounting and

Accounting for admission of a new partner
Lecture Hall: A1
Lecture days: Wednesdays; Time:7:30am 9:30am
Tutorial days: Fridays; Times: 9.30am-10.20am
Office hours: Mondays 3.30pm-5.45; Wednesdays 1.00pm-3.00pm
Office: G13
email: yawcab72@yahoo.co.uk; mobile: 0266225129
WhatsApp: +447745808142
Lecture one: Introduction and overview
Broad objective of the course
The course examines accounting for partnerships arrangements and

other business transactions involving, hire-purchase, long-term
contracts and lease arrangements
Lecture one
Focus questions
What is the outline of the course (ACCT301)?
What is the approach to the delivery of the
course, assessment and grading of students?
What is our prior knowledge of Partnership
accounting? Partnership Accounting is a
major component of the module!
Course Outline
Lecture one: Overview of Module and Basics of Partnership Accounting
Lecture two: accounting for changes in partnership admission of a new partner
Lecture three: accounting for changes in partnership changes in sharing ratio and
retirement/withdrawal/death of a partner
Lecture four: accounting for changes in partnership - Amalgamation
Lecture five: Accounting for Changes in Partnerships Dissolution: One-off/one-stage

Dissolution
Lecture six: Accounting for Changes in Partnerships Dissolution: Piecemeal [in stages,
bit-by-bit] Dissolution
Course Outline [Continuation]
Lecture seven: Accounting for Changes in Partnership Sale of a Partnership to a Limited

Company and a Conversion of a Partnership into a Company
Lecture eight: Accounting for Hire-Purchase: High Value items
Lecture nine: Accounting for Hire-Purchase: Low Value items [High Volume] and repossessions
Lecture ten: Accounting for Construction Contracts: Background, Definitions and Basic
Accounting
Lecture eleven: Accounting for Construction Contracts: Further Accounting Complications
Lecture twelve: Accounting for Lease Transactions: Background, Definitions, Classifications,

Finance Lease in the books of Lessee and Disclosure
Lecture thirteen: Accounting for Lease Transactions: Operating lease in the books of Lessee and
Disclosure; Lessor Accounting; Sale and Lease back
Approach to the delivery of the course
Thirteen two-hour face-to-face weekly lectures
Twelve one-hour face-to-face weekly tutorials
One-hour revision workshop [I will lead it]
All lecture slides, reference materials and reference list shall be
emailed to students on the first day of lectures
So I will expect students to have a look at slides before the start of
each lecture. Note down problems and raise issues with them.
Approach to the delivery of the course [continuation]
Participation is central!
Discussion forums for posting queries (via facebook?) or class email
Ask your fellow students. I encourage you to respond to one another
Ask me - your lecturer and I will give you feedback on your work and
help you resolve any queries
Come to see me at the office, you can send email to request a meeting
with me.
You can also ask your tutorial assistant
Approach to the delivery of the course [continuation]
Self study
Remember we are here to learn by doing!
In addition to attending lectures and tutorials, you must complete:
Reading
Project work? IA?
Self-study questions
Quizzes
I will advise that you spend about 7 hours a week in self study on this module!
Approach To The Delivery Of The Course [Continuation]
Key Texts
1. A R Jennings 1993 Financial Accounting Reprinted 2006 By Thomson Learning
2. Frank Wood (2008) Business Accounting Volume 1 & 2, Financial Times
Supplementary Materials
International Financial Reporting Standards (IFRS)
Companys Code, Act 179, 1963
Incorporated Private Partnership Act, (IPPA), Act 1952, 1962
The UGBS reader in Accounting [I will encourage everyone to have a copy cost GH25]
Lecture slides and tutorial questions

Assessment
A two-way Assessment of course participants
Course work interim assessment of all registered students
End-of-year three-hour written examination to be taken by all
registered students
More guidance on content given during the
revision workshop
Evaluation of course, its delivery approach (lecture style), lecturer
behaviour and others by students a very important component of
the course.
Any other suggestions?
Please do not suffer in silence!
Partnership [Some review]
Similar to sole proprietorship

The difference is that it has two or more
owners (partners)
Business income is divided among partners

Partners report their share of
partnership income on their personal
tax returns
Procedure for Creating Partnership Accounts
1 Complete notes for Income Statement (Profit and Loss Account) and
Statement of Financial Position (Statement of Financial Position)
2 Work down to RESIDUAL PROFIT in Income Statement
3 Work out share of profits for each partner
4 Complete appropriation account
5 Complete each partners current accounts
6 Complete each partners capital accounts
7 Create Statement of Financial Position
RESIDUAL PROFIT
This is the amount of profit remaining after any payments have been made or taken from each
partner. This is the amount that is shared between partners
CURRENT ACCOUNT
Contains any share of profits, drawings, interest on capital. Interest on drawings
Allows distinction between capital investment and profit
CAPITAL ACCOUNT
Identifies initial fixed capital
Records further investment
Forms basis for profit calculation
Identifies fluctuations in capital
FIXED CAPITAL METHOD AND FLUCTUATING CAPITAL METHOD!
FIXED CAPITAL METHOD AND FLUCTUATING CAPITAL
METHOD!
it
Capital Account
- Account maintained to record the capital contributions of the individual
partners.
It is credited with contributions from partners and debited with withdrawals
from capital by a partner.
Fixed Capital Account
Only capital increases and decreases are recorded in the capital account.
Floating/ Fluctuating Capital Account
Records all other resource flow, to and from the partners to the firm.
PROFIT AND LOSS APPROPRIATION ACCOUNT FOR YEAR ENDED (Enter Date)
GH GH GH
NET PROFIT x
ADD Interest on Drawings
Partner A x
Partner B x x
LESS
Salary (insert name) (x)
Interest on Capital
Partner A x
Partner B x (x)
RESIDUAL PROFIT x
SHARE OF RESIDUAL PROFIT Should
Partner A x Agree
Partner B x x
Current Accounts Partner A
Dr Cr Balance
Opening Balance X cr
+ Interest on capital X X cr
+ Salary X X cr
+ Share of profit X X cr
- Drawings X X cr
- Interest on drawings X XX cr
The Closing Balance XX cr get carried forward to The

Statement of Financial Position the Financed By Section)
Current Accounts Partner B
Dr Cr Balance
+ Interest on capital X X cr
+ Salary X X cr
+ Share of profit X X cr
- Drawings X X cr
- Interest on drawings X XX cr

Capital Accounts Partner A
Dr Cr Balance
+ New capital Introduced X X cr
- Capital withdrawals X X cr

Capital Accounts Partner B
Dr Cr Balance
+ New capital Introduced X X cr
- Capital withdrawals X X cr

Statement of financial position as at (Enter Date)
Cost Dep NBV
FIXED ASSETS
Equipment x x x
Premises x x x
x
CURRENT ASSETS
Stock x
Debtors x
Prepayments etc x
x ADD
CURRENT LIABILITIES
Creditors x
Accruals x
Bank Overdraft x -x
WORKING CAPITAL +x
NET ASSETS x
Continuation
FINANCED BY
CAPITAL ACCOUNT BALANCES
Partner A x
Partner B x x
CURRENT ACCOUNT BALANCES
ADD
Partner A x
Partner B x x
NET WORTH x
The net assets figure on the previous slides and the net
worth should be equal
Income-Sharing Plans
Partners can agree on any type of income
sharing plan regardless of the amount of their

respective capital investment.
The Partnership Act states that if partners fail
to specify a plan for sharing net income/loss, it

is assumed that they intend to share equally
[see Section 35of the Act].
[continuation]
The following are a few possible plans of
income-sharing:
Equally
In the ratio of partners' capital account
balance on a specific date or in the ratio of
average capital account balance in the year;
Allowing interest on partner's capital account
balances and dividing the remaining net
income/loss in a specified ratio.
[continuation]
Allowing salaries to partners and dividing the remaining

net income/loss in a specified ratio
Bonus to managing partner based on income
Allowing salaries to partners, allowing interest on capital
account balances, and dividing the remaining net
income/loss in a specified ratio.
Illustration 1
A and B start business on 1st January, 2015, with capitals of GH
30,000 and GH 20,000 respectively. According to their
Partnership Agreement, B is entitled to a salary of GH 500 per
month and interest is to be allowed on capitals at 6% per annum.
The remaining profits are to be distributed amongst the partners in
the ratio of 5:3 respectively. During 2015, the firm earned a profit,
before charging salary to B and interest on capital amounting to
GH 25,000. A withdrew GH 8,000 and B withdrew GH 10,000
for domestic purposes [assume that the drawings were made on the
31st of December, 2015, and treated as withdrawals from the
partners capital and therefore, should not attract any interest].
Show the capital accounts of the partners following fluctuating
capital method. Also, prepare fixed capital accounts and Current
Accounts for the partners.
Profit and Loss Appropriation account
GH GH
Profit 25,000
Salary B [500*12] 6,000
Interest on Capital
A 6%*30,000 1,800
B 6%*20,000 1,200
[9,000]
Residual Profit 16,000
Share of R. Profit: A 5/8*16,000 10,000
B 3/8*16,000 6,000
Capital A [Fluctuating Capital]
Details Debit Credit Balance
GH GH GH
Opening Balance 30,000
Interest on Capital 1,800 31,800
Share of Profit 10,000 41,800
Drawings 8,000 33,800

Capital B [Fluctuating Capital]
GH GH GH
Salary 6,000 26,000
Drawings 10,000 23,200

Capital A [Fixed Capital]
GH GH GH
Drawings 8,000 22,000

Current Account A
GH GH GH

Capital B [Fixed Capital]
GH GH GH
Drawings 10,000 10,000
Current B
GH GH GH
Salary 6,000 6,000
Notes
Profit and Loss Appropriation account
GH GH
Profit 25,000
Salary B [500*12] 6,000
Interest on Capital
A 6%*30,000 1,800
B 6%*20,000 1,200
[9,000]
Residual Profit 16,000
Share of R. Profit: A 5/8*16,000 10,000
B 3/8*16,000 6,000
Notes
Concluding remarks
The treatment of drawings depends on the nature of the drawings,

so read my questions carefully, as I will sometimes go beyond
conventional text book questions. When a question is not clear,
state your assumptions and use it to guide your workings.
However, I will to be clear in my questions!
CLASS ACTIVITY
Class Activity
Yaw, Kofi and Kwabena are into a partnership business for the
sale of Ghana Cedi sharing profits in the ratio 1:2:2. The
partners have agreed to charge interest on their capital
accounts and drawings account. The trial balance of the
partnership as at 31st December 2015 after preparing the
income statement for the period was as follows;
DR GH CR GH
Capital account:
Yaw 2,500,000
Kofi 2,250,000
Kwabena 2,000,000
Current account:
Yaw 400,000
Kofi 100,000
Kwabena 225,000
Loan: Kwabena 500,000
Income Statement 580,000
Land & Building 5,000,000
Office Equipment 375,000
Inventory (31/12/2011) 875,000
Receivables and Payables 675,000 720,000
Cash in hand 525,000
Motor Vehicle 1,625,000
9,175,000 9,175,000
A salary of GH 75,000 to be paid to Kwabena
The following entries have not been made

General expenses of GH 37,500 paid by Kofi
in the books;
Cash drawings made by partners;
Yaw GH 150,000
Kofi GH 100,000
Kwabena GH 75,000
Goods taken for personal use by Yaw GH 175, 000
Interest on drawings
Yaw GH 16,250
Kofi GH 8,750
Kwabena GH 5,000
Interest on Loan: Kwabena GH 50,000
Interest on capital accounts
Yaw GH 125,000
Kofi GH 112,000
Kwabena GH 100,000
Capital accounts were to remain fixed.
You are required to prepare the profit and loss appropriation account
and the statement of financial position as at 31st December, 2015 for
the partnership.
Yaw, Kofi and Kwabena Partnership
Statement of Adjusted Net Profit
GH GH
Net Profit b/d 580,000
Add:
goods drawn- Yaw 175,000
755,000
Less:
general expenses- Kofi 37,500
Interest on loan- Kwabena 50,000
(87,500)
Adjusted Net profit 667,500
Profit and Loss Appropriation Account
GH GH
Adjusted Net Profit 667,500
Add Interest on drawings:
Yaw 16,250
Kofi 8,750
Kwabena 5,000
30,000
697,500
Less Interest on capital:
Yaw 125,000
Kofi 112,000
Kwabena 100,000
( 337,000 )
salary- Kwabena ( 75,000)
profit to be shared 285,500
Share of Profit
Yaw 57,100
Kofi 114,200
Kwabena 114,200
285,500
Partners' Current Account
Yaw Kofi Kwabena Yaw Kofi Kwabena
GH GH GH GH GH GH
Bal. b/d 100,000 Bal. b/d 400,000 225,000

Interest on Interest on
drawings 16,250 8,750 5,000 capital 125,000 112,000 100,000
Goods drawings 175,000 Salary-Pound 75,000
Cash drawings 150,000 100,000 75,000 Interest on loan 50,000
General expenses 37,500
Bal. c/d 240,850 54,950 484,200 Share of profit 57,100 114,200 114,200
582,100 263,700 564,200 582,100 263,700 564,200
Bal. b/d 240,850 54,950 484,200

Statement of Financial Position as at 31st December 2015
GH GH
Non-Current Assets:
Land & Building 5,000,000
Office Equipt. 375,000
Motor Vehicle 1,625,000
7,000,000
Current Assets:
Inventory 875,000
Receivables 675,000
Cash in Hand (525000-325000) 200,000
1,750,000
Current Liabilities:
Payables ( 720,000 )
Working capital 1,030,000
Net Assets 8,030,000
Financed By:
Capital Account:
Yaw 2,500,000
Kofi 2,250,000
Kwabena 2,000,000
6,750,000
Current Account:
Yaw 240,850
Kofi 54,950
Kwabena 484,200
780,000
7,530,000
Loan 500,000
8,030,000
End of lecture one [1]
Thank you very much
Office: G13
email: yawcab72@yahoo.co.uk
mobile: 0266225129
WhatsApp: +447745808142
Background: Many changes in
Ownership/Constitution of Partnerships may occur
1. Changes in profit and loss sharing ratio
2. Admission of a new partner,
3. Retirement, Withdrawal or death of a partner,
4. Bankruptcy of a partnership firm or of any partner,
5. Expiration of a time period stated in the contract, or
6. Amalgamate with other business or
7. Convert into a company or
8. A mutual agreement of the partners to end their association.
Changes in Ownership/constitution
of partnerships [continuation]
The change in partnership should be
recorded after evaluating all the
circumstances of the individual case.
Focus
Our focus for this lecture will be on:
Admission of a new partner
Other changes will be dealt with in the six

subsequent lectures
Admission of a new Partner
Purpose
To increase the membership
To replace a retired, withdrawn or
deceased partner [s]
Admission of a new Partner some issues
Admission of a Partner may require one or a
combination of the following
To revalue some or all of the existing assets and
liabilities [the aim is to reflect their true and fair
values]
Assign value to any internally generated goodwill
To revise the terms of the partnership agreement in
relation to net income sharing ratios, capital
contribution, interest on capital/current
account/drawings; salaries inter alia!
Admission of a partner revaluation of assets
and liabilities
Basic mechanics
Initial measurement of assets is at the cost at which
they were bought
Subsequent measurement is the cost less
depreciation, giving rise to what is usually described
as Net Book Value (NBV)
Upon admission of a new partner, assets may be
revalued
and liabilities
Basic mechanics [continuation]
Where the revalued amount is higher than the NBV:
Debit the asset account and credit revaluation
account
Where the revalued amount is lower than the NBV:
Debit the revaluation account and credit the asset
account
and liabilities
The credit on the revaluation account, which can be
described as revaluation surplus/reserve, is credited to
old partners capital accounts according to the old
profit sharing ratios
[Remember your double entry techniques and the
accounting equation]!
and liabilities
The debit on the revaluation account, which can
be described as revaluation deficit, is debited to
old partners capital accounts according to the
old loss sharing ratios
Again - [remember your double entry techniques
and the accounting equation]!
and liabilities
After the admission, the new partnership may decide
to maintain the assets in the books as revalued
However, the new partnership may decide to revert
to the NBV prior to the admission of the new partner
This will require a reversal of some sort see next
slides
and liabilities
Reversal of revaluation
surplus/reserve
Debit the new partners [old and new
partners] capital accounts according
to the new profit and loss sharing
ratios and credit the asset account
and liabilities stop
Reversal of revaluation deficit
Debit the asset account and credit
new partners [old and new partners]
capital accounts according to the new
profit and loss sharing ratios
Admission of a partner
Upon an admission of a new partner, goodwill

may arise
GOODWILL YOU ARE WELCOME!
BUT WHO ARE YOU?

Admission of a new Partner: Goodwill in
Partnership
Defining goodwill
Goodwill is an assumed value of the factors that generate
sales revenue in a business, and add value to a firms assets.
It is an intangible but saleable asset. It is built
conscientiously over the years, usually with: heavy and
continuous expenditure in marketing and promotion; creation
and maintenance of durable customer and supplier
relationships; high quality of goods and services; and high
quality and conduct of management and employees.
Partnership
Goodwill may be purchased or internally generated
In partnership, goodwill is usually generated
internally [non-purchased]
Partnership
Features of Internally generated goodwill:
It is an intangible asset
It cannot be realised [sold] separately from the business as a whole
Its value has no certain [definite] relationship to any cost incurred
It is impossible to place value on the individual factors which
contribute to goodwill
The value of goodwill may fluctuate widely according to internal and
external circumstances across time
It is subjectively assessed/determined
Partnership
Factors that can give rise to Internally generated goodwill:
Advantageous location
Favourable contracts and monopoly position
Reputation and image of the business and the owner
Quality goods and /or services
Skilled and efficient workforce [employees and management]
Patents and trade mark worth of corporate identity
Research and development
Heavy and continuous advertisement, and cordial management/
worker relationship
Admission of a new Partner: Accounting
for Goodwill in Partnership
Valuation of Internally generated goodwill:
Revaluation method
This involves revaluation of the net assets of the business. The
excess of the revalued figure over the book value is the
goodwill.
Plain Bargaining
This involves a process of plain negotiation to determine the
value of the business. The excess of the agreed/negotiated value
over the (book) net assets or net worth is the goodwill.
Net profit basis/ Average annual profit

Goodwill is defined as a specified number of years' purchase of net
profit of the business, so for example, goodwill is determined as
three years' purchase of last four years' simple average profits
Illustration: Profits for the last four were as follows:
GH
2011 80,000
2012 120,000
2013 180,000
2014 80,000
Simple profits approach
Goodwill is calculated as 3( 80,000 + 120,000 + 180,000 + 80,000)/ 4 =
GH 345,000
Admission of a new Partner: Accounting for Goodwill in Partnership
Or three years' purchase of last four years' weighted average profit
Year profit weight weighted profit
GH GH
2011 80,000 1 80,000
2012 120,000 2 240,000
2013 180,000 3 540,000
2014 80,000 4 320,000
---- ----------
10 1,180,000
---- ----------
Goodwill = 3( GH 1,180,000 / 10) = GH 354,000
Gross Income / Fees / Revenue

This method involves the use of gross income and it is usually
deployed by professionals like lawyers, accountants, surveyors and the
like.
For example, 4 months' purchase of gross monthly fees.
Illustration: Average monthly fees = GH150,000
Goodwill = 4 * GH150,000 = GH600,000
Super profit method the excess of actual profit over expected profit. This is
multiplied by the number of years purchase to determine goodwill. Super
profits (S) = P rA; where P = actual profit; A = value of net tangible assets
[capital employed]; and r = the normal rate of return [return on capital
employed]
So, for example, Yaw and Kofi Agyenim-Boateng partnership employed
capital of GH100m. The expected return on the capital employed is 25%. In
the past year, the partnership made a profit of GH40m. Assuming goodwill
is calculated as 4 years purchase of super profit, calculate goodwill for the
partnership.

Super profit method [number of years purchase]
Goodwill
Actual profit GH40m
Less rA= 0.25*GH100m GH25m
Super profit GH15m
Goodwill [4*15] = GH60m

Valuation of Internally generated goodwill: Super profit approach [discounting
approach]
Since the earning of super profits demands higher risks than normal profits,
Super profit should be discounted by using capitalization rate: m, which is
greater than the long-run rate of return an investor is expected to earn: r.
Therefore, the goodwill can be calculated using the formula: G=(P-rA)/m
where; G = goodwill
P = actual profit
A = value of net tangible assets [Capital Employed]
r = the normal rate of return [Return on Capital Employed ie ROCE]
m = the capitalization rate [discount rate] of the super profit
Using the formula, the value of the business is given as: A + (P - rA)
m

Super profit method [Discounting approach]
Yaw and Kofi Partnership has net asset of GH200m. The partnership expects a
normal rate of 25% on the net assets. The average profit earned by the
partnership in the recent past is GH75m. Calculate the super profit, the goodwill
and value of the business, assuming that the super profit is capitalised
(discounted) at 30%
Super Profit = P rA = GH75m- [0.25*200m] = GH75m GH50m =
GH25m
Goodwill = (P rA)/m = GH25m/0.3 = GH83.33m
Value of the business = A + [(P - rA)]/m = GH200m + GH83.33m
=GH283.33m
Treatment of goodwill:
Upon the introduction of goodwill
Debit goodwill; and Credit old partners capital accounts according to their old profit and
loss sharing ratios
Where the goodwill account is not to be maintained after the admission of new partner, it
should be eliminated by
Debiting the new partners [old and the admitted partner] in their new profit and loss
sharing ratios; and crediting the goodwill account
Cash paid for goodwill goes directly to the old partners without going through the books.
This is by far the most disadvantageous to the new partner.
No goodwill account is opened in the books in the first place. Instead the proportion of
goodwill deemed to be attributable to the new partner's share of future profits is paid for in
cash to the firm. The cash paid in as goodwill is credited to the capital accounts of the old
partners. Where there is no change in sharing ratio, use the existing ratio to share it to old
partners. Where there is a change, the proportion will be in accordance with the share of
profits each surrenders to the new partner.
ILLUSTRATION 1
Yaw and Kofi are in partnership. They share profits and losses equally. Their
Statement of Financial Position as at 31st December, 2015 is as follows:
GH GH
Capital Accounts
Yaw 100m Net Assets 200m
Kofi 100m
Total 200m 200m

On the1st of January, 2016 they agreed to admit Kwabena

into the partnership with a new profit and loss sharing ratio
of 2:2:1. They agreed to value goodwill at GH 50,000 and
Kwabena will introduce GH 65,000 in cash as his capital.
Prepare Separate Statement of financial Position to reflect:

A situation where goodwill is maintained in the books of
the partnership
A situation where goodwill is not maintained in the
books of the partnership
A situation where goodwill is maintained in the books of the partnership
The goodwill of GH50,000 will be credited to Yaw and Kofis capital account
according to their old sharing ratio, that is they will share the GH50,000
equally.
Yaw: * 50,000 = GH25,000
Kofi: * 50,000 = GH25,000
Therefore, the new Statement of Financial Position will be as follows

GH GH
Capital Accounts
Yaw [100+25] 125m Net Assets [original] 200m
Kofi [100+25] 125m Goodwill 50m
Kwabena 65m Cash [introduced by Kwabena] 65m
Total 315m 315m
A situation where goodwill is not maintained in the books of the partnership

Firstly, the goodwill of GH50,000 introduced, will be credited to Yaw and
Kofis capital account according to their old sharing ratio, that is they will share
the GH50,000 equally.
Yaw: * 50,000 = GH25,000
Kofi: * 50,000 = GH25,000
Secondly, the goodwill will be written off against all partners [old and new] in
the new sharing ratio: 2:2:1: for Yaw, Kofi and Kwabena respectively
Yaw: 2/5 * 50,000 = GH20,000
Kofi: 2/5 * 50,000 = GH20,000
Kwabena 1/5 * 50,000 = GH10,000
Therefore, the new Statement of Financial Position will be as follows
GH GH
Capital Accounts
Yaw [100+25-20] 105m Net Assets [original] 200m
Kofi [100+25-20] 105m
Kwabena[65-10] 55m Cash [introduced by Kwabena] 65m
Total 265m 265m
IMPLICATIONS
Kwabena has purchased 1/5th share of future profits which amounts to buying 1/5th of the
goodwill which amounts to GH 10,000 (1/5 * GH 50,000). Since the old partners are giving
up 1/5th of their future profit, that is the loss of one-fifth of the goodwill, the GH10,000
goodwill purchased by Kwabena is credited to their capital account in their profit and loss
sharing ratio. It does not matter which ratio is used since the profit and loss sharing ratio
between the old partners remain the same both before and after the admission of Kwabena,
namely, equally.
Other Complications - Where the cash paid for goodwill goes directly to
the old partners without going through the books.
ILLUSTRATION 1
Yaw and Kofi are in partnership. They share profits and losses equally. Their
Statement of Financial Position as at 31st December, 2015 is as follows:
GH GH
Capital Accounts
Kofi 100m
Total 200m 200m

On the1st of January, 2016 they agreed to admit Kwabena

into the partnership with a new profit and loss sharing ratio
of 2:2:1. They agreed to value goodwill at GH 50,000,
which Kwabena paid directly to Yaw and Kofi. In addition,
Kwabena will introduce GH 65,000 in cash as his capital.
Prepare separate Statement of financial position to reflect:
GH GH
Capital Accounts
Yaw 100m Net Assets [original] 200m
Kofi 100m
Total 265m 265m
Another Complication - Admission of a new Partner: No goodwill account
is opened!
No goodwill account is opened in the books in the first place. Instead the
proportion of goodwill deemed to be attributable to the new partner's share of
future profits is paid for in cash to the firm. The cash paid in as goodwill is
credited to the capital accounts of the old partners. Where there is no change in
sharing ratio, use the existing ratio to share it to old partners. Where there is a
change, the proportion will be in accordance with the share of profits each
surrenders to the new partner.
Let us go back to our illustration!

Admission of a new Partner: Where no goodwill account is opened!
The goodwill of GH 10,000 purchased by Kwabena is paid for in cash to the

firm which is then shared by the old partners in their profit and loss sharing ratio.
The total amount Kwabena introduces into the business is therefore GH 75,000 (
GH 65,000 for his capital and GH 10,000 for purchase of part of the goodwill.
The new Statement of Financial Position will look as follows [next slide]:
GH GH
Capital Accounts
Yaw [100+5] 105m Net Assets [original] 200m
Kofi [100+5] 105m
Total 275m 275m
Note: cash increases by the goodwill and Kwabenas capital. Cash was not
paid directly to Yaw and Kofi!
Some more complication admission of new partner: Purchase
of a Partners Interest, where cash is paid directly to partners
For example, Kwabena agrees to pay GH10,000 each to Yaw and Kofi for
1/3 of their interest in the Yaw-Kofi partnership. At the time of the
admission of Kwabena, each partner has a GH30,000 capital balance. So
Statement of Financial Position was:
GH GH
Net Assets 60,000 Financed by: Yaw 30,000
Kofi 30,000
60,000 60,000
Each partner,therefore, gives up GH10,000 of their capital equity. The
entry to record the admission of Kwabena is shown as follows.
Ledger Balances after Purchase of a Partners Interest
Details Debit Credit
Capital: Yaw GH10,000
Capital: Kofi GH10,000
Capital: Kwabena GH20,000
To record admission of
Kwabena
GH000 GH000
Capital Accounts
Yaw [30-10] 20 Net Assets [original] 60
Kofi [30-10] 20
Kwabena[20] 20
Total 60 60
Another complications- admission of a new partner - Investment
of Assets
Assume that instead of purchasing an interest, Kwabena invests

GH30,000 in cash in the Yaw-Kofi partnership for a 1/3 capital
interest. In such a case, the entry would be as shown. The effects of
this transaction on the partnership accounts are shown as follows.
Ledger Balances after Purchase of a Partners Interest
Cash GH30,000
Kwabenas capital GH30,000
Kwabena by
investments
GH GH
Capital Accounts
Yaw 30 Net Assets [original] 60
Kofi 30 Cash 30
Kwabena 30
Total 90 90
Comparison of Purchase of an Interest and Admission by
Investment
The different effects of the purchase of an interest and admission by
investment are shown in the comparison of net assets and capital balances.
When an interest is purchased, the total net assets and total capital of the
partnership do not change. On the other hand, when a partner is admitted by
investment, both the total net assets and the total capital change.
Investment
Details Purchase of an interest Admission by
GH000 investment GH000
Net Asset GH60 GH90
Capital
Yaw GH20 GH30
Kofi GH20 GH30
Kwabena GH20 GH30
Additional Complications admission of a new partner
Investment when investment and capital are different
For an admission by investment, when the new partners

investment and the capital equity acquired are different, the
difference is considered a bonus to
1) the old partners or
2) the new partner.
Bonus to old partners
Bonus to old partners when the new partners investment in the firm is greater
than the credit to his capital account on the date of admittance.
To determine new partners capital credit and the bonus to the old partners
1) Determine the total capital of the new partnership:
new partners investment + capital of the old partnership.
2) Determine the new partners capital credit
multiply the total capital of the new partnership by the new partners
ownership interest
3) Determine the amount of bonus: subtract the new partners capital credit from
the new partners investment
4) Allocate the bonus to the old partners on the basis of their
income ratios.
BONUS TO OLD PARTNERS
Yaw and Kofi partnership with total capital of GH120,000 agree to
admit Kwabena to the business. Kwabena acquires a 25% ownership
interest by making a cash investment of GH80,000 in the partnership.
Yaw and Kofi share profit and loss in the ratio 6:4 respectively. The
determination of Kwabenas capital credit and the bonus to the old
partners is as follows:
Determine the total capital of the new partnership by adding the new partners
investment to the total capital of the old partnership. In this case, the total
capital of the new firm is GH200,000, calculated as follows:
Total capital of old partnership GH120,000
Investment by Kwabena GH 80,000
Total capital of new partnership GH200,000
Determine the new partners capital credit by

multiplying the total capital of the new partnership by
the new partners ownership interest. Kwabenas
capital credit is GH50,000 (GH200,000 X 25%).
Determine the amount of bonus by subtracting the new partners

capital credit from the new partners investment. The bonus in
this case is GH30,000 (GH80,000 GH50,000).
Allocate the bonus to the old partners on the basis of

their income ratios. Assuming the ratios are Yaw, 60%
and Kofi, 40%, the allocation is: Yaw, GH18,000
(GH30,000 X 60%) and Kofi, GH12,000 (GH30,000
X 40%).
The entry to record the admission of Kwabena is as follows:
Cash GH80,000
Capital; Yaw GH18,000
Capital: Kofi GH12,000
Capital: Kwabena GH50,000

Kwabena and bonus of old
partners
BONUS TO NEW PARTNER
A bonus to a new partner
results when the new partners investment is less than his or her capital
credit in the firm.
capital balances of the old partners are decreased based on their income
ratios before the admission of the new partner.
BONUS
Bonus to New Partner
Assuming Kwabena invests GH20,000 in cash for a 25% ownership interest in the
Yaw-Kofi partnership. The calculations for Kwabenas capital credit and the bonus are
as follows:
Total Capital of Yaw-Kofi partnership GH120,000
Investment by Kwabena new partner GH 20,000
Total capital of new partnership GH140,000
Kwabena capital credit [25%*140,000] GH35,000
Bonus to Kwabena [35,000-20,000] = GH15,000

Allocation of bonus
Yaw [15,000*60%] = GH9,000; Kofi [15,000 * 40% = GH6,000
The entry to record the admission of Kwabena is as follows:
Cash GH20,000
Yaws capital GH9,000
Kofis Capital GH6,000
Kwabenas capital [investment and bonus] GH35,000
To record admission of Kwabena and bonus

Long journey!
End of lecture one [1]
Thank you very much
Office: G13
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ACCT 301: Financial Reporting I:
Lecture two: Accounting for Changes in Partnerships Changes in sharing ratio
and retirement/withdrawal/death of a partner
Lecture Hall: A1
Lecture Days: Wednesdays; Time:7:30am 9:30am
Office: G13
Email: yawcab72@yahoo.co.uk
Mobile: 0266225129
WhatsApp: +447745808142
Lecturer: Cletus Agyenim-Boateng (PhD, MSc, BSc, FCCA)

Change in Profit and Loss sharing Ratio
A change in profit and loss sharing ratio may be necessitated by:
Mutual agreement by partners [existing ones]
Change in the constitution/ownership of a partnership: admission, retirement,

death etc of a partner or partners.
Thus, changes in sharing ratio and changes in constitution/ownership are

interconnected!
Before the change occurs, assets and liabilities of the existing partnership
including goodwill may be revalued.
And any surplus should be credited and any deficit should be debited to the
partners' capital accounts according to the existing [old] profit and loss
sharing ratio.
Focus
Change in Profit and Loss sharing Ratio by mutual agreement of
existing partners
All other changes in sharing ratio necessitated by other

arrangements are dealt with in such circumstances. We have with
change in sharing ratio necessitated by admission and others will
be dealt with under retirement/withdrawal/death inter alia! So be
mindful!
Retirement/withdrawal/death of a partner
by mutual agreement of existing partners
Example: Yaw and Kofi are in partnership. They share profits and losses equally.
Their Statement of Financial Position [SOFP] as at 31st December, 2015 is as
follows:
GH GH
Capital Accounts
Kofi 100m
Total 200m 200m
They agreed to change their sharing ratio to 2:1 with effect from 1/01/2016.
They valued goodwill at GH90m and agreed that all other assets should retain
their Statement of Financial Position values above. Prepare Statement of
Financial Position to reflect the change in profit and loss sharing ratios. No
goodwill account is to appear in the SOFP.
Suggested Solution
As there is no change in the valuation of the other assets, any
adjustment will affect the goodwill only.
The partners' capital accounts will be credited with the goodwill

according to their old profit and loss sharing ratio and goodwill
account debited.
However, as goodwill is not supposed to appear in the accounts, it will

be written off by crediting goodwill account and debiting the partners'
capital accounts according to their new profit and loss sharing ratio.
Old New Balance
GHm GHm GHm
Yaw 45 Cr 60 Dr 15 Dr
Kofi 45 Cr 30 Dr 15 Cr
Statement of Financial Position [SOFP] as at 1st January, 2016:
GH GH
Capital Accounts
Yaw [100 15] 85m Net Assets 200m
Kofi [100 + 15] 115m
Total 200m 200m

Accounting relating to retirement or withdrawal
or death of a partner
Accounting relating to retirement or withdrawal or death of
a partner
The retiring/withdrawing or deceased partners entitlement in the partnership

may comprise of the following:
Capital and current account balances
Share of unrecorded goodwill and asset revaluation surplus or deficit valued
subsequently as part of the process of determining the interest of the out-
going partner: [retired, withdrawn or dead partner]
Share of profit from the last statement of financial position date to the date
of retirement/withdrawal/death
The entitlement determined may be paid off or may be retained as loan to the
partnership
The Retirement/Withdrawal of a Partner
On the retirement/withdrawal of a partner, the partnership
agreement will provide guidelines as to how affairs
between the partners will be settled.
Generally on accounting matters the following steps will be
taken:
A profit and loss account will be prepared up to the date of the
retirement or to any other date as provided in the partnership
agreement.
The retiring or withdrawing partner's capital will then be
credited with his/her share of the profits or debited with his/her
share of loss ascertained.
His/her capital account will also be credited with any
outstanding salary, interest etc due to him from the firm and
debited with any obligation due to the firm.
The balance on his/her current account will be transferred to
his/her capital account
A revaluation of the net assets will be carried out and the share of
the outgoing partner will be credited or debited to his capital
account depending upon whether the revaluation resulted in a
figure either more or less than the book values reflected in the
accounts.
The goodwill of the firm will be valued and the share of the
outgoing partner credited to his/her account.
Two situations are likely to happen.
1. Either the retiring/withdrawing partners entitlement will be

paid in full to him/her OR;
2. the amount treated as a loan , interest will definitely be paid on
it.
According to section 41(5) of the Incorporated Partnership Act

1962, in the absence of any agreement, the loan will attract an
interest of 5% per annum and the loan and interest will be
treated as a debt to the firm.
However, a partnership agreement may indicate that the debt [the
retiring/withdrawing partners entitlement] be borne personally by the
partners and not be treated as a debt to the firm.
In that case, any amounts credited to the capital account of the
retiring/withdrawing partner will be debited to the remaining
partners' capital account in proportion to their existing profit and
loss sharing ratio.
Once a partner leaves it is very likely that the profit and loss
sharing ratio subsisting between the remaining partners will be
changed. Once the total amount due to the retiring/withdrawing
partner has been calculated, the mode of settlement will depend
upon a partnership agreement.
ILLUSTRATION
Yaw, Kofi and Kwabena are in partnership sharing profit and losses in the
ratio of 3: 2:1. Their capital accounts as at 31st December, 2015 stood as
Yaw GH 700,000; Kofi GH 600,000 and Kwabena GH 300,000.
Kwabena withdrew from the partnership as on that date. Goodwill which
has not been previously recorded in the books is valued at GH 900,000.
They agreed that the goodwill will not be reflected in the account of the
new partnership. Kwabena's capital is left as a loan to the new partnership.
Yaw and Kofi are to share profits and losses equally.
Required
Record the necessary entries to illustrate the withdrawal of Kwabena from
the partnership.
Journal Entries
Dr. Cr.
GH GH
(a) Goodwill a/c 900,000
Capital a/c:
Yaw (3/6 * GH 900,000) 450,000
Kofi (2/6 * GH 900,000) 300,000
Kwabena (1/6 * GH 900,000) 150,000
valuation of goodwill on the retirement of Titi
(b) Capital a/c - Kwabena [300,000+150,000] 450,000
Loan a/c - Kwabena [300,000+150,000] 450,000
Transfer of Kwabena's capital a/c to loan a/c
GH GH
DR CR
(c) Capital a/c:
Yaw 450,000
Kofi 450,000
Goodwill 900,000
Elimination of goodwill account.
The capital accounts of Yaw and Kofi will stand as follows:
Yaw (GH 700,000 + GH 450,000 - GH 450,000) = GH 700,000
Kofi ( GH 600,000 + GH 300,000 - GH 450,000) = GH 450,000
Accounting for the death of a partner
The accounting matters associated with the death of a partner are
similar to the situation caused by the retirement/withdrawal of a
partner.
However, it could happen that on the death of a partner, there might
not be sufficient money to pay the executors or administrators of the
deceased partner's entitlements.
A way out is for the partners to take out a joint life policy insurance
to provide cash for the payment of any deceased partner's estate.
Life Assurance Policy
Thus, a partnership firm may take up a Life Assurance Policy
before any death occurs.
To ensure regular payment to the surviving relations of a deceased

partner, without negatively affecting the cash flow of the
partnership business
The normal accounting treatment is as follows:

The annual premium paid is credited to the cash account and debited to a Life Policy
Account building an asset! [Dr]
A sum equal to the annual premium is debited to the Profit and Loss Account and credited
to a " Life Policy Fund Account" each year [building a reserve from Income Statement!
[Cr]
The Policy account [Dr] and the Life Policy Fund Account [Cr] is corresponding accounts
[reversals]
In the early years of the policy the surrender value of it [the policy] will be lower than the
total amount of premium paid. An adjustment will be made between the Life Policy
Account by crediting it and debiting the Life Policy Fund Account with the difference
between the total premium paid (higher amount) and the surrender value (lower amount).
Adjusting the corresponding accounts [mindful of the prudence principle, bringing these
accounts at par with the surrender value/ future insurance receipts]
Life Assurance Policy
In the Statement of Financial Position, the Life Policy Account will be shown
as an asset while the Life Policy Fund Account will be shown as a surplus
belonging to the partners.
On the death of a partner or when the policy is matured and realized, any
cash received is debited to cash account and credited to the Life Policy
Account. Any remaining balance on the Life Policy Account is then
transferred to the Life Policy Fund Account. The balance indicates either a
profit or loss on the policy. [closing the policy accounts]
The final balance on the Life Policy Fund Account will now represent
reserved under the policy. This balance will be credited to the partners in
proportion to their profit and loss sharing ratio. [closing the fund account]
ILLUSTRATION
Fofie, Atta and Abbam are in partnership. They share profits and losses in the
ratio of 5:3:2. They took out a joint assurance life policy for GH 400,000 at an
annual premium of GH 18,000. Accounts are prepared to 31st December of
each year..
On 31st May, 2015 Fofie died. The partnership agreement provides that in the
event of death of a partner, goodwill is to be valued at two years' purchase of
the average profits for the last three years.
These have been :
2012: GH 140,000; 2013: GH 150,000; 2014: GH 160,000
ILLUSTRATION
The total premium paid at the time Fofie died amounted to GH 130,000
with a surrender value GH 115,000. The policy realized GH 400,000 on
the death of Fofie. The profit from the last Statement of Financial Position
date to the date of Fofie's death showed GH 86,000. The balances of
Fofie's account at the time of his death were:-
Capital: GH 100,000 (credit) and Current: GH 16,000 (debit)
Required:
Show the ledger accounts in the books of the partnership
Answer
Life Policy Account
GH GH
Bal b/f ( cash payments) 130,000 Life policy a/c
Life policy fund a/c ( adjustment to
Profit transferred 285,000 surrender value ) 15,000
Cash 400,000
415,000 415,000
Answer
Life Policy Fund Account
GH GH
Life policy a/c. 15,000 Bal. b/f (cash payments) 130,000
Capital a/c. Life policy a/c 285,000
Fofie (5/10) 200,000
Atta (3/10) 120,000
Abbam (2/10) 80,000
400,000
415,000 415,000
Capital Account - Fofie
GH GH
Current a/c 16,000 Bal. b/f 100,000
Bal. c/d 477,000 Goodwill 150,000
Life policy fund a/c 200,000
Profit to date of death 43,000
493,000 493,000
Calculation of goodwill:
2( GH 140,000 + GH 150,000 + GH 160,000) = GH 300,000
3
Fofie's share = 5/10 * GH 300,000 = GH 150,000
End of lecture two [2]
Thank you very much
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Lecture three Accounting for Changes in Partnerships - Amalgamation
Lecture Hall: A1
Office: G13
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Accounting for amalgamation of Partnership Firms
Admission of one partnership firm into another firm
Involves revaluing some or all assets including goodwill and including all
changed values in the capital accounts of existing partnership
Amalgamation necessitates the closing of the books of each of the

amalgamating partnership firms and then opening of the books of the new
firm
Two issues are involved:
1. Winding-up of the existing partnership
[closing the books] and
2. Formation of a new firm [opening the books]
Accounting entries in the books of the
amalgamating firms
The book values of the assets transferred to the new partnership [merged
firm] are debited to a realisation account and credited to the respective
assets accounts to close them
The carrying values of liabilities transferred to the new partnership
[merged firm] are credited to the realisation account and debited to the
respective liabilities account to close them
Expenses relating to the merger are debited to the realisation account and
credited to the cash book; or expense creditor when is not paid
amalgamating firms
The agreed transfer value which represents the purchase
consideration is credited to the realisation account and debited to
the new partnership firm [the merged entity]
The balance on the realisation account represents profit or loss on
the merger and is transferred to the partners Capital Account
Where some assets were revalued as part of the merger process,
the resultant revaluation surplus or deficit is transferred to
partners Capital account according to agreed ratios
amalgamating firms
Where goodwill implication is considered, the resultant goodwill is
transferred to partners capital account according to agreed ratios
The partners transfer their accounts balances to the new partnership

firm to represent their initial capital. This may be increased by further
capital contribution or reduced by capital withdrawal to reflect the new
capital contribution structure
Accounting entries in the books of the merged
firm
The merged firm would take the assets and liabilities or part of the
liabilities [depending on the arrangement of the merger], of the
individual firms at agreed values by crediting the purchase of business
account with assets, and debiting it with the liabilities and or purchase
consideration.
The difference in the purchase of business account represents capital

surplus [credit balance] or goodwill [debit balance]
Accounting entries in the books of the merged
firm
The assets and liabilities, as taken over from the individual firms,
plus the balancing figure in the purchase of business account,
represent the opening statement of financial position of the
merged entity after the purchase consideration is changed to be
represented by the non-cash consideration like debentures and
shares. Any difference thereafter represent cash balance
Amalgamation of Partnership : Illustration
The partnership of A and B (operating under the

business name AB & Co) and that of C and D
(operating under the business name CD &Co) agreed to
amalgamate with effect from 1st July, 2015. A new firm
known as ABCD & Co has been established for this
purpose. At the close of business on 30th June, 2015,
the separate statement of financial positions of the two
firms were as follows:
AB & Co CD & Co
GH GH
Fixed Assets (NBV)
Business Premises 70,000 100,000
Machinery - 95,000
Motor Vehicles 15,000 20,000
Furniture and Equipment 46,000 -
131,000 215,000
AB & Co. CD & Co.
GH GH
Current Assets
Stocks 55,000 109,000
Debtors 27,000 64,000
Bank and Cash 21,000
103,000 173,000
Current Liabilities
Trade creditors 31,000 57,000
Taxation 22,000
Bank overdraft 49,000
31,000 128,000
Working capital 72,000 45,000
Net Assets Employed 203,000 260,000
AB& Co. CD& Co.
GH GH
Financed by:
Capital Accounts:
A 120,000
B 60,000
C 100,000
D 100,000
Current Accounts
A 10,000
B 13,000
C 40,000
D 20,000
203,000 260,000
Illustration
Under the terms of the agreement, ABCD & Co acquired all the assets of
AB & Co except for bank and cash. This balance was retained by the
partners in order to discharge some of the creditors. B paid the remaining
creditors from his personal resources. Other assets were taken over at the
following values:
GH
Business Premises 120,000
Motor Vehicle 9,000
Furniture and Equipment 40,000
Stocks 50,000
Debtors 27,000
A and B share profits and losses in accordance with their capital account
proportions. ABCD & Co took over all the assets of CD &Co and also
assumed responsibility for discharging all the liabilities. The assets were
revalued as follows:
GH
Machinery 80,000
Vehicles 20,000
Stocks 81,000
Debtors 61,000
For the purpose of the amalgamation, the values of AB & Co and CD & Co
are transferred to the new firm, ABCD & Co at GH 273,000 and GH
360,000 respectively. It was further agreed that the initial capital of ABCD
&Co was to be GH 800,000 to be contributed equally by the four partners.
A, B , C A and D are to be equal partners in the new firm. the new firm is to
recognize all assets and liabilities as revalued for the amalgamation process.
Required
(a) Make the necessary entries to close the books of AB &
Co and CD & Co.
(b) Make the necessary entries to record the amalgamation
in the books of ABCD & Co.
(c) Draw up the Statement of financial position of ABCD
& Co immediately after the amalgamation.
Realization Account
AB CD AB CD
GH GH GH GH
Business Premises 70,000 100,000 ABC & Co:(Transfer
Machinery 95,000 Value) 273,000 360,000
Motor vehicles 15,000 20,000 Creditors 57,000
Furniture and Equip. 46,000 Taxation 22,000
Stocks 55,000 109,000 Bank Overdraft 49,000
Debtors 27,000 64,000
Share of profit: 40,000 50,000
20,000 50,000
273,000 488,000 273,000 488,000
Partners' Capital Accounts
A B C D
GH GH GH GH
Bal b/f 120,000 60,000 100,000 100,000
Current Account transferred 10,000 13,000 40,000 20,000
Share of profit on transfer to ABCD & Co (*) 40,000 20,000 50,000 50000
Payment to creditors 10,000
Interest to be transferred to new business 170,000 103,000 190,000 170,000
(*) This figure will be the same as share of revaluation surplus and share of goodwill. Thus
as an alternative to the realization account, we could have prepared the revaluation account
and share the goodwill arising among the partners.
ABCD & Co. Partnership
AB CD AB CD
GH GH GH GH
Realization (transfer value) 273,000 360,000 Partners' capital:
A 170,000
B 103,000
C 190,000
D 170,000
273,000 360,000 273,000 360,000
Creditors - AB & Co.
GH GH
Cash 21,000 Balance b /f 31,000
Capital account: B 10,000
31,000 31,000
Alternative Treatment
Calculation of goodwill ( Valuation of firm as a whole - Value of net separable assets)
AB CD
GH GH
Total assets taken over by ABCD & Co.(as revalued) 246,000 442,000
Total liabilities assumed 128,000
Value of separable net assets 246,000 314,000
Value of firm as a whole 273,000 360,000
Goodwill 27,000 46,000
Shared as to :
A 18,000
B 9,000
C 23,000
D 23,000
Revaluation Account
AB CD AB CD
GH GH GH GH
Machinery 15,000 Business Premises 50,000 100,000
Motor vehicle 6,000
Furniture & Equip. 6,000
Stocks 5,000 28,000
Debtors 3,000
Share of surplus: A 22,000
B 11,000
C 27,000
D 27,000
50,000 100,000 50,000 100,000
A B C D
GH GH GH GH
Balance b/f 120,000 60,000 100,000 100,000
Current Account transferred 10,000 13,000 40,000 20,000
Share of goodwill introduced(*)18,000 9,000 23,000 23,000
Share of revaluation surplus(*) 22,000 11,000 27,000 27,000
Payment to creditors 10,000
Interest to be transferred to new 170,000 103,000 190,000 170,000
business
(*) The sum of the revaluation surplus and the goodwill equals the profit on realization
Opening entries in ABCD & Co. Books
Business Acquisition Account
AB CD AB CD
GH GH GH GH
Trade Creditors 57,000 Business Premises 120,000 200,000
Taxation liabilities 22,000 Machinery 80,000
Bank Overdraft 49,000 Motor Vehicles 9,000 20,000
Partners' Capital Furniture and equip. 40,000
( value of business) 273,000 360,000 Stocks 50,000 81,000
Debtors 27,000 61,000
Goodwill 27,000 46,000
273,000 488,000 273,000 488,000
Partners Capital Accounts
A B C D
GH GH GH GH
Balance transferred from old firm 170,000 103,000 190,000 170,000
Bank- Additional capital required 30,000 97,000 10,000 30,000
Capital required in New firm 200,000 200,000 200,000 200,000
Bank
GH GH
Capital: A 30,000 Business acquisition 49,000
B 97,000 Balance c/d 118,000
C 10,000
D 30,000
167,000 167,000
ABCD & Co. STATEMENT OF FINANCIAL POSITION AS AT IST JULY, 2015
GH GH
Fixed Assets
Goodwill 73,000
Machinery 80,000
Motor Vehicles 29,000
Furniture and Equipment 40,000
542,000
Current Assets
Stocks 131,000
Debtors 88,000
Bank 118,000
337,000
Current Liabilities
Trade creditors 57,000
Taxation liability 22,000 79,000 258,000
800,000
Financed by:
Capital accounts:
A 200,000
B 200,000
C 200,000
D 200,000
800,000
End of lecture three
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Lecture four: Accounting for Changes in Partnerships Dissolution: One-
off/one-stage Dissolution of a Partnership
Lecture Hall: A1
Office: G13
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Dissolution/Winding up of Partnerships
Introduction
Winding up is the term used in the Act to describe dissolution of a firm. A
firm is dissolved when the winding up procedure is completed and it ceases to
carry on business. Section 44 of the Act provides the circumstances under
which a winding up of a firm may take place. Under section 51 of the Act a
dissolution of a firm may take two forms.
Firstly, the firm may be sold off as a going concern to another partnership. In
such a situation, the change should be duly registered with the Registrar in
accordance with section 7 of the Act.
Secondly, the firm may cease to exist and its assets disposed off either
separately or en-bloc. In such a situation, the Registrar shall strike the firm off
the register and notify the same in the Gazette. The firm shall thereupon be
deemed to be dissolved as at the date of the publication in the GAZETTE.
Winding up of Partnerships
Section 41(1) of the Act also states as follows:" If on any partner ceasing to be
a partner in the firm, there is only one surviving or continuing partner of the
firm, the surviving partner shall, within six months of the cessation, either;
Admit another member or members into partnership in the firm; or
Commence to wind up the firm in accordance with section 47 or 48 of the
Act.
Section 50(2) of the Act provides a formula to be used in settling accounts
between the partners after dissolution in absence of any contrary agreement.
Dissolution of a Partnership
The effect of the dissolution is that:

a) The partnership ceases to carry on business.
b) The assets of the partnership are disposed off and all creditors paid off.
c) Any profit or loss is transferred to the capital accounts of the partners.
d) The remaining cash is paid to the partners to clear off their capitals from the
books.
.
Steps for Closing partnership Books on Dissolution
Since the practical effect of a dissolution is the sale of the firm, a realization
account is opened which doubles up as a sort of profit and loss account.
The steps then are as follows:
Transfer all assets, with the exception of cash, to the realization account
by crediting assets accounts and debiting realization account.
Transfer all specific reserves and provisions such as provision for
depreciation and bad and doubtful debts to the realization account by
debiting the reserve or provision account and crediting realization account.
Accounting for Dissolution of Partnerships:
Divided into two
Focus of this lecture:
One-off Dissolution of partnership
The next lecture will focus on:
Piecemeal/bit-by-bit Dissolution/Realization
Steps for Closing Partnership Books on Dissolution
The realization account is debited with any expenses on realization and cash
account credited.
Credit the realization account with any cash proceeds from the sale of assets
and debit the cash account or if a partner has taken over any asset, debit such
a partner's capital account.
Any external liabilities are discharged by the payment of cash. The entry is to
debit external liability and credit cash account.
Pay off any contingent liabilities that have crystallized during the winding up
(e.g. bills of exchange receivable discounted) in cash and credit cash account
and debit realization account.
Steps for Closing Partnership Books on Dissolution.
Settle any loans made by a partner. However any debit balance on the capital
account of a partner should first be set- off against his loan account. Cash
account should be credited and partner's loan account debited.
Any discounts or allowances given by creditors on discharging liabilities
shall be debited to the creditors' accounts and credited to the realization
account.
Steps for Closing Partnership Books on Dissolution.
The balance on the realization account will now represent either the
profit or loss made on realization and is transferred to the partner's
capital accounts. If a profit is made on realization, it will be divided
and credited to the capital accounts of the partners in proportion to
their profit sharing ratio and the realization account debited. However
if a loss is made on realization, it will be divided and debited to the
capital accounts of the partners in proportion to their lost sharing ratio
[which may be last agreed capital ratio or loss sharing ratio or any
agreed basis] and the realization account credited.
Transfer the balances on partners' current accounts to their
capital accounts by crediting capital accounts and debiting
current accounts. If a partner's current account is in debit, his
capital account will be debited and his current account
credited.
Pay to the partners the balance due on their capital accounts.
Partners' capital accounts should be debited and cash account
credited.
Section 50(2)(b) states that:
subject to any agreement, deficiencies of capital shall not be
made up but shall be borne by the partners in the proportion in
which they were entitled to capital.
Therefore unless the partnership agreement specifically states
it, any partner whose capital account is in deficit during
dissolution should Not be called upon to make good the
deficiency. The partners shall bear the loss in their capital ratio
and not profit and loss sharing ratio as it would be made clear
in the examples following.
Upon dissolution, one of three situations can arise:
a) A profit is made on realization
b) A break-even situation( no profit, no loss) is achieved.
c) A loss is made on realization.
Under (a) and (b) there should be sufficient money to discharge all external
liabilities as well as pay off in full partners' capitals. Also under (a) any profit
made is divided and credited to the partners' capital accounts according to their
profit and loss sharing ratio. Under (c) any loss on realization is debited to the
partners' capital accounts according to their loss sharing ratio [which may be
last agreed capital ratio or loss sharing ratio or any agreed basis]. The "last
agreed capital accounts" are the capital accounts as shown in the last NORMAL
business Statement of Financial Position. It should be noted that the proportions
of the capital accounts, both before and immediately after the realization may
be quite different.
Also under (c), two different situations may arise.
(a) There would be sufficient money to pay all external liabilities in full but not
sufficient to pay partners capital in full.
(b) There would not be sufficient money to pay all external liabilities in full and
therefore no capital accounts can be paid at all.
It should be noted that once a loss is made on realization, there would be no
possibility of paying off completely all the claims, both external and/or internal,
against the assets of the firm just before the dissolution. Another situation
which shall be considered under the three cases stated above are where a
partner's last agreed capital account is in deficit before the dissolution of the
partnership.
Profit Made on Dissolution: Illustration 1
Yaw and Kofi are in partnership sharing profits and losses 3:2. They decide to dissolve the partnership as at 31st
December, 2015. The Statement of Financial Position of the partnership as at that date being shown below:
GH GH GH
Capital Accounts: Furniture & Fittings 25,000
Yaw 20,000 Stock 7,000
Kofi 15,000 Debtors 6,000
35,000
Creditors 5,000 Cash 2,000
40,000 40,000
The assets except cash realized GH 50,000
Required: Close the books of the firm. [Assume profit on realization is shared according to the profit and loss
sharing ratio]
Realization Account
GH GH
Sundry assets 38,000 Cash a/c 50,000
Capital a/c-Profit
Yaw (3/5) 7,200
Kofi (2/5) 4,800 12,000
50,000 50,000
Cash Account
GH GH
Bal b/f 2,000 Creditors 5,000
Realization 50,000 Capital a/c: Yaw 27,200
Kofi 19,800
47,000
52,000 52,000
Creditors Account
GH GH
Cash a/c 5,000 Bal b/f 5,000
Capital Account
Yaw Kofi Yaw Kofi
GH GH GH GH
Cash a/c 27,200 19,800 Bal b/f 20,000 15,000
Realization a/c- Profit 7,200 4,800
27,200 19,800 27,200 15,800
Since there was profit on realization, the profit is shared to the

partners in their profit and loss sharing ratio.
Loss on Dissolution/Realisation
Poku, Kusi and Otoo are in partnership sharing profits and losses in the
ratio 2:2:1. As at 31st December, 2015, their last accounting date their
abridged Statement of Financial Position was as follows:
GH GH GH
Capital Accounts: Total Assets 285,000
Poku 60,000
Kusi 40,000
Otoo 20,000 120,000
[See next slides for the continuation]

Loan Accounts:
Kusi 20,000
Otoo 30,000
50,000
Creditors 115,000
285,000 285,000
The partners decide to dissolve partnership as on the last accounting date, the
assets realized GH 261,000.
Required
Close the books of the partnership [Assuming loss on dissolution/realisation
is shared according to their capital ratio]
Answer
Total assets amount to GH 285,000 while they realize only

GH261,000. Therefore there is a loss of GH 24,000. The
loss will be borne by the partners in their capital ratio, i.e.
60,000: 40,000: 20,000 = 3:2:1 and not in their profit and loss
sharing ratio of 2:2:1.
Answer
Realization Account
GH GH
Capital a/c:
Loss:
Poku (3/6) 12,000
Kusi (2/6) 8,000
Otoo (1/6) 4,000
24,000
285,000 285,000
Answer
Cash Account
GH GH
Realization a/c 261,000 Creditors a/c 115,000
Partners Loan a/c

Kusi 20,000
Otoo 30,000
50,000
Capital a/c
Poku (3/6) 48,000
Kusi(2/6) 32,000
Otoo(1/6) 16,000
96,000
261,000 261,000
Answer
Creditors Account
GH GH
Cash a/c 115,000 Bal b/f 115,000
Answer
Partners' Loan Account
Kusi Otoo Kusi Otoo
GH GH GH GH
Bal b/f 20,000 30,000
Cash a/c 20,000 30,000
20,000 30,000 20,000 30,000
Answer
Partners' Capital Account
Poku Kusi Otoo Poku Kusi Otoo
GH GH GH GH GH GH
Realization a/c 12,000 8,000 4,000 Bal b/f 60,000 40,000 20,000
Cash 48,000 32,000 16,000
60,000 40,000 20,000 60,000 40,000 20,000
Illustration
Assume the same facts as the Illustration above except that
this time the assets realized only GH 100,000.
Required:
Close the books of the partnership. [Assuming loss on
realisation is shared according to their capital ratio; and any
additional capital contribution is assumed to be made
according to profit and loss sharing ratio]
Answer
The total loss on realization is GH 185,000. Therefore there will not be
sufficient money to pay off all the external liabilities let alone pay partners'
loans and capitals.
Section 50(4) of the Act states that:"Notwithstanding the dissolution of the
firm the former partners shall remain jointly and severally liable to pay the
debts and liabilities of the firm in so far as these have not been fully
discharged in the winding up or otherwise".
Combining this with section 50(2)(a) ( see paragraph 1-12) it would appear
realization loss should first be borne by the partners in proportion to their
capital, next in proportion to their loan accounts and finally in proportion to
their profit and loss sharing ratio.
In this illustration, the total loss of GH185,000 is first written off against
the total capitals of GH120,000, next against the loan accounts GH50,000
and the balance of GH15,000 is debited to the capital accounts in their profit
and loss sharing ratio, i.e. 2:2:1.
Answer
Since additional amount of GH15,000 will be needed to
enable the total external liabilities to be paid, the partners will
pay that money in the ratio of 2:2:1 to the firm. It should be
noted that this arrangement is to enable external liabilities to
be met in full and not to make up for deficiencies in capital.
Answer
Realization Account
GH GH
Capital a/c:
Loss:
Poku (3/6) 60,000
Kusi (2/6) 40,000
Otoo (1/6) 20,000
120,000
Loan a/c: loss
Kusi (2/5) 20,000
Otoo (3/5) 30,000
50,000
Answer [continuation of the previous slide]
Capital a/c- loss
Poku(2/5) 6,000
Kusi (2/5) 6,000
Otoo (1/5) 3,000
15,000
285,000 285,000
Answer
Cash Account
GH GH
Realization a/c 100,000 Creditors 115,000

Capital a/c:
Poku 6,000
Kusi 6,000
Otoo 3,000
15,000
115,000 115,000
Answer
Creditors Account
GH GH
Cash a/c 115,000 Bal b/f 115,000
Partners' Loan Account

Kusi Otoo Kusi Otoo
GH GH GH GH
Realization a/c 20,000 30,000 Bal. b/f 20,000 30,000
Answer
Partner's Capital Account

Poku Kusi Otoo Poku Kusi Otoo
GH GH GH GH GH GH
Reali-
zation a/c 66,000 46,000 23,000 Bal. b/f 60,000 40,000 20,000
Cash a/c 6,000 6,000 3,000
66,000 46,000 23,000 66,000 46,000 23,000

Partners Capital in Deficit before Realisation
Baaba, Amanua and Kaaley are in partnership sharing profits and losses equally.
They decide to dissolve the partnership. At the date of dissolution their abridged
Statement of Financial Position was as follows:
GH GH
Capital accounts Net Assets 45,000
Baaba 30,000
Amanua 20,000
50,000
Kaaley - deficit (5,000)
45,000 45,000
The net assets realize GH90,000
Required:
Close the books of the firm [Assume profit is shared using profit and loss sharing ratio]
Answer
Realization Account
GH GH
Capital a/c - Profit
Baaba (1/3) 15,000
Amanua(1/3) 15,000
Kaalay(1/3) 15,000
45,000
90,000 90,000
Answer
Cash Account
GH GH
Realization a/c 90,000 Capital a/c
Baaba 45,000
Amanua 35,000
Kaaley 10,000
90,000 90,000
Answer

Baaba Amanua Kaaley Baaba Amanua Kaaley
GH GH GH GH GH GH
Bal b/f 5,000 Bal b/f 30,000 20,000
Realization a/c 15,000 15,000 15,000

Cash a/c 45,000 35,000 10,000
45,000 35,000 15,000 45,000 35,000 15,000
Illustration
Assume the same facts as in the illustration above . However
the assets realize only GH48,000.
Required:
Close the books of the firm.
Answer
Realization Account
GH GH
Capital a/c - Profit
Baaba (1/3) 1,000
Amanua(1/3) 1,000
Kaalay(1/3) 1,000
3,000
48,000 48,000
Answer
Cash Account
GH GH
Baaba 28,600
Amanua 19,400
48,000 48,000
Answer
Baaba Amanua Kaaley Baaba Amanua Kaaley
GH GH GH GH GH GH
Bal b/f 5,000 Bal b/f 30,000 20,000
Capital-contra 2,400 1,600 Realization
(Kaaley) a/c 1,000 1,000 1,000
Cash a/c 28,600 19,400 Capital-contra 4,000
31,000 21,000 5,000 31,000 21,000 5,000
Illustration
Assume the same facts as illustration 4. However, the assets
realized only GH39,000.
Required:
Close the books of the firm. [Assume loss on realization is
shared according to capital ratio]
Answer
Realization Account
GH GH
Capital a/c - Loss
Baaba (3/5) 3,600
Amanua(2/5) 2,400
6,000
45,000 45,000
Answer
Cash Account
GH GH
Baaba (3/5) 23,400
Amanua (2/5) 15,600
39,000 39,000
Answer
B A K B A K
GH GH GH GH GH GH
Bal b/f 5,000 Bal b/f 30,000 20,000
Realiz.a/c 3,600 2,400
Capital-contra 3,000 2,000
Cash a/c 23,400 15,600 Capital-contra 5,000
30,000 20,000 5,000 30,000 20,000 5,000
Answer
The loss on realization is debited to the two partners whose capital
accounts are in credit in the proportion of their last agreed capital
accounts. The deficit on the capital account of Kaaley is also written
off to the capital accounts of Baaba and Amanua in the proportion of
their last agreed capital accounts. Thus Baaba and Amanua bear the
loss in their capital ratio
End of lecture four
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Lecture five Accounting for Changes in Partnerships Piecemeal/bit-by-bit
Dissolution
Lecture Hall: A1
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Peacemeal/Bit-by-bit Dissolution/Realisation
In practice, or in real world situation, a business dissolution may take a long
time to complete. However, the partners who are involved obviously want to
obtain the value or assets to which they are entitled as soon as possible.
Piecemeal realization is the dissolution of partnership spread over a period of
time with assets disposed off individually rather than together as a going
concern. Notwithstanding that, the final position when the final asset is sold and
the last external liability paid is going to be the same as if the distribution had
happened immediately (assuming of course that the net proceeds are the same).
Interim payment to partners need to be made in such a way that no
partner will have to pay money already received if future
realizations produce less than expected. The calculation can be
done using either of the two methods:
Maximum Loss Method
Surplus Capital Method
Maximum Loss Method
This method is applied where assets are realized over a period of time
and it is decided to make distributions to the partners after each realization
such that no partner receives more than what will be his/her ultimate
entitlement.
The basic principles are as follows:
Each realization is treated as a final realization and the normal entries are
made to record the receipt of cash (debit cash, credit Realization account);
In order to calculate how much of the realized cash can be paid out to
partners, a calculation has to be done to ensure that no partner receives
more than his ultimate entitlement. This is done as follows:
Maximum Loss Method
Determine the maximum loss: the total liabilities and partners capital!
Dispose off asset[s]
Deduct from the cash received an amount that will cover the liabilities of
the partnership. These liabilities will include not only the liabilities that
are recorded in the books, but also any anticipated liabilities and costs of
dissolution that are not yet recorded.
This means that the maximum loss will be reduced.
The remaining loss, which is the new maximum loss, is shared between
or among the partners according to their profit and loss sharing ratio or
any agreed basis.
Any deficit position of any partner [debit balance] is shared by the
solvent partners [partners with credit balances] according to their
sharing ratio or any agreed basis.
Maximum Loss Method
That is this new maximum loss is notionally deducted from the partners
individual balances according to their loss sharing ratio (again, no entries
are made in the ledgers). And the debit balance of any partner is written
off against the balances of those partners with credit balances.
The cash distribution is then made to the partners with credit balances
remaining on their accounts. Thus, the normal double entry will be passed
as debit the partners' capital accounts and credit cash book.
This circle continues till all the assets have been sold and the winding up
complete!
Illustration
Mary, Nancy and Evelyn are in partnership sharing both capital and revenue profits and losses equally. The
statement of financial position as at 30th June, 2016 was as follows:
GH GH
PPE 40,000
Inventory in trade 7,500
Trade receivables 7,500
55,000
Financed by:
Capital: Mary 30,000
Nancy 10,000
Evelyn 5,000
45,000
Trade payables 10,000
55,000
Illustration
The partners decided to dissolve the firm with effect from 1st July, 2016
because of stiff competition in the industry. On July 15th, 2016, the fixed
assets were bought by a competitor for GH 33,000 and the professional fees
paid in connection with the sale amounted to GH2,000.
On August 10th, 2016, the sale of the inventory were completed realizing a
total of GH6,000. Recovering the amount owed by the trade receivable
became extremely difficult so on 5th September 2016, it was decided to factor
the trade receivable with a debt collection agency for cash of GH6,600.
Distribution to partners is effected on monthly basis as and when cash is
available
Required:
a) Show the amount paid to each partner at each distribution.
b) Prepare the realization account, and partners' accounts to give effect to the
Suggested solution
Schedule of Cash Distribution
Cash Maximum Liabilities Mary Nancy Evelyn
Loss
GH GH GH GH GH GH
1st Distribution
Balance b/f - 55,000 10,000 30,000 10,000 5,000
Proceeds from assets 33,000 (33,000)
Realization expenses (2,000) 2000
Settlement of payables (10,000) (10,000)
21,000 24,000 - 30,000 10,000 5,000
Share of maximum loss (24,000) (8,000) (8,000) (8,000)
Share of Evelyn's deficit (1,500) 1,500) 3,000
Distribution of cash (21,000) - - 20,500 500 -
Suggested solution
2nd Distribution
Balance b/d 24,000 9,500 9,500 5,000
Proceeds from inventory 6,000 (6,000)
Share of maximum loss (18,000) (6,000) (6,000) (6,000)
Share of E's deficit (500) (500) 1,000
Distribution of cash (6,000) 3,000 3,000 -
3rd and Final Dist.
Balance b/d 18,000 6,500 6,500 5,000
Proceeds from T. receivable6,600 (6,600)
Share of Final loss (11,400) (3,800) (3,800) (3,800)

Final Cash Distribution (6,600) 2,700 2, 700 1,200
Suggested solution
Realization Account
GH GH
Fixed Assets 40,000 Cash: Fixed Assets 33,000
Inventory 7,500 Inventory 6,000
Trade receivable 7,500 Trade receivable 6,600
Realization expenses 2,000 Share of loss on Realization:
M 3,800
N 3,800
E 3,800
57,000 57, 000
Suggested solution
Partners' capital account
Mary Nancy Evelyn Mary Nancy Evelyn
GH GH GH GH GH GH
1st Cash dist. 20,500 500 - Balance b/f 30,000 10,000 5,000
2nd distribution 3,000 3, 000 -
3rd distribution 2,700 2, 700 1,200
Share of loss on real. 3,800 3, 800 3,800
30,000 10,000 5,000 30,000 10,000 5,000
The Surplus Capital Method
Under this method, the proceeds from realized assets are

allocated in such a way as to bring the partners capital
balances into the ratio as their profit sharing arrangement.
The last priority is to the partner with the largest per unit
profit share and the next in order and so on. Meaning that we
need to prepare distribution sequence schedule.
The resulting cash distribution is the same as that of the
Maximum loss method
Illustration
Use facts in illustration above

Required: Demonstrate the cash distribution to partners using
the Surplus Capital Account
Suggested solution
Distribution Sequence Schedule
Mary Nancy Evelyn
GH GH GH
Capital Balance 30,000 10,000 5,000
Capital in Profit and Loss sharing
Ratio. (5,000) (5,000) (5,000) [Last priority]
Surplus Capital 25,000 5,000 -
Capital in profit sharing ratio (5,000) (5,000) [Second priority]
20,000 0 [First priority]
Distribution sequence
First GH 20,000 1: 0:0 [first priority]
Next GH 10,000 1:1:0 [second priority]
Cumulative over GH30,000 1:1:1 [last priority]
Suggested solution
Cash Distribution Schedule
Total Proceeds Expenses Liabilities M N E
July 33,000 2,000 10,000 20,000
500 500
20,500 500 -
August 6,000 3,000 3, 000 -
September 6,600 1,500 1,500 -
1,200 1, 200 1,200
2,700 2, 700 1,200
Total Payment 45,600 2,000 10,000 26,200 6,200 1,200

Amount due (57,000) (2,000) (10,000) (30,000) (10,000) (5,000)
Share of loss 11,400 3,800 3, 800 3,800
NB: Realization account, Partners' Accounts and Cash account are the same with both methods.
End of lecture five
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ACCT 301: Financial Reporting:
Lecture six: Accounting for Changes in Partnership Sale of a Partnership to a
limited company and a conversion of a partnership into a company
Lecture Hall: A1
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Sale of a Partnership to a Limited Company
When a partnership is sold to a limited company, the accounting
treatment is just as if the partnership has been dissolved. A sale price
would be arrived at between the partners and the purchasing company.
The sale price is normally referred to as the purchase consideration. The
purchase consideration may come in a combination of forms. These are:
(a) Cash payment to the partners by the purchasing company.
(b) Shares of the purchasing company are issued to the partners by the
purchasing company.
(c) Debentures of the purchasing company are issued to the partners by the
purchasing company.
(d) A combination of the three
An agreement will indicate how the purchase
consideration will be divided between/among the
partners. Since a sale of a partnership to a company
amounts to a dissolution, a realization account will be
opened by the partnership to record the transaction.
The steps to close the books of the partnership are
similar to dissolution procedure [we have discussed
similar issues in earlier lectures]. The steps will
normally be as follows:
Open a realization account and debit it with the book values of all assets
taken over by the purchasing company and crediting the various assets
accounts.
Credit the realization account with all creditors taken over by the
purchasing company and debit the various creditors accounts.
Debit the purchasing company's account and credit the realization
account with the purchase consideration.
Debit the realization account with any expense on sale and credit cash.
The balance on the realization account will represent either profit or loss on the
sale and will be transferred to the partners' capital account in the proportions in
which they share profits and losses in the case of a profit and in their capital
ratio in the case of a loss. There may be an agreed basis!
Debit the assets accounts (e.g. cash, shares, debentures, etc.) with the purchase
consideration received and credit the account of the purchasing company.
Settle any liabilities not taken over by the purchasing company, debiting the
liabilities and crediting cash.
The shares, debentures etc. are now distributed between the partners in
whatever proportions which had been agreed upon. The partners capital
accounts will be debited and the accounts of shares, debentures etc. will be
credited.
The shares, debentures etc. are now distributed between the partners in
whatever proportions which had been agreed upon. The partners capital
accounts will be debited and the accounts of shares, debentures etc. will be
credited.
The accounts which would be left opened are the partners' capital account and
the cash accounts. The amount of cash left should be equal to the total balance
in the partners' capital accounts. The balances in the capital accounts will
therefore be settled by the payment or withdrawal of cash.
There are times assets are taken over by a partner. In such a case, the asset
account is credited with the takeover value and the partners' capital account is
debited. Any difference between the book value of the asset and the takeover
value is transferred to the realization account.
Illustration
Atinga and Awuni were in business as partners sharing profits and losses in the ratio 2:1. A
summarized Statement of Financial Position for the business as at 31st December, 2015 was
as follows:
GH GH
Fixed Assets 70,000
Current Assets:
Stock 35,000
Debtors 65,000
Cash 15,000
115,000
Current Liabilities:
Trade creditors (55,000)
Net Current Assets 60,000
130,000
Loan- Awuni (30,000)
100,000
Financed by:
Capital Accounts:
Atinga 50,000
Awuni 40,000
90,000
Current Accounts
Atinga 20,000
Awuni (10,000) 10,000
100,000
Included in the fixed assets were two motor vehicles having book values of GH 8,000 and
GH6,000 respectively. The Partners decided to cease trading and accepted an offer from
Dagadu Ltd. to purchase the stock and fixed assets, other than the motor cars, for GH
160,000. The purchase consideration was to be met by a cash payment of GH56,000, the
issue to the partners of 40,000 preference shares of no par value at an agreed price of
GH0.80 per share, and the balance by the issue to the partners of 180,000 ordinary shares of
no par value at an agreed price of GH0.40 each. On realization, GH61,000 was received
from the debtors while the creditors were settled for GH51,000.
The partners agreed on the following distribution arrangement.
(a) Atinga to take over one car at a valuation of GH 12,000 and Awuni the other at
GH8,000.
(b) Awuni to be issued preference shares to the value of his loan, the remainder to be issued to
Atinga.
(c) The ordinary shares to be issued in proportion to the fixed capitals.
(d) The balance to be settled in cash.
Required:
You are to record the above transactions to close the books of the partnership.
Suggested solution
Realization Account
GH GH
Fixed assets a/c 56,000 Motor cars a/c. profit 6,000
Stock a/c 35,000 creditors a/c. profit 4,000
Debtors a/c- loss 4,000 Dagadu Ltd. 160,000
Capital a/c:
Atinga (2/3) 50,000
Awuni (1/3) 25,000 75,000
170,000 170,000
Suggested solution
Partners Capital Account
Atinga Awuni Atinga Awuni
GH GH GH GH
Current a/c 10,000 Bal b/f 50,000 40,000
Motor vehicle a/c 12,000 8,000 Current a/c 20,000
Preference shares a/c 2,000 Realization a/c 50,000 25,000
Ordinary shares a/c 40,000 32,000
Cash a/c 66,000 15,000
120,000 65,000 120,000 65,000
Suggested solution
Cash Account
GH GH
Bal b/f 15,000 Creditors a/c 51,000
Dagadu Ltd a/c 56,000 Capital a/c:
Debtors a/c 61,000 Atinga 66,000
Awuni 15,000
132,000 132,000
Suggested solution
Motor Vehicle Account
GH
Bal b/f 14,000 Capital a/c:
Realization a/c- profit 6,000 Atinga 12,000
Awuni 8,000
20,000 20,000
Debtors Account
GH GH
Bal b/f 65,000 Cash a/c 61,000
Realization a/c 4,000
65,000 65,000
Creditors Account
GH GH
Cash a/c 51,000 Bal b /f 55,000
Realization a/c 4,000
55,000 55,000
Suggested solution
Loan Account - Awuni
GH GH
Preference share a/c 30,000 Bal b/ f 30,000
Dagadu Ltd. Account
GH GH
Realization a/c 160,000 Cash a/c 56,000
Preference shares a/c 32,000
Ordinary shares a/c 72,000
160,000 160,000
Suggested solution
Preference Shares Account
GH GH
32,000 Capital a/c:- Atinga 2,000
Loan a/c:- Awuni 30,000
32,000 32,000
Ordinary Shares Account
GH GH
Dagadu Ltd a/c 72,000 Capital a/c:
Atinga (5/9) 40,000
Awuni (4/9) 32,000
72,000 72,000
Conversion of a Partnership into a Company
Accounting Arrangements
a) The partnership winds up and may close the records for the new company to start off.
b) In this situation, the entries relating to the winding up and closure of records are as
outlined in the dissolution process.
c) Where the conversion takes place during the financial year, the ledgers may be kept
opened till the end of the year i.e. the transactions of the newly formed company may be
entered in the ledgers kept by the partnership.
d) The purchase consideration payable to the partners for giving up their interest in the firm
in favour of the company is based on the net assets of the firm at the time of conversion.
Where this is not known, and only balances at the end of the year are given, the net assets
at the time of conversion is represented by the net worth at the time of the conversion.
This consists of Capital Account balance, plus Current Account balance, plus/(minus)
profit/(loss) from the beginning of the year to the time of conversion, less drawings
during the period.
e) The excess of the purchase consideration over the net assets/ net
worth of the firm represents goodwill and the reverse represents
negative goodwill (gain on bargain purchase)
f) For the purpose of preparing the final accounts at the end of the
year, distinction should be made between the pre-incorporation
transactions and the post- incorporation transactions. Appropriate
bases are used to allocate the expenses and revenue items. Pre-
incorporation profit is distributed among the partners in accordance
with profit sharing ratio whilst post-incorporation profit becomes
available for distribution as dividends
.
Illustration
A, B and C have been in partnership for some time sharing profits and losses in the ratio 4:3:2
respectively. The state of the business as at 31st December, 2015 was as follows:
GH GH
Freehold land and Buildings 409,000
Fixtures and fittings 15,000
Trade receivable 688,300
Allowance for doubtful debts (20,000) 668,300
Cash at Bank 45,700
1,333,000
Capital : A 250,000
B 150,000
C 100,000
500,000
Loan on Mortgage 200,000
Trade payables 633,000
1,333,000
They decided to convert the business into a private company limited by shares.
The company was to take over all the assets of the firm and assume all
liabilities (except mortgage loan). As part of the conversion process, the land
and buildings were assessed to have a fair value of GH 450,000 and the
company was to take it over as such. The fair value of all other assets and
liabilities approximate their book values.
In satisfaction of their interest in the company, the partners were to be paid
cash of GH 250,000, and to receive investment in ABC company by way of
15% GH200,0000 Debentures (issued at par) and 200,000 equity shares
issued at GH2 per share. Expenses of GH6,000 relating to the conversion
are to be paid by the partnership firm.
It was further agreed that the investments in ABC Company were to be
shared among the partners on the basis of their last capital account balances.
Any cash balances between the partners and the firm are to be settled.
The partners (now members of the new company) invited a friend, D, to
subscribe to 150,000 equity shares issued at GH2 per share. D accepted
and paid cash consideration in full. Assume the transactions to have been
carried through and the loan on mortgage repaid:
Required:
a) Close the books of the firm.
b) Show the opening statement of financial position of ABC Company.
a) Closing the books of the firm
Realization Account
GH GH
Land and buildings 409,000 Provision for bad debts 20,000
Furniture and fittings 15,000 Trade payables 633,000
Stock in trade 195,000 ABC Company:
Trade receivable 688,300 (purchase consideration) 850,000
Cash at bank 45,700
Cash, Realization expenses 6,000
Share of profit on realization:
A 64,000
B 48,000
C 32,000
1,503,000 1,503,000
Suggested solution
ABC Company
GH GH
Realization: purchase 850,000 Cash 250,000
consideration Investment in ABC Co.
15% debentures 200,000
Equity Shares 400,000
850,000 850,000
Suggested solution
Cash
GH GH
ABC Company(purchase 250,000 Conversion Expenses 6,000
consideration) Mortgage loan 200,000
Partners' Capital: A 14,000
B 18,000
C 12,000
250,000 250,000
Suggested solution
Investment in ABC Company
Equity Debenture Equity Debenture
GH GH GH GH
ABC Company 400,000 200,000 Capital : A 200,000 100,000
B 120,000 60,000
C 80,000 40,000
400,000 200,000 400,000 200,000
Suggested solution
A B C A B C
GH GH GH GH GH GH
Debenture 100,000 60,000 40,000 Balance b/f 250,000 150,000 100,000
Equity Share 200,000 120,000 80,000 profit on . 64,000 48,000 32,000
Cash-Final realization
Settlement 14,000 18,000 12,000
314,000 198,000 132,000 314,000 198,000 132,000
Suggested solution
b) Opening Statement of financial position of ABC Company.
Business Acquisition Account
GH GH
Trade payables 633,000 Land and Buildings 450,000
A,B & C (Purchase cons.) 850,000 Furniture and fittings 15,000
Provision for doubtful debts 20,000 Inventory in trade 195,000
Bank 45,700
Goodwill 109,000
1,503,000 1,503,000
Suggested solution
Bank
GH GH
Business Acquisition 45,700 A, B & C Firm 250,000
Issue of shares 300,000 Balance c/d 95,700
345,700 345,700
Balance b/d 95,700
Suggested solution
A, B, & C Firm
GH GH
Equity shares 400,000 Business Acquisition
(purchase consideration) 850,000
15% Debentures 200,000
Cash 250,000
850,000 850,000
Suggested solution
Stated Capital
GH GH
Balance c/d 700,000 A,B, & C (Purchase
Consideration 400,000
Bank - Additional issue 300,000
700,000 700,000
Balance b/d 700,000
15% Debentures
GH GH
A,B, & C(Purchase Consideration) 200,000
Suggested solution
ABC Company
Statement of Financial Position as at 1st January, 2016
GH GH
Goodwill 109,000
Land and Buildings 450,000
Furniture and fittings 15,000
574,000
Less Allowance for doubtful debts (20,000)
Bank 95,700
959,000
Less Trade payables (633,000) 326,000
Suggested solution
GH
900,000
Less 15% Debentures (200,000)
700,000
Financed by:
Stated Capital 700,000
End of lecture six
Thank you very much
Office: G13
mobile: 0266225129
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Lecture seven: Accounting for Hire-Purchase: High Value items
Lecture Hall: A1
Office: G13
Mobile: 0266225129
WhatsApp: +447745808142

Some background
We have a law that regulates Hire-Purchase transactions in
Ghana: the Hire-Purchase Decree (1974) NRCD 292 as
amended. [The major provisions can be referred to in the
Decree].
Items bought on hire purchase are commonly non-current

tangible assets.
There is a legal restriction to dispose of the items during the

hiring period.
Accounting Arrangements for Hire- Purchase Transactions
The total amount payable for the asset is made up of:
The cash cost price: This is the amount that would have been paid if payment had
been made immediately on acquisition instead of being paid for by installments.
The interest element: This refers to the financial compensation to the selling firm for
loss of working capital, risk element of default by the hire-purchaser and perhaps for
extra administrative expenses
Therefore, from the hirer's point of view, the total hire purchase price consists of '
cash cost price' and the 'hire purchase interest '. The two elements must be accounted
for separately.
From a strict legal interpretation of the law, the hire-purchaser should not
include the asset in his/her non-current assets register until the hiring period
has ended and option to buy the asset has been [fully] exercised, and thus,
title has been acquired.
However, accounting looks at the substance of the transaction rather than its
legal form. [substance-over-form principle in mind]! Consequently, the
hire-purchaser makes the necessary entry in the fixed assets register at the
beginning of the period and not after the legal title has been acquired.
However, we are also mindful of the prudence principle in accounting for

hire-purchase transactions!, especially, in accounting for profit on hire-
purchase transactions.
Issues to cover! [in two lecture sessions]
Large/High Value [low volume] items, usually treated as non-current assets
- In the books of the Hire-Purchaser
- In the books of the Hire-Seller
Small/Low Value [high volume] items
- In the books of the Hire-Purchase
In each situation, we have two methods to account for the transaction!

We also deal with issues around repossession
We need ledger entries and extracts for Income Statement and Statement of
Financial Position
For this lecture, our focus is on:
High Value [low volume] items

- In the books of the Hire-Purchaser
Large and high value items:
With these items the values involved are high and volume is low
[Usually, in one units/singles]. Therefore, hire-purchasers/sellers are
capable of accounting for each transaction separately.
As a result, the hirer/seller is in position to allocate the gross profit
and the hire purchase interest over the agreement period.
Where a supplier sells the goods to a customer through a finance
company, the seller can take full credit for gross profit at point of sale
but the finance company should take credit for hire purchase interest
over the agreement period on some suitable (preferably by using the
sum of the years digits or the actuarial methods).
Ledger Entries in the books of the Hire-Purchaser
Either of two methods can be deployed!
Method 1 Hire-Purchase Interest Account is kept
The cash cost price is debited to the asset account and credited to the Hire-
Purchase seller/ Finance company's (FC) account. [double-entry principle in mind]
The hire-purchase interest is charged to Hire Purchase(HP) Interest Account and
credited to Hire-Purchase seller (HP seller)s or FC's account when each installment
is due. [again, double-entry principle in mind]
Deposits and installments paid are debited to HP seller/FC's account and credited to
Cash Account. [double-entry principle in mind]
The balance on FC's account at the statement of financial position date represents
the unpaid portion of the cash cost price and is included in the trade payables
(analyzed into payable within one year and payable after more than one year).
[Going Concern, Matching principles in mind]
Method 2 Hire-Purchase Interest Suspense Account is kept
The cash cost price is debited to the asset account and credited to the Hire purchase
seller/ Finance Company's (FC) account. [see earlier principle]
The total hire purchase interest is charged to Hire purchase Interest Suspense
Account and credited in full to HP seller/FC's account. [prudence, double-entry]
When each installment is due, the appropriate amount of interest is released from the
Interest Suspense Account to the Interest Account. [Matching, double-entry]
Deposits and installments paid are debited to HP seller/FC's account and credited to
Cash Account. [double-entry]
The balance on FC's account at the statement of financial position date, less the
balance on the Interest Suspense Account represents the unpaid portion of the cash
cost price and is included in the trade payables (analyzed into payable within one
year and payable after more than one year). [going concern, prudence [remove
interest suspense to avoid over statement of the asset], matching, valuation/accrual]
Depreciation is charged on the cash cost price and should commence from the date of
acquiring possession and not from the date of legal ownership. [matching and
accrual]
.Illustration
Pamfo Water Ltd wishes to expand its production line and have purchased a
new packaging line from Scotty Engineering on hire purchase terms on the
1st of January, 2013. The list price of the line as disclosed by Scotty was
GH54 million. The hire purchase agreement provided that Pamfo would
pay a deposit of GH9 million on 1st January, 2013 and two annual
installments of GH24 million on 31st December, 2013, 2014 and a final
installment of GH20.391 million on 31st December, 2015. The true rate of
interest is 25% per annum.
The depreciation policy of Pamfo is to write off the line to nil value over 10
years on straight line basis. The total cost of manufacturing the line to
Scotty was GH 43.2 million.
Required
Account for the above transaction in the books of Pamfo (using both
methods 1 and 2 above).
Suggested solution
Method1: Hire-Purchase Interest Account is kept

Packaging Line
GH'000 GH' 000
1/1/13 Scotty 54,000
Scotty Engineering
GH'000 GH '000
1/1/13 Bank- deposit 9,000 1/1/13 Packaging Line 54,000
31/12/13 Bank- Ist
Installment 24,000 31/12/13 HP Interest 11,250
Bal c/d 32,250 25% of ( 54,000 - 9,000)
---------- -----------
65,250 65, 250
---------- ----------
31/12/14 Bank- 2nd
Installment 24,000 1/1/14 Balance b/d 32,250
Balance c/d 16,313 31/12/14 HP Interest 8,063
(25% 0f 32,250)
---------- ---------
40,313 40, 313
---------- ----------
31/12/15 Bank- Final
Installment 20,391 1/1/15 Balance b/d 16,313
31/12/15 HP Interest 4,078
(25% of 16,313)
--------- ---------
20,391 20, 391
--------- ----------
Hire Purchase Interest
GH'000 GH'000
31/12/13 Scotty 11,250 31/12/13 Income statement 11,250
Income Statement (extract) for the year ended...
2013 2014 2015 2016
GH'000 GH '000 GH'000 GH '000
Hire purchase Interest 11,250 8,063 4,078
Depreciation charge 5,400 5,400 5,400 5,400
Statement of financial position as at ...( Extracts)
2013 2014 2015 2016

GH '000 GH'000 GH '000 GH'000
Fixed Assets
Packaging Line at cost 54,000 54, 000 54, 000 54,000
Less Accumulated depreciation 5,400 10,800 16,200 21,600
---------- --------- ---------- --------
-
48,600 43,200 37,800 32,400
---------- --------- --------- ---------
-
Liabilities
Hire Purchase Debts Outstanding 32,250 16,313
Method 2
Packaging Line
GH'000 GH '000
1/1/13 Scotty 54,000
Scotty Engineering
GH '000 GH'000
1/1/13 Bank 9,000 1/1/13 Packaging Line 54,000
31/12/13 Bank-Ist Installment 24,000 31/12/13 HP Interest Suspense 23,391
Bal c/d 44,391
---------- ----------
77,391 77, 391
---------- ----------
31/12/14 Bank- 2nd Installment 24,000 1/1/14 Balance b/d 44,391
Balance c/d 20, 391
--------- ----------
44,391 44, 391
---------- ----------
31/12/15 Bank - Final Installment 20,391 1/1/16 Balance b/d 20,391
--------- ----------
20,391 20,391
--------- ----------
Hire Purchase Interest Suspense
GH'000 GH '000
Bal c/d 12,141
--------- ----------
1/1/14 Bal b/d 12,141 31/12/14 Income statement 8,063
25% of (44,391 -12,141)
Balance c/d 4,078
--------- ---------
12,141 12, 141
--------- ---------
1/1/15 Balance b/d 4,078 31/12/15 Income Statement 4,078
25% of ( 20,391 - 4,078)
-------- ---------
Income Statement for the year ended...(extracts)
2013 2014 2015 2016
GH '000 GH'000 GH '000 GH'000
Hire purchase Interest 11,250 8,063 4,078
Depreciation charge 5,400 5, 400 5, 400 5,400
Statement of financial position as at ...( Extracts)
2013 2014 2015 2016
GH '000 GH'000 GH '000 GH'000
Fixed Assets
Packaging Line at cost 54,000 54, 000 54, 000 54,000
Less Accumulated depreciation 5,400 10,800 16,200 21,600
---------- --------- ---------- ---------
48,600 43,200 37,800 32,400
---------- --------- --------- ----------
Liabilities
Hire Purchase Debts Outstanding 32,250 16,313
Ledger Entries in the books of the Hire-Seller
One of the following two methods may be used:[all the principles

mentioned earlier are relevant here]
Method 1: Hire-Purchase Interest Received Account is kept
The Cash sale price is debited to the customer's account and credited
to the Hire Purchase Sale account.
Hire Purchase Interest is debited to the customer's account (as and
when each installment is due) and credited to Hire Purchase Interest
received account.
Deposits and installment received are debited to Cash account and
credited to customer's account.
Method 1:
At Statement of Financial Position date, the balance on the customer's
account represents the portion of the cash sale price not yet received or due
and is included in the statement of financial position as Hire Purchase trade
receivable.
REMEMBER THE SELLER IS SELLING!
SO, at the end of each accounting period, the balance on the HP sale
account and HP Interest Received account are transferred to the credit of
HP Trading account. The cost of Hire Purchase goods sold is charged
(debited) to the HP Trading account.
Method 1
And also, in line with prudence concept, a provision for unrealized profit is raised
to defer appropriate portion of the gross profit included in hire purchase trade
receivable. This is debited to HP Trading and credited to Provision for Unrealized
Profit Account. Subsequent movement in the Provision for Unrealized Profit
account will be transferred to the Hire Purchase trading account. The provision for
unrealized profit is calculated as follows:
Balance on cash selling price not yet due * Gross profit
Total cash selling price
Or Gross profit rate(%) * Balance on cash selling price not yet due.
The balance on the Hire purchase trading account, referred to Gross profit, and
which represents earned pure profit margin and earned HP interest, is transferred
to Income statement (if the business is entirely on HP transactions) or to General
Trading account (if there are different classes of transactions).
Method 2: Hire-Purchase Interest Receivable Suspense Account is kept
This adopts the Hire Purchase interest receivable suspense account:
The customer's account is debited with the Hire purchase cash price
and the Hire purchase sales account is credited;
The total HP Interest is debited to the customer and credited to the HP
Interest Receivable Suspense account.
Deposits and installments received are debited to the cash book and
credited to customer's account.
Method 2
At the end of the accounting period, the earned HP Interest is

calculated and transferred from the HP Interest Suspense Account to
the credit of HP Trading account.
At the statement of the financial position date the actual HP Trade
receivable figure is represented by the balance on the Hire purchase
customers account less the balance on the HP Interest Receivable
Suspense Account.
Other transactions are treated as in method 1 above.
ILLUSTRATION
Pamfo Water Ltd wishes to expand its production line and have purchased a
new packaging line from Scotty Engineering on hire purchase terms at 1st
January, 2013. The list price of the line as disclosed by Scotty was GH 54
million. The hire purchase agreement provided that Pamfo would pay a
deposit of GH9 million on 1st January, 2013 and two annual installments
of GH24 million on 31st December,2013, 2014 and a final installment of
GH20.391 million on 31st December, 2015. The true rate of interest is
25% per annum.
The depreciation policy of Pamfo is to write off the line to nil value over 10
years on straight line basis. The total cost of manufacturing the line to
Scotty was GH 43.2 million.
Required
Account for the above transaction in the books of Scotty Engineering (using
both methods 1 and 2 above).
Suggested solution
Method 1
Hire Purchase Sale
GH '000 GH '000
31/12/13 HP Trading 54,000 1/1/13 Pamfo co. 54,000
----------- -----------
Suggested solution
Pamfo Company
GH '000 GH '000
1/1/13 HP Sale 54,000 1/1/13 Bank- Deposit 9,000
31/12/13 Hire Purchase interest 11,250 31/12/13 Bank- First Installment 24,000
Balance c/d 32,250
--------- ---------
65,250 65, 250
---------- ----------
1/1/14 Balance b/d 32,250 31/12/14 Bank: 2nd Installment 24,000
31/12/14 HP Interest 8,063 Balance c/d 16,313
---------- ---------
40,313 40, 313
---------- ---------
1/1/15 Balance b/d 16, 313 31/12/15 Bank: Final Installment 20,391
31/12/15 Hire purchase interest 4,078
----------- ---------
20,391 20, 391
----------- ---------
Suggested solution
HP Interest Receivable
GH '000 GH '000
31/12/13 HP Trading 11,250 31/12/13 Pamfo Co. 11,250
Solution
Hire Purchase Trading Account for the year ended 31st December, 2013
GH '000 GH '000
HP cost of sales 43,200 HP Sales 54,000
Provision for unrealized profit c/d
32250/54,000* 10,800 6,450 HP Interest Receivable 11,250
Profit of HP Trading 15,600
------------ -----------
65,250 65, 250
----------- -----------
Solution
GH '000 GH '000
Provision for unrealized profit c/d provision for unrealized profit 6,450
16,313/ 54,000 * 10,800 3,263 HP Interest Receivable 8,063
Profit on HP Trading 11,250
---------- -------
14,513 14,513
---------- --------
Solution
GH '000 GH '000
Profit on HP Trading 7,341 Provision for unrealized profit b/d 3,263
HP Interest Receivable 4,078
--------- ---------
7,341 7, 341
---------- ----------
Solution
Note: Total profit earned = 15,600 + 11,250 + 7,341 = GH
34,191,000
True gross profit = GH54,000 - GH 43,200 = GH 10,800
Total HP Interest receivable = (9,000+24,000+24,000+20,391)m =

GH77.391m- GH54m = GH23,391,000
So True gross profit + Total HP interest receivable = Total profit earned
= GH 10,800 + GH23,391,000 = GH 34,191,000

Method 2
Pamfo Company
GH '000 GH '000
1/1/13 HP Sale 54,000 1/1/13 Bank- Deposit 9,000
31/12/13 HP Interest Receivable

suspense 23,391 31/12/13 Bank- 1st Installment 24,000
Balance c/d 44,391
------------ --------
77,391 77,391
----------- --------
1/1/14 Balance b/d 44,391 31/12/14 Bank- 2nd installment 24,000
Balance c/d 20,391
---------- --------
44,391 44,391
---------- -------
1/1/15 Balance b/d 20,391 31/12/15 Bank-3rd installment 20,391
Solution
Hire Purchase Interest Receivable Suspense
GH'000 GH' 000
31/12/13 HP Trading 11,250 31/12/13 Pamfo 23,391
Balance c/d 12,141
---------- ---------
31/12/14 HP Trading 8,063 1/1/14 Balance b/d 12,141
Balance c/d 4,078
--------- ----------
12,141 12,141
--------- ----------
31/12/15 HP Trading 4,078 1/1/15 Balance b/d 4,078
--------- ---------
Note: All other accounts are the same as in method 1.
End of lecture seven
Thank you very much
Office: G13
mobile: 0266225129
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Lecture eight: Accounting for Hire-Purchase: Low Value items [High Volume] and
repossessions
Lecture Hall: A1
Office: G13
Mobile: 0266225129
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Small and less valuable items [larger volume items]
In the books of the Hire-Seller
[In the books of the purchaser is simply as done with high value items!]
So our focus would be on the Hire-Seller!!!!!

Small and less valuable items [larger volume items]
These items are, usually, in high volumes. It is, in practice, difficult for the
supplier to apportion the Hire-Purchase Interest and actual Gross profit over
the agreement period on item-by-item basis.
Therefore, in practice, the calculation of interest and gross profit is based on
the total of all transactions in a particular accounting period of a particular class
of items under the Hire-Purchase contract. For the purpose of the calculation,
pure gross profit and Hire-Purchase interest are combined and apportioned over
the agreement period.
One of the following two main methods may be used:
Provision for unrealized profit method
Stock on hire method
Goods sold on hire purchase are debited to HP Trade receivable and

credited to HP sales at hire purchase selling price.
Deposits and installments are debited to cash account and credited to
HP Trade receivable.
The balance on the HP Trade receivable represents amount owed but
not yet due. At the statement of financial position date, this figure
(sometimes referred to as Net investment in Hire Purchase contracts)
is split between current and non-current portions.
At the end of the accounting period, the balance on HP sales is transferred to
the credit of HP Trading account. The cost of goods sold on HP is charged
(debited) to the HP Trading account.
A provision for unrealized profit is raised. The amount calculated is debited to
HP Trading account and credited to provision for unrealized profit account. It is
calculated as:
HP Trade receivable not yet due * Total profit
Total Hire Purchase Sales
The balance on the HP Trading account represents gross profit and hire
purchase interest earned and is transferred to the profit and loss account or
General Trading account ( as appropriate)
Illustration
Boateng Enterprise (BE) Started business on 1st January, 2015 mainly

to sell TV sets of a standard type (Sharp 21) to civil servants on hire
purchase terms. The total amount, including interest payable for each
set is GH3,000. Customers are expected to pay an initial deposit of
GH600 followed by twenty four monthly installments of GH100
each. BE purchases his inventory from AC Electronics at a unit cost of
GH2,000. Prices remained unchanged throughout 2015. The
following trial balance was extracted from the books of BE as on 31st
December, 2015.
ILLUSTRATION
DR CR
GH'000 GH' 000
Capital 2,000
Fixed Assets 200
Drawings 80
Bank Overdraft 192
Trade payables 532
Purchases 3,600
Cash collected from customers 1,530
Bank interest 8
Wages and salaries 256
General operating expenses 110
--------- -----------
4,254 4, 254
--------- -----------
ILLUSTRATION
For the first year of operation (year ended 31st December, 2015),
1,700 sets were sold. It is the policy of BE to take credit for profits
(including interest) in proportion to the cash collected from customers.
Fixed assets are depreciated at the rate of 10% on cost.
Required:
Using the provision for unrealized profit method, prepare the Hire
Purchase trading accounting and income statement for the year ended
31st December, 2015 and a statement of financial position as at 31st
December, 2015.
BE Enterprise: Hire Purchase Income Statement for the year ended 31st December, 2015
GH'000 GH' 000
Hire Purchase sales 5,100
Cost of Sales:
Purchases ( 1,800 * 2,000) 3,600
Closing inventory (100 * 2,000) (200) (3,400)
1,700
Less Provision for unrealized profit
( 3,570/ 5,100 * 1,700) (1,190)
Gross Profit earned 510
Less Expenses: Wages and salaries 256
Depreciation of fixed assets 20
Bank Interest 8 394
Net Profit 116

BE Enterprise
Statement of financial position as at 31st December, 2015
GH'000 GH '000
Fixed Assets (NBV) 180
Current Assets:
Inventory 200
Provision for unrealized profit (1,190) 2,380
2,580
Current liabilities:
Bank overdraft 192
Trade payables 532 724
2,036
Financed by:
Capital introduced 2,000
Profit earned 116
Drawings (80) 36
2,036
Stock on Hire Method
The name is derived from the fact that the items sold on hire purchase
are treated as if they are 'hired' out to the customers.
Accounting entries are as follows:
Goods sold on hire purchase are debited to HP Trade receivable and
credited to HP sales at hire purchase selling price.
Deposits and installments received are debited to Cash Account and
credited to HP trade receivable. The balance on HP Trade receivable
account represents sums owed but not yet due.
At the end of the accounting period, an amount equivalent to the deposits and
installments received during the period is debited to the Hire purchase sale
account and credited to HP Trading account. The balance on the HP sales
account and the HP receivable account will be equal and opposite and will
cancel out (thus not appearing in the statement of financial position).
The cost of goods sold on hire purchase is debited to the Hire Purchase
trading (and credited to general trading/ purchases account)
At the end of the accounting period, the stock on hire is calculated as follows:
HP Trade receivable (owing not yet due) * Cost of Hire Purchase Goods
Total Hire Purchase Sales.
The amount as calculated, is credited to the HP Trading account and

carried down as a debit to the next accounting period.
The balance on the HP trading account represents the pure gross
profit and hire purchase interest earned during the period and is
transferred to the Income statement or General Trading account (as
appropriate)
Illustration
Use facts in the illustration above

Required:
Prepare the Hire purchase trading account and Income statement for
the year ended 31st December, 2015 and statement of financial
position as at 31st December, 2015 using the " stock on hire method"
Suggested solution
BE Enterprise
Hire Purchase Income Statement for the year ended 31st December, 2015
GH'000 GH '000
Hire purchase sales
( cash collected from HP Trade receivable) 1,530
Stock on hire ( 3,570/ 5,100 * 3,400) 2,380
3,910
Cost of sales:
Purchases 3,600
Closing inventory (200)
3,400
Gross Profit earned 510
Suggested solution
Less Expenses:
Wages and salaries 256
Depreciation of fixed assets 20
Bank Interest 8 394
Net profit 116
BE Enterprise
GH'000 GH '000
Fixed Assets (NBV) 180
Current Assets:
Inventory 200
Trade receivable ( stock on hire) 2,380
2,580
Current liabilities:
Bank overdraft 192
Trade payables 532 724
2,036
Financed by:
Capital introduced 2,000
Profit earned 116
Drawings (80) 36
2,036
Repossession
It sometimes happens that the buyer of goods on hire purchase

defaults installment payment. After complying with some legal
requirements, the seller may repossess the goods.
Repossessed goods may be reconditioned and resold. Deposits and
installments paid in respect of repossessed goods are retained by the
seller (and are thus forfeited by the buyer/ hirer).
Repossessed goods may be accounted for within the hire purchase
trading account (under both methods - Provision for unrealized profit
method and stock on hire method). It is, however, preferred that values
relating to repossessed goods are accounted for separately from those
which continue under hire purchase contracts in the normal way.
Repossession
The accounting entries are as summarized below:
HP Trade receivable is credited and HP sales is debited with the hire

purchase selling price of the repossessed goods. Under the provision
for unrealized profit method, the effect of this is to reduce the amount
subsequently transferred to Hire Purchase Trading.
HP Trade receivable is debited and Repossession account is credited
with deposits and installments already received on the repossessed
goods, Under the stock on hire method, the effect of this is to reduce
the amount subsequently transferred to HP Trading.
Repossession
The cost of goods sold on hire purchase is split. The portion relating
to the repossessed goods is transferred to the debit of repossessed
account and the portion relating to goods still under hire purchase is
debited to HP Trading. In each case, the credit is in the General
Trading account.
The repossessed stock, as revalued, is transferred or credited to
Repossession account and then carried down on that account as a debit
balance.
The balance on the Repossession account (representing profit/loss)
on repossession is transferred to general trading account.
Illustration
The following figures are a summary of the sales on hire purchase
made by Premier Motors during its first year in business.
GH
Goods sold on hire purchase
Cost of sales 90,000
Hire purchase selling price 150,000
Deposits and installments paid by buyers 110,000
The terms of the hire purchase agreement applicable to all customers
require a deposit of 331/3% of the hire purchase price of the goods
followed by 10 equal monthly installments. A car costing GH1,800 and
sold on hire purchase for GH 3,000 to Glorious Company were
repossessed after the deposit of GH1,000 and 2 monthly installments
of GH 400 had been received. The car was then reconditioned at a cost
of GH100 and sold for GH600.
ILLUSTRATION
Required:
Prepare the appropriate ledger accounts to give effect to the above.
Suggested solution
Stock on hire method

Hire Purchase Trade receivable
GH GH
HP sales 150,000 Bank- Deposits 50,000
Repossessions 1,400 Installment 60,000
HP Sales (repossession) 3,000
Balance c/d 38,400
----------- ----------
151,400 151,400
----------- -----------
Balance b/d 38,400
Solution
Hire Purchase Sales

GH GH
HP Trade receivable (repossessions) 3,000 HP Trade receivable 150,000
HP Trading( 50,000 + 60,000 - 1,400) 108,600
Balance c/d 38,400
---------- ----------
150,000 150, 000
---------- ----------
Balance b/d 38,400
Solution
Hire Purchase Trading

GH GH
Trading ( cost of HP sales)
( 90,000 - 1,800) 88,200 HP Sales 108,600
Gross Profit 43,440 Stock on hire c/d 23,040
( 38,400/147,000 * 88,200)
--------- ---------
131,640 131,640
---------- -----------
Stock on Hire b/d 23,040
Solution
Repossession
GH GH
Trading (cost of sales) 1,800 HP Trade receivable 1,400
Gross profit 100 Cash: sale of repossessed 500
------- --------
1,900 1,900
-------- ---------
Hire Purchase Trade receivable

GH GH
HP sales 150,000 Bank- Deposits 50,000
Repossessions 1,400 Installment 60,000
HP Sales (repossession) 3,000
Balance c/d 38,400
----------- ----------
151,400 151,400
----------- -----------
Balance b/d 38,400
Solution
Hire Purchase Sales

GH GH
HP Trade receivable( repossessions) 3,000 HP Trade receivable 150,000
HP Trading 147,000
---------- ----------
150,000 150, 000
---------- ----------
Solution
Hire Purchase Trading

GH GH
Trading ( cost of HP Sales)
( 90,000 - 1,800) 88,200 HP Trade receivable 147,000
Provision for unrealized profit
38,400/147,000*( 147,000 - 88,200) 15,360
Gross Profit 43,440
--------- ---------
147,000 147,000
----------
Solution
Provision for unrealized profit
GH GH
Balance c/d 15,360 HP Trading 15,360
--------- --------
Balance b/d 15,360
Solution
Repossession
GH GH
Trading (cost of sales) 1,800 HP Trade receivable 1,400
Gross profit 100 Cash: sale of repossessed 500
------- --------
1,900 1,900
-------- ---------
End of lecture eight
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Lecture nine: Accounting for Construction Contracts: Background, Definitions and
Basic Accounting
Lecture Hall: A1
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Accounting for Construction Contracts
Main Objectives:
To define a construction contract and discuss the role of accounting
concepts in the recognition of profit.
To describe the acceptable methods of determining the stage
(percentage) of completion of contract.
To prepare financial statements extracts for construction contracts.
Background
Accounting for construction contracts is regulated by International
Accounting Standard (IAS) 11. The objective of this standard is to
prescribe the accounting treatment of revenue and costs associated with
construction contracts.
The main issues in accounting for construction contracts are:
the allocation of contract revenue and; contract costs to the accounting

periods in which construction work is performed!
The standard shall be applied in accounting for construction contracts

in the financial statements of contractors
Definitions of Terminologies and basic accounting for
Construction Contracts
A construction contract is a contract specifically negotiated for the
construction of a single asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and function
or their ultimate purpose or use.
Examples of construction of single assets include the construction of bridge,

building, dam, pipeline, road, ship etc.
Example of construction of interrelated assets is the construction of refineries.

Construction contracts include:
(a) Contracts for the rendering of services which are directly related to the
construction of the asset, for example, those for the services of project managers and
architects; and
(b) Contracts for the destruction or restoration of assets, and the restoration of the
environment following the demolition of assets.
Pricing a contract!
A fixed price contract - a contractor agrees to a fixed contract price, or a fixed rate
per unit of output, which in some cases is subject to cost escalation clauses.
A cost plus contract - a contractor is reimbursed for allowable or otherwise defined
costs, plus a percentage of these costs or a fixed fee.
Combining and segmenting construction contracts
When a contract covers a number of assets, the construction of
each asset shall be treated as a separate construction contract
when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the
contractor and customer have been able to accept or reject that
part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
A group of contracts, whether with a single customer or with
several customers, shall be treated as a single construction
contract when:
The group of contracts is negotiated as a single package;
The contracts are so closely interrelated that they are, in effect,
part of a single project with an overall profit margin; and
The contracts are performed concurrently or in a continuous
sequence.
A contract may provide for the construction of an
additional asset at the option of the customer or may be
amended to include the construction of an additional
asset.
The construction of the additional asset shall be
treated as a separate construction contract when:
(a) the assets differs significantly in design, technology
or function from the asset or assets covered by the
original contract; or
(b) the price of the asset is negotiated without regard to
the original contract price.
Accounting for contracts: Basic Considerations and
Accounting
Accounting for contracts: Illustration 1
ABC Ltd is negotiating with the local government to build a new bridge after demolishing
the existing bridge in downtown near the city center. At the initial meeting, it was indicated
that the government would not be willing to pay for both components of the contract an
amount exceeding GH 1,000,000.The government representatives insisted that separate
proposals would need to be submitted and negotiated and that the contractor should
maintain separate records for each component of the contract and upon request furnish
details of the contract costs incurred to date by component. After submission of the
separate proposals, it was agreed that the split of the contract price of GH 1,000,000
would be in the ratio of 70% for construction of the new bridge and 30% for demolishing
the existing bridge.
Required:
Evaluate, in the light of the provision of IAS 11, whether the contract for the construction
of the new bridge and the contract for demolishing the existing bridge should be
segmented and treated as separate contracts or be combined and treated as a single
contract.
Answer
The two contracts should be segmented and treated as separate
contracts because:
Separate proposals were submitted for the two contracts
The two contracts were negotiated separately
Costs and revenues of each contract can be identified separately.
Illustration 2
Thywill Builders Ltd. is well known for its expertise in
building flyovers and maintaining these structures. Impressed
with Thywill's track record, the local municipal authorities
have invited them to submit a tender for a two-year contract to
build a super flyover in the heart of the city (the largest in the
region) and another tender for maintenance of the flyover for
10 years after completion of the construction.
Required:
Evaluate whether these two contracts should be segmented or
combined into one contract for the purpose s of IAS 11.
Answer
The two contracts should be combined and treated as a single contract because
The two contracts are very closely related to each other and, in fact, are part of
a single contract with an overall profit margin.
The contracts have been negotiated as a single package.
The contracts are performed in a continuous sequence
Contract revenue
Contract revenue is measured at the fair value of the consideration received or

receivable. The measurement of contract revenue is affected by a variety of
uncertainties that depend on the outcome of future events. The estimates often
need to be revised as events occur and uncertainties are resolved. Therefore,
the amount of contract revenue may increase or decrease from one period to
the next
For example:
A contractor and a customer may agree variations or claims
that increase or decrease contract revenue in a period
subsequent to that in which the contract was initially agreed;
The amount of revenue agreed in a fixed price contract may
increase as a result of cost escalation clauses;
The amount of contract revenue may decrease as a result of
penalties arising from delays caused by the contractor in the
completion of the contract; or
When a fixed price contract involves a fixed price per unit of
output, contract revenue increases as the number of units is
increased.
A variation is an instruction by the customer for a change in the
scope of the work to be performed under the contract.
A variation may lead to an increase or a decrease in contract
revenue.
Examples of variations are changes in the specifications or design
of the asset and changes in the duration of the contract. A variation
is included in contract revenue when:
It is probable that the customer will approve the variation and
the amount of revenue arising from the variation; and
The amount of revenue can be reliably measured.
Claims in contracts
A claim is an amount that the contractor seeks to collect from the customer
or another party as reimbursement for costs not included in the contract
price.
A claim may arise from, for example, customer caused delays, errors in
specifications or design, and disputed variations in contract work. The
measurement of the amounts of revenue arising from claims is subject to a
high level of uncertainty and often depends on the outcome of negotiations.
Therefore, claims are included in contract revenue only when:
(a) negotiations have reached an advanced stage such that it is probable that the
customer will accept the claim; and
(b) the amount involved can be measured reliably.
Incentive payments
Incentive payments are additional amounts paid to the contractor

if specified performance standards are met or exceeded.
For example, a contract may allow for an incentive payment to the
contractor for early completion of the contract. Incentive
payments are included in contract revenue when:
(a) the contract is sufficiently advanced that it is probable that the

specified performance standards will be met or exceeded; and
(b) the amount of the incentive payment can be measured reliably.

Contract costs
Contract costs shall comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be
allocated to the contract; and
(c) such other costs as are specifically chargeable to the customer under
the terms of the contract.
Costs that relate directly to a specific contract include:
Site labour costs, including site supervision;
Costs of materials used in construction;
Depreciation of plant and equipment used on the contract;
Costs of moving plant, equipment and materials to and from the
contract site;
Costs of hiring plant and equipment;
Costs of design and technical assistance that is directly related to
the contract;
The estimated costs of rectification and guarantee work, including
expected warranty costs; and
Claims from third parties
These costs may be reduced by any incidental income that is not
included in contract revenue, for example income from the sale of
surplus materials and the disposal of plant and equipment at the end of
the contract.
Costs that may be attributable to contract activity in general and can be
allocated to specific contracts include:
Insurance
Costs of design and technical assistance that are not directly related
to a specific contract; and
Construction overheads.
These include borrowing costs when the contractor adopts the allowed
alternative treatment in IAS23 Borrowing Costs
Costs that cannot be attributed to contract activity or cannot be allocated to a
contract are excluded from the costs of a construction contract. Such costs
include:
General administration costs for which reimbursement is not specified in the
contract;
Selling costs;
Research and development costs for which reimbursement is not specified in
the contract; and
Depreciation of idle plant and equipment that is not used on a particular
contract
Contract costs include the costs attributable to a contract for
the period from the date of securing the contract to the final
completion of the contract. However, costs that relate directly
to a contract and are incurred in securing the contract are also
included as part of the contract costs if they can be separately
identified and measured reliably and it is probable that the
contract will be obtained.
When costs incurred in securing a contract are recognized as
an expense in the period in which they are incurred, they are
not included in contract costs when the contract is obtained in
a subsequent period.
Illustration
Bediako Construction Company Ltd is involved in a number of construction contracts
extending over long periods of time. The following expenses have been incurred in
respect of construction contract during the year ended 31st December, 2015.
GH'000
Labour 1,200
Materials 2,700
Contract design cost 800
General administration costs 200
Borrowing cost 400
Selling costs 100
What is the total costs which should be allocated to construction contracts with
reference to IAS 11 in the year ended 31st December, 2015?
Answer
GH'000
Labour 1,200
Materials 2,700
Design costs 800
Borrowing costs 400
5,100
Fixed Price Contract: Recognition of contract revenue and
expenses
Accrual and Matching and Prudence Principles in Mind!

Basis
The outcome of a construction contract can be estimated reliably when all the
following conditions are satisfied:
Total contract revenue can be measured reliably;
It is probable that the economic benefits associated with the contract will
flow to the entity;
The contract costs attributable to the contract can be clearly identified and
measured reliably, so that actual contract costs incurred can be compared
with prior estimates.
Fixed Price Contract: Recognition of contract revenue and
expenses
Basis
Accrual and Matching and Prudence Principles in Mind!
When the outcome of a construction contract can be estimated
reliably, contract revenue and contract costs associated with the
construction contract shall be recognized as revenue and expenses
respectively by reference to the stage of completion of the
contract activity at the statement of financial position date.
Revenue and Cost are measured in relation stage of completion

in order to compute profit for each accounting period.
Expected Loss on a Contract!
An expected loss on the construction contract shall be recognized as an

expense immediately.
End of lecture nine
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Lecture ten: Accounting for Construction Contracts: Further Accounting
Complications
Lecture Hall: A1
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A fixed Price Contract
Determine the revenue for each period using the stage [percentage] of completion
method
relate cost to date to the total cost estimated [cost incurred to date plus any
additional cost to complete the contract]
OR
calculated as the agreed value of work completed to the agreed contract price.
The percentage/stage of completion is multiplied by the total revenue in order

to ascertain the revenues for each period!
A fixed Price Contract: Illustration
Nhyira Construction Ltd took up a fixed price contract on 1st January, 2013 to
construct a road from Adoakrom to Otweekrom at a contract price of GH10
million. The following information relates to this construction contract:
2013 2014 2015
GH'000 GH '000 GH '000
Cost incurred to date 2,000 6,300 8,200
Estimated additional cost to complete 6,000 2,100 -
The outcome of the contract can be estimated reliably at all three year ends.
Required:
Calculate the amounts to be recognized in income statement for each of the three
years.
Note: Nhyira Ltd prepare accounts to 31st December each year.
Suggested Solution
Year 2013 2014 2015
Stage of completion 2,000 6,300
8,000 8,400
25% 75% 100%
Income Statement extracts GH'000 GH' 000 GH'000

Contract revenue 2,500 5,000 2,500
Cost of sale (2,000) (4,300) (1,900)
Profit to recognize 500 700 600
Cost Plus Contracts
In the case of a cost plus contract, the outcome of a construction contract

can be estimated reliably when all the following conditions are satisfied:
It is probable that the economic benefits associated with the contract will
flow to the entity; and
The contract costs attributable to the contract, whether or not specifically
reimbursable, can be clearly identified and measured reliably.
Cost Plus Contracts
The recognition of revenue and expenses by reference to the stage of
completion of a contract is often referred to as the percentage of
completion method.
Under this method, contract revenue is matched with the contract costs
incurred in reaching the stage of completion, resulting in the reporting of
revenue, expenses and profit which can be attributed to the proportion of
work completed.
This method provides useful information on the extent of contract activity
and performance during a period.
Cost Plus Contracts
Under the percentage of completion method, contract revenue is
recognized as revenue in the income statement in the accounting
periods in which the work is performed.
Contract costs are usually recognized as an expense in the income
statement in the accounting periods in which the work to which they
relate is performed.
However, any expected excess of total contract costs over total
contract revenue for the contract is recognized as an expense
immediately.
A contractor may have incurred contract costs that relate to future
activity on the contract.
Such contract costs are recognized as an asset provided it is probable
that they will be recovered. Such costs represent an amount due from
the customer and are often classified as contract work in progress
Cost Plus Contracts
The outcome of a construction contract can only be estimated reliably when it is
probable that the economic benefits associated with the contract will flow to the
entity.
However, when an uncertainty arises about the collectability of an amount
already included in contract revenue, and already recognized in the income
statement, the uncollectable amount or the amount in respect of which recovery
has ceased to be probable is recognized as an expense rather than as an adjustment
of the amount of contract revenue.
An entity is generally able to make reliable estimates after it has agreed to a
contract which establishes:
Each party's enforceable rights regarding the asset to be constructed;
The consideration to be exchanged; and
The manner and terms of settlement.
Cost Plus Contracts
It is also usually necessary for the entity to have an effective

internal financial budgeting and reporting system.
The entity reviews and, when necessary, revises the estimates of
contract revenue and contract costs as the contract progresses.
The need for such revisions does not necessarily indicate that
the outcome of the contract cannot be estimated reliably.
Stage of Completion
The stage of completion of contract may be determined in variety of
ways. The entity uses the method that measures reliably the work
performed. Depending on the nature of the contract, the methods may
include:
The proportion that contract costs incurred for work performed to
date bear to the estimated total contract costs;
Surveys of work performed; or
Completion of a physical proportion of the contract work.
Progress payments and advances received from customers often do

not reflect the work performed.
Stage of Completion
When the stage of completion is determined by reference to the contract

costs incurred to date, only those contract costs that reflect work performed
are included in costs incurred to date. Examples of contract costs which are
excluded are:
Contract costs that relate to future activity on the contract, such as costs
of materials that have been delivered to a contract site or set aside for use
in a contract but not yet installed, used or applied during contract
performance, unless the materials have been made especially for the
contract; and
Payments made to subcontractors in advance of work performed under
the subcontract.
Stage of Completion
During the early stages of a contract it is often the case that the
outcome of the contract cannot be estimated reliably. Nevertheless,
it may be probable that the entity will recover the contract costs
incurred. Therefore, contract revenue is recognized only to the
extent of costs incurred that are expected to be recoverable.
[Contract Revenue = Contract Cost Incurred]
As the outcome of the contract cannot be estimated reliably, no
profit is recognized. However, even though the outcome of the
contract cannot be estimated reliably, it may be probable that the
total contract costs will exceed total contract revenues. In such
cases, any expected excess of total contract costs over total
contract revenue for the contract is recognized as an expense
immediately. [Contract Revenue Contract Cost Incurred]
Stage of Completion
Contract costs that are not probable of being recovered are recognized as an
expense immediately. Examples of circumstances in which the recoverability
of contract costs incurred may not be probable and in which contract costs
may need to be recognized as an expense immediately include contracts:
that are not fully enforceable, i.e. their validity is seriously in question;
The completion of which is subject to the outcome of pending litigation or
legislation;
Relating to properties that are likely to be condemned or expropriated;
Where the customer is unable to meet its obligations; or
Where the contractor is unable to complete the contract or otherwise meet
its obligations under the contract.
A construction contractor has a fixed price contract in January, 2013 for GH9,000,000 to
build a bridge . The initial amount of revenue agreed in the contract is GH9,000,000.The
contractor's initial estimate of contract costs is GH8,000,000. It will take 3 years to build the
bridge. By the end of 2013, the contractor's estimate of contract costs has increased to
GH8,050,000 and GH2,093,000 had been spent to date. In 2014, the customer approves a
variation resulting in an increase in contract revenue of GH200,000 and estimated additional
contract costs of GH150,000. At the end of 2014, costs incurred to date were GH6,168,000;
these included GH100,000 for standard materials stored at the site to be used in 2015 to
complete the project. The contract was completed in December, 2015, by which date the costs
incurred to date were GH8,200,000.
The contractor determines the stage of completion of the contract by calculating the
proportion that contract costs incurred for work performed to date bear to the latest estimated
total contract costs.
Required:
(a) Calculate the stage of completion at the end of each relevant year.
(b) Determine the contract revenue, contract cost of sale and profit to be recognized for each
of the years ended 31st December, 2013, 2014 and 2015.
Suggested solution
A summary of the financial data during the construction period is as follows:
Year 1 Year 2 Year 3
GH'000 GH '000 GH'000
Initial amount of revenue agreed in contract 9,000 9, 000 9,000
Variation - 200 200
-------- -------- ---------
9,000 9,200 9, 200
----------- -------- ---------
Contract costs incurred to date 2,093 6,168 8,200
Contract costs to complete 5,957 2,032 -
---------- --------- ---------
Total estimated contract costs 8,050 8,200 8,200
--------- -------- ---------
Estimated profit 950 1,000 1,000
Stage of completion(%) 26% 74% 100
Suggested solution
The stage of completion for year 2 (74%) is determined by excluding from contract costs incurred for work
performed to date, the GH100,000 of standard materials stored at the site for use in year 3. The amounts of
revenue, expenses and profit recognized in the income statement in the three years are as follows:
To date Recognized Recognized in
In prior years current year
Year 1 GH'000 GH' 000
Revenue (9,000 * .26) 2,340 2,340
Expenses (8,050 * .26) 2,093 2,093
-------- --------
Profit 247 247
-------- ---------
Year 2
Revenue (9,200 *.74) 6,808 2,340 4,468
Expenses (8,200 *.74) 6,068 2,093 3,975
Profit -------- ------- --------
Profit 740 247 493
Suggested solution
Year 3
Revenue (9,200 *1.00) 9,200 6,808 2,392
Expenses 8,200 6,068 2,132
-------- -------- --------
Profit 1,000 740 260
--------- --------- ---------
Recognition of expected losses
When it is probable that total contract costs will exceed total

contract revenue, the expected loss shall be recognized as an
expense immediately. The amount of such a loss is determined
irrespective of :
(a) whether work has commenced on the contract;
(b) the stage of completion of contract activity; or
(c) the amount of profits expected to arise on other contracts
which are not treated as a single construction contract
Disclosure
An entity shall disclose:
(a) the amount of contract revenue recognized as revenue in the period;
(b) the methods used to determine the contract revenue recognized in
the period; and
(c) the methods used to determine the stage of completion of contracts
in progress.
An entity shall disclose each of the following contracts in progress at
the statement of financial position date:
(a) the aggregate amount of costs incurred and recognized profits(less
recognized losses) to date;
(b) the amount of advance received; and
(c) the amount of retentions.
Disclosure
Retentions are amounts of progress billings that are not paid until the
satisfaction of conditions specified in the contract for the payment of such
amounts or until defects have been rectified. Progress billings are amounts
billed for work performed on a contract whether or not they have been
paid by the customer. Advances are amounts received by the contractor
before the related work is performed.
An entity shall present:
The gross amount due from customers for contract work as an asset;
and
The gross amount due to customers for contract work as a liability.
Disclosure
The gross amount due from customers for contract work is the net amount
of :
Costs incurred plus recognized profits; less
The sum of recognized losses and progress billings for all contracts in
progress for which progress billing exceed costs incurred plus recognized
profits(less recognized losses).
An entity discloses any contingent liabilities and contingent assets in

accordance with IAS 37 provisions, contingent liabilities and contingent
assets. Contingent liabilities and contingent assets may arise from such
items as warranty costs, claims, penalties or possible losses.
ILLUSTRATION
Fred Ltd is a construction company that prepares its financial statements to 31st March
each year. During the year ended 31st March, 2015 the company commenced two
construction contracts that are expected to take more than one year to complete. The
position of each contract at 31st March, 2015 is as follows:
Contract 1 2
GH'000 GH' 000
Agreed contract price 5,500 1,200
Estimated total cost of contract at commencement 4,000 900
Estimated total cost at 31st March, 2015 4,000 1,250
Agreed value of work completed as at 31st March, 2015 3,300 840
Progress billings invoiced and received at 31st March, 2015 3,000 880
Contracts costs incurred to 31st March, 2015 3,900 720
The agreed value of the work completed at 31st March, 2015 is
considered to be equal to the revenue earned in the year ended 31st
March, 2015.The percentage of completion is calculated as the agreed
value of work completed to the agreed contract price.
Required:
Calculate the amounts which should appear in the income statement
and statement of financial position of Fred at 31st March, 2015 in
respect of above contracts.
Workings(in GH'000)
Estimated total profit:
Agreed contract price 5,500 1,200
Estimated contract cost (4,000) (1,250)
----------- ---------
Estimated total profit/loss 1,500 (50)
Percentage complete:
Agreed value of work completed at 31/3/15 3,300
Contract price 5,500
percentage complete at 31st March, 2015 60%
Profit to 31st March, 2015 (60% * 1,500) 900
At 31st March, 2015 the increase in the expected total costs of contract 2 means that a
loss of GH50,000 is expected on this contract. In these circumstances, regardless of
the percentage completed, the whole of this loss should be recognized immediately.
Suggested solution
Fred Ltd
Income statement
Contract 1 Contract 2 Total
GH'000 GH '000 GH'000
Revenue recognized 3,300 840 4,140
Contract expenses recognized (2,400) (720) (3,120)
Expected loss recognized (contract 2) (170) (170)
----------- ---------- -----------
Attributable profit/loss 900 (50) 850
Contract 1: If recognized revenue is 3300 and profit is 900 [see workings], then recognized
expenses will be a balancing figure of 2400
Contract 2: If recognized revenue is 840 and loss is 50 [see workings], the balancing figure is
890. But as the cost incurred is 720, we need to recognize all the cost incurred expenses and
a further 170 as expected loss.
Suggested solution
Statement of Financial Position GH'000 GH '000 GH'000
Contract costs incurred 3,900 720 4,620
Recognized profit/loss 900 (50) 850
------- ---------- --------
4,800 670 5,470
Progress billings (3,000) (880) (3,880)
Amounts due from customers 1,800 1,800
Amount due to customers (210) (210)
Changes in estimates
The percentage of completion method is applied on a cumulative
basis in each accounting period to the current estimates of contract
revenue and contract costs.
Therefore, the effect of a change in the estimate of contract
revenue or contract costs, or the effect of a change in the estimate
of the outcome of a contract, is accounted for as a change in
accounting estimate (1AS 8 Accounting policies, changes in
Accounting Estimates and Errors).
The agreed estimates are used in the determination of the amount
of revenue and expenses recognized in the income statement in the
period in which the change is made and in subsequent periods.
ILLUSTRATION
On 1st July, 2014, General Electricals signed a GH 3,000,000 contract to build a
new studio for Peace TV. The following information is relevant to this contract:
In 2014 In 2015
Expenditure GH GH
Labour 240,000 310,000
Materials 473,000 586,000
Site expenses 84,500 125,000
Hire of plant 57,500 14,000
Plant purchased- 1st July, 2014 360,000 -
Progress Payments Invoiced
(based on work certified) 1,000,000 2,000,000
Cash Received from Peace TV 900,000 1,800,000
ILLUSTRATION
Accrued expenses and inventory of unused materials at 31st December,

2014 amounted to GH8,000 and GH17,000 respectively.
- Overheads are allocated between contracts at 10% of labour costs.
- Plant is depreciated at 25% p.a straight line on cost.
- a rectification provision of 4% of the contract is set aside at the end of
each contract.
The profitable outcome of the contract was apparent on 31st December,
2014. Estimated costs to completion on 31st December were
GH1,035,000.
The contract was completed on 31st August, 2015 and Peace TV paid the
10% retention money on 1st March, 2016. During January, 2016,
GH100,000 was incurred to rectify construction defects.
ILLUSTRATION
The figure for progress payments invoiced is to be taken as the value of

work performed for the turnover figure in the income statement. The
stage of completion is therefore determined based on the proportion the
value of work certified bears with contract price.
Required:
Show the necessary ledger entries in the books of General Engineers Ltd
and the relevant income statement and statement of financial position
extracts as at 31st December, 2014 and 2015.
Studio Contract Account [2014 entries]
GH GH
Labour 240,000 31st Dec.
Trading account cost of sale 650,000
Material 473,000 Inventory (c/d) 17,000
Site Expenses 84,500 Work in progress (c/d) 265,000
Hire of plant 57,500
Overheads (10% * 240,000) 24,000
31st Dec. Depreciation
(6/12*25% * GH360,000) 45,000
Accruals (c/d) 8,000
--------- ---------
932,000 932,000
---------- ---------
We need to ascertain stage of completion:
GH1,000,000/ GH3,000,000 = 33.33% or 1/3
And how are the cost of sales and work-in-progress determined?
The cost of sale is a balancing figure between turnover and profit to be recognised and work-in-
progress is a balancing figure in the contract account
Computation of attributable profit to date at 31st December, 2014
GH GH
Contract price 3,000,000
Less:
Costs to date (932,000 - 17,000) 915,000
Estimated costs to complete 1,035,000
1,950,000
Estimated total profit 1,050,000
Profit to recognize =1/3 * GH1,050,000 = GH350,000
Income statement [extracts] for the year ended 31st December, 2014
GH
Turnover(given) 1,000,000
Cost of sales (650,000)
Profit (calculated) 350,000
Solution
Progress Payments Accounts

2014 GH 2014 GH
31st Dec. Trading Account 1,000,000 Peace TV Account Debtor 1,000,000
Peace TV Account
2014 GH 2014 GH
Progress Payment Account 1,000,000 Cash 900,000
Balance c/d 100,000
------------- -----------
1,000,000 1,000,000
-------------- ------------
Solution
Statement of financial position [extracts] as at 31st December, 2014
GH GH GH
Cost Accu. Dep NBV
PPE -Plant 360,000 45,000 315,000
Current Assets:
Stock: Raw Materials 17,000
Long- term contract balances(W.I.P) 265,000
Less: Applicable payments on a/c Nil
265,000
282,000
Trade receivable:
Progress payments receivable 100,000
382,000
Trade payables: amounts falling due within one year
Accruals (8,000)
374,000
689,000
Studio Contract Account [2015 entries]
GH GH
2015 2010
Stock b/d 17,000 Accruals b/d 8,000
Work in progress(b/d) 265,000
Labour 310,000
Materials 586,000
Site Expenses 125,000
Hire of plant 14,000
Overheads (10% * 310,000) 31,000
31 Dec. Depreciation
(8/12 * 25% * 360,000) 60,000
Rectification
(4% * 3,000,000)
provision c/d 120,000 31 Dec. Trading Account 1,520,000
------------ -------------
1,528,000 1,528,000
------------- ------
Solution
Studio Contract Account, continued
2016 GH 2016 GH
Maintenance Expenditure 100,000 Provision b/d 120,000
Profit& Loss Account 20,000
----------- ----------
120,000 120,000
Solution
Progress Payments Account
2015 GH 2015 GH
31st Dec. Trading Account 2,000,000 Peace TV Account-Debtor 2,000,00
Peace TV Account
2015 GH 2015 GH
Balance b/d 100,000 Cash 1,800,000
Progress payments account 2,000,000 Balance c/d 300,000
------------ ------------
2,100,000 2,100,000
------------ ------------
2016 Balance b/d 300,000 2016 Cash 300,000
----------- -----------
Solution
Income Statement for the Year ended 31st December, 2015

GH
Turnover (given) 2,000,000
Cost of sales (remaining cost in contract account) 1,520,000
Profit 480,000
Depreciation (4/12 * 25% * 360,000) 30,000
Solution
Statement of financial position ( extract) as at 31st December, 2015
GH GH
Fixed Assets:
Contract plant, at cost 360,000
Less: Accumulated depreciation
(45,000 + 60,000 + 30,000) 135,000
225,000
Net Current Assets:
Trade receivable- Progress payments receivable 300,000
Creditor- Amounts falling due within one year (120,000)
180,000
405,000
End of lecture ten
Thank you very much
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Lecture eleven: Accounting for Lease Transactions: Background, Definitions,
Classifications, Finance Lease in the books of Lessee and Disclosures
Lecture Hall: A1
Office: G13
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Accounting for Lease Transactions
Objectives:
Explain why recording the legal form of a finance lease can be
misleading to users
Describe and apply the method of determining a lease type: an
operating or finance lease).
Discuss the effect on the financial statements of a finance lease being
incorrectly treated as an operating lease.
Account for assets financed by finance leases in the records of the
lessee.
Account for operating leases in the records of the lessee.
Background
International Accounting Standards (IAS 17) regulates
the accounting for lease transaction. The objective of
this standard is to prescribe, for lessees and lessors, the
appropriate accounting basis to apply in relation to
leases.
Some useful terminologies
A non-cancellable lease is a lease that is cancellable only:
Upon the occurrence of some remote contingency;

With the permission of the lessor;
If the lessee enters into a new lease for the same or an equivalent
asset with the same lessor; or
Upon payment by the lessee of such an additional amount that at
inception of the lease, continuation of the lease is reasonably certain.
[failure to pay the additional amount renders the lease cancellable]
The inception of the lease is the earlier of the date of the lease
agreement and the date of commitment by the parties to the
principal provisions of the lease.
The commencement of the lease term is the date from which
the lessee is entitled to exercise its right to use the leased. It is
the date of initial recognition of the lease (i.e. the recognition
of the assets, liabilities, income or expenses resulting from the
lease, as appropriate)
The lease term is the non-cancellable period for which the
lessee has contracted to lease the asset together with any
further terms for which the lessee has the option to continue to
lease the asset, with or without further payment, when at the
inception of the lease it is reasonably certain that the lessee
will exercise the option
Minimum lease payments are the payments over the lease term that the lessee
is or can be required to make, excluding contingent rent, costs for services
and taxes to be paid by and reimbursed to the lessor, together with:
(a) for a lessee, any amounts guaranteed by the lessee or by a party related to
the lessee; or
(b) for a lessor, any residual value guaranteed to the lessor by: the lessee; a party
related to the lessee; or a third party unrelated to the lessor that is financially
capable of discharging the obligations under the guarantee.
However, if the lessee has an option to purchase the asset at a
price that is expected to be sufficiently lower than fair value at
the date the option becomes exercisable for it to be reasonably
certain, at the inception of the lease, that the option will be
exercised, the minimum lease payments comprise the minimum
payments payable over the lease term to the expected date of
exercise of this purchase option and the payment required to
exercise it.
Fair value is the amount for which an asset could be exchanged, or a

liability settled, between knowledgeable, willing parties in an arm's
length transaction.
Economic life is either:
the period over which an asset is expected to be economically
usable by one or more users; or
the number of production or similar units expected to be obtained
from the asset by one or more users.
Useful life is the estimated remaining period, from the

commencement of the lease term, without limitation by the lease
term, over which the economic benefits embodied in the asset are
expected to be consumed by the entity.
Guaranteed residual value is :
for a lessee, that part of the residual value that is guaranteed by the
lessee or by a party related to the lessee (the amount of the guarantee
being maximum amount that could, in any event, become payable); and
for a lessor, that part of the residual value that is guaranteed by the
lessee or by a third party unrelated to the lessor that is financially
capable of discharging the obligations under the guarantee.
Unguaranteed residual value is that portion of the residual value of the

leased asset, the realization of which by the lessor is not assured or is
guaranteed solely by a party related to the lessor.
Initial direct costs are incremental costs that are directly
attributable to negotiating and arranging a lease, except for
such costs incurred by manufacturer or dealer lessors
Gross investment in the lease is the aggregate of :
the minimum lease payments receivable by the lessor under a
finance lease , and
any unguaranteed residual value accruing to the lessor.
Net investment in the lease is the gross investment in the lease

discounted at the interest rate implicit in the lease.
Unearned finance income is the difference between:
the gross investment in the lease, and
the net investment in the lease.
The interest rate implicit in the lease is the discount rate that, at the
inception of the lease, causes the aggregate present value of :
the minimum lease payments and
the unguaranteed residual value to be equal to the sum of :
the fair value of the leased asset and
any initial direct costs of the lessor.
The lessee's incremental borrowing rate of interest is the rate of interest
the lessee would have to pay on a similar lease or, if that is not
determinable, the rate that, at the inception of the lease, the lessee would
incur to borrow over a similar term, and with a similar security , the
funds necessary to purchase the asset.
Contingent rent is that portion of the lease payments that is not fixed in
amount but is based on the future amount of a factor that changes other
than with the passage of time (e.g. percentage of future sales, amount of
future use, future price indices, future market rates of interest).
A lease agreement or commitment may include a provision to adjust the
lease payments for changes in the construction or acquisition cost of the
leased property or for changes in some other measure of cost or value, such as
general price levels, or in the lessor's costs of financing the lease, during the
period between the inception of the lease and the commencement of the lease
term.
If so, the effect of any such changes shall be deemed to have taken place
at the inception of the lease for the purposes of this standard.
The definition of a lease includes contracts for the hire of an asset that
contain a provision giving the hirer an option to acquire title to the asset
upon the fulfilment of agreed conditions.
Classification of Leases
The classification of leases adopted in this standard is based on the extent to

which risks and rewards incidental to ownership of a leased asset lie with the
lessor or the lessee.
A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership.
A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership.
Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract.
Paragraph 10 of IAS 17 goes on to say that whether a lease is a finance lease
or an operating lease depends on the substance of the transaction rather than
the form of the contract. It then gives examples of situations which would
normally lead to a lease being classified as a finance lease:
1. The lease transfers ownership of the asset to the lessee by the end of the
lease term;
2. The lessee has the option to purchase the asset at a price which is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable such that, at the inception of the lease, it is reasonably certain that
the option will be exercised;
3. The lease term is for the major part of the economic life of the asset even if
title is not transferred;
Paragraph 10 of IAS 17 goes on to say that whether a lease is a finance lease
or an operating lease depends on the substance of the transaction rather than
the form of the contract. It then gives examples of situations which would
normally lead to a lease being classified as a finance lease [continuation]:
4. At the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased
asset; and
5. The leased assets are of a specialised nature such that only the lessee can
use them without major modifications being made.
Paragraph 11 goes on to provide indicators of situations that
individually or in combination could result in a finance lease. These
are:
a. If the lessee can cancel the lease, the lessors losses associated with
the cancellation are borne by the lessee;
b. Gains or losses from the fluctuation in the fair value of the residual
accrue to the lessee (for example, in the form of a rent rebate equalling
most of the sales proceeds at the end of the lease); and
c. The lessee has the ability to continue the lease for a secondary
period at a rent that is substantially lower than market rent.
Special case of Land and buildings
Leases of land and of buildings are classified as operating or finance

leases in the same way as leases of other assets.
However, a characteristic of land is that it normally has an indefinite
economic life and, if title is not expected to pass to the lessee by the
end of the lease term, the lessee normally does not receive
substantially all of the risks and rewards incidental to ownership, the
lease of land will be an operating lease.
Finance Leases in the financial statements of lessees
Initial Recognition
At the commencement of the lease term, lessees shall recognize finance
leases as assets and liabilities in their statement of financial positions at
amounts equal to the fair value of the leased property or, if lower, the present
value of the minimum lease payments, each determined at the inception of the
lease.
Subsequent measurement
Minimum lease payments shall be apportioned between the finance charge
and the reduction of the outstanding liability. The finance charge shall be
allocated to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability. Contingent
rents shall be charged as expenses in the periods in which they are incurred.
[continuation]
A finance lease gives rise to depreciation expense for depreciable

assets as well as finance expense for each accounting period. The
depreciation policy for depreciation of leased assets shall be consistent
with that for depreciable assets that are owned.
The sum [total] of the depreciation expense for the asset and the
finance expense for the period is rarely the same as the lease payments
payable for the period, and it is, therefore, inappropriate simply to
recognize the lease payments payable as an expense. Accordingly, the
asset and the related liability are unlikely to be equal in amount after
the commencement of the lease term.
[continuation]
There are a number of ways that we can calculate the finance charge
and outstanding obligations:
a) Actuarial method where the interest rate implicit in the lease

b) Sum of years digits method
We can examine these with some illustrations!!!!

Illustration
Scotty Ltd leased an equipment on 1st January, 2015. The terms of the
finance lease were non-refundable deposit of GH 2,000 followed by
four annual payments of GH 2,000, commencing on 31st December,
2015. The fair value of the asset (equivalent to the present value of the
minimum lease payment on 1st January, 2015 was GH 7,710.
Calculate the interest charge and depreciation in the income statement
and the finance liability and asset in the statement of financial position
for the year ended 31st December, 2015, 2016, 2017 and 2018 using the
following methods.
a) Actuarial method where the interest rate implicit in the lease is 15%
c) Sum of the digits method assuming that payments are made in advance
commencing 1st January, 2015 [SELF STUDY].
Suggested Answer
(a) Actuarial Method:

Working 1
Year Obligation at Finance Lease Obligation

start charge @ Payment at close
15%
GH GH GH GH
2015 5,710 857 ( 2,000) 4,567
2016 4,567 685 ( 2,000) 3,251
2017 3,251 488 (2,000) 1,739
2018 1,739 261 (2,000)
Total finance charge = [(5 * GH 2,000) - GH 7,710] = GH 2,290
Year Obligation Finance charge Lease Obligation

at start Payment at close
GH GH GH GH
2015 5,710 [4/10*2290] = 916 (2,000) 4,626
2016 4,626 [3/10*2290] = 687 (2,000) 3,313
2017 3,313 2/10*2290] = 458 (2,000) 1,771
2018 1,771 1/10*2290] = 229 (2,000)
The Actuarial Method
On the Statement of Financial Position, the obligation to the finance lease creditor needs to
be split between current and long-term liabilities. There is no need to accrue for any
interest as a lease payment has just been made. The current liability is the capital element
of next years lease payments i.e., next years payments net of the future interest. The
long-term element of the creditor is the balance of the year end liability.
Actuarial method
Current liability Long-term liability

First year 2,000 - 685 = 1,315 4,567 - 1,315 = 3,252
Second year 2,000 - 488 = 1,512 3,252 - 1,512 = 1,740
Third year 2,000 - 260 = 1,740
Income Statement
2010 2011 2012 2013
GH GH GH GH
Depreciation 1,927 1,928 1,927 1,928
Interest 857 685 488 260
2015 2016 2017 2018
GH GH GH GH
Balance sheet
Fixed assets 7,710 7,710 7,710 7,710
Depreciation 1,927 3,855 5,783 7,710
5,783 3,855 1,927 0
Obligations under
finance leases
Current liabilities 1,315 1,512 1,740 -
Long-term liabilities 3,252 1,740 - -
Total year end

4,567 3,252 1,740
liability
Sum of Digit Method
On the Statement of Financial Position, the obligation to the finance lease creditor needs to
be split between current and long-term liabilities. There is no need to accrue for any interest
as a lease payment has just been made. The current liability is the capital element of next
years lease payments i.e., next years payments net of the future interest. The long-term
element of the creditor is the balance of the year end liability
Current Liability Long-term Liability
2015 2000 687 = 1,313 4626 1,313 = 3,313
2016 2000 458 = 1,542 3313 1,542 = 1,771
2017 2000 229 = 1,771

Income Statement
2015 2016 2017 2018
GH GH GH GH
Depreciation 1,927 1,928 1,927 1,928
Interest 916 687 458 229
2015 2016 2017 2018
GH GH GH GH
Balance sheet
Fixed assets 7,710 7,710 7,710 7,710
Depreciation 1,927 3,855 5,783 7,710
5,783 3,855 1,927 0
Obligations
under finance
leases
Current liabilities 1,313 1,542 1,771 -
Long-term
3,313 1,771 - -
liabilities
Total year end
4,626 3,313 1,771
liability
Lessee Accounting- Land and Building
On 1st January, 2015, Asona Ltd acquired a land and building lease with
a term of 30 years at an annual rental of GH50,000 payable in advance.
Other details of the lease are as follows:
The useful life of the building is 30 years
The interest rate implicit in the lease was 7.5% and the present value of
GH 50,000 per annum payable in advance over 30 years is GH630,000
The fair value of the leasehold interest was GH 660,000 of which GH
66,000 is attributable to the land element.
Calculate the amounts to be recognized in the entitys income statement for
the year ended 31st December, 2015 and its statement of financial position
at that date.
A characteristic of land is that it normally has an indefinite economic life and,
if title is not expected to pass to the lessee by the end of the lease term, the
lessee normally does not receive substantially all of the risks and rewards
incidental to ownership, in which case the lease of land will be an operating
lease.
So the buildings element within the lease should be classified as a finance
lease and the land element classified as operating lease.
The two elements should be measured by reference to the fair value of the
leasehold interests, so GH 66,000 (which is 10% of GH 660,000) is allocated
to the land and GH 594,000 ( the remaining 90%) is allocated to the buildings
The annual rental should be allocated between:
The land: GH 5,000 ( 10% of the GH 50,000 rental). As the period covered
by the rental payment is identical to the financial year, there is no prepayment
or accrual to be recognized in the statement of financial position.
The buildings: The lower of the GH 594,000 fair value allocated to the
buildings and the GH 567,000 (90% of GH 630,000) present value of
the minimum lease payments so allocated should be recognized as a non-
current asset and a liability, charging depreciation on the asset and
adjusting the liability by GH 45,000 ( 90% of the GH 50,000 annual
rental) and by the finance at 7.5% of the outstanding amount.
GH
Income Statement (extract)
Expenses:
Operating lease rental 5,000
Depreciation charge (567,000/ 30 years) 18,900
Finance charge (w1) 39,150
On the Statement of Financial Position, the obligation to the finance lease

creditor needs to be split between current and long-term liabilities. There is
no need to accrue for any interest as a lease payment has just been made.
The current liability is the capital element of next years lease payments i.e.,
next years payments net of the future interest. The long-term element of
the creditor is the balance of the year end liability
Statement of financial position as at 31st December, 2015 (extract)
GH
Property, plant and equipment
Leasehold property (cost) 567,000
Depreciation (18,900)
548,100
Non current liabilities
Obligation under finance lease (w1) 554,861
Current liabilities
Obligation under finance lease (w1) : 6,289
NB:
Current liability = 45,000-38,711 = 6,289
Long term liability = 561,150 6,289 = 554,861
Working 1
Year Balance Lease Balance Finance Balance at close

at start payment outstanding cost @
during the 7.5% GH
GH GH year GH
GH
2015 567,000 (45,000) 522,000 39,150 561,150
2016 561,150 (45,000) 516,150 38,711 554,861
Disclosure
Leases shall, in addition to meeting the requirements of IFRS 7 Financial
Instruments: Disclosure make the following disclosures for finance leases:
(a) for each class of asset, the net carrying amount at the statement of
financial position date.
(b) a reconciliation between the total of future minimum lease payments at
the statement of financial position date, and their present value. In
addition, an entity shall disclose the total of future minimum lease
payments at the statement of financial position date, and their present
value, for each of the following periods:
(i) not later than one year
(ii) later than one year and not later than five years;
(iii) later than five years
Disclosure
(c) Contingent rents recognized as an expense in the period

(d) the total of future minimum sublease payments expected to be received
under non-cancellable subleases at the statement of financial position date.
(e) a general description of the lessees material leasing arrangements
including, but not limited to, the following:
the basis on which contingent rent payable is determined;
the existence and terms of renewal or purchase options and escalation
clauses; and
Restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt, and further leasing.
End of lecture eleven
Thank you very much
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Lecture twelve: Accounting for Lease Transactions: Operating lease in the
books of Lessee and Disclosure; Lessor Accounting; Sale and Lease back
Lecture Hall: A1
Office: G13
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Operating leases in the financial statements of the lessee
For operating leases, lease payments (excluding costs for services such
as insurance and maintenance) are recognized as an expense on a straight
line basis unless another systematic basis is representative of the time
pattern of the users benefit, even if the payments are not on that basis.
Leases shall, in addition to meeting the requirements of IAS 32, make
the following disclosures for operating leases:
the total of future minimum lease payments under non-cancellable
operating leases for each of the following periods:
Not later than one year
later than one year and not later than five years
later than five years.
Operating leases in the financial statements of the lessee
the total of future minimum sublease payments expected to be received

under non-cancellable subleases at the statement of financial position date.
lease and sublease payments recognized as an expense in the period, with
separate amounts for minimum lease payments, contingent rents and
sublease payments.
a general description of the lessees significant leasing arrangements
including, but not limited to, the following:
the basis on which contingent rent payable is determined;
the existence and terms of renewal or purchase options and escalation
clauses.
restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt and further leasing.
Illustration
On 1st July, 2015, Halleluyah Ltd increased the operating capacity of

its plant. Due to a lack of liquid funds, it was unable to buy the
required plant which had a cost of GH700,000. On the
recommendation of the finance director, Halleluyah Ltd entered into
an agreement to lease the plant from the manufacturer. The lease
required four annual payments in advance of GH200,000 each
commencing on 1st July, 2015. The plant would have a useful life of
four years and would be scrapped at the end of this period. The finance
director, believing the lease to be an operating lease, commented that
the agreement would improve the companys return on capital
employed compared to outright purchase of the plant.
Illustration
Required :
(i) Discuss the validity of the finance directors comment and describe how
IAS 17 Leases ensures that leases such as the above are faithfully
represented in an entitys financial statements.
(ii) Prepare extracts of Halleluyah Ltds income statement and statement of
financial position for the year ended 31st December, 2015 in respect of the
rental agreement assuming:
1. it is an operating lease
2. it is a finance lease ( use an implicit interest rate of 10% per annum)
Suggested Solution
(a) The finance directors comment that the ROCE would improve based
on the agreement being classified as an operating lease is correct. Over
the life of the lease the reported profit is not affected by the lease being
designated as an operating or finance lease, but the statement of
financial position is. This is because the depreciation and finance costs
charged on a finance lease would equal (over the full life of the lease)
what would be charged as lease rentals if it were classed as an operating
lease instead. However, classed as an operating lease, there would not
be a leased asset or lease obligation recorded in the statement of
financial position; whereas there would be if it were a finance lease or
an outright purchase . The capital employed under an operating lease
would be lower leading to a higher ROCE.
IAS 17 Leases defines a finance lease as one which transfers to the
lessee substantially all the risks and rewards incidental to ownership
(an application of the principle of substance over form). In this case,
as the asset will be used by Halleluyah Ltd for four years (its entire
useful life) and then be scrapped, it is almost certain to require
classification as a finance lease. Thus, the finance directors
comments are unlikely to be valid.
b) 1. Operating lease GH
Income statement
cost of sales (machine rental) (200,000 * 6/12) 100,000
Statement of Financial Position
Current assets:
Prepayment ( 200,000 * 6/12) 100,000
(2) Finance Lease GH
Income statement
cost of sales (depreciation) ( 700,000/4 * 6/12) 87,500
Finance costs ( see working) 25,000
Statement of Financial Position

Non-current assets
Leased plant at cost 700,000
Depreciation ( from above) (87,500)
412,500
Suggested Solution
Statement of Financial Position GH
Non- current liabilities
Lease obligation (500,000 150,000) 350,000
Current liabilities
Accrued interest (see working) 25,000
Lease obligation (200,000 50,000) 150,000
175,000
NB: At the end of the year 200,000 has been paid, leaving an outstanding of
500,000. In the coming year, 200,000 would be paid, out of which, 50,000 is
interest, meaning that current obligation would be 150,000. Therefore, the
long term obligation would be 500,000 150,000 = 350,000
Workings
GH
Cost 700,000
Deposit (200,000)
500,000
Interest to 31st December, 2015
( 6 months @ 10%) 25,000
Total obligation at 31st December, 2015 525,000
NB: The payment of GH 200,000 on 1st July, 2015 will contain GH 50,000
of interest (GH 500,000 * 10%) and a capital repayment of GH 150,000.
Lessor Accounting
Finance leases
Initial recognition
Lessors shall recognize assets held under a finance lease in their
statement of financial positions and present them as a receivable at an
amount equal to the net investment in the lease.
Under a finance lease substantially all the risks and rewards incidental
to legal ownership are transferred by the lessor, and thus the lease
payment receivable is treated by the lessor as repayment of principal
and finance income to reimburse and reward the lessor for its investment
and services.
Lessor Accounting
Subsequent measurement
The recognition of finance income shall be based on a pattern reflecting
a constant periodic rate of return on the lessors net investment in the
finance lease.
A lessor aims to allocate finance income over the lease term on a
systematic and rational basis. This income allocation is based on a
pattern reflecting a constant periodic return on the lessors net investment
in the finance lease.
Lease payments relating to the period, excluding costs for services, are
applied against the gross investment in the lease to reduce both the
principal and the unearned finance income.
Illustration: Gross Investment
Georgino Ltd purchased a lorry from Barnes Automobiles Ltd (BAL) for
GH 50,000 and leased it to Pamfo Communications (PC) on a four year
lease requiring annual payments in arrears of GH 13,500. BAL has
agreed to buy the lorry back at an open market value at the end of the
lease. PC has agreed that the value of the lorry after four years will not be
less than GH 6,000. A realistic estimate of its open market value in four
years is GH 9,000.
Required:
What is Georginos gross investment in the lease at the inception of the
lease?
Suggested solution
Remember gross investment in the lease is the aggregate of :
the minimum lease payments receivable by the lessor under a finance lease
[rentals plus guaranteed residual value], and any unguaranteed residual value
accruing to the lessor.
Unguaranteed residual value is that portion of the residual value of the leased
asset, the realization of which by the lessor is not assured or is guaranteed
solely by a party related to the lessor.
At the inception of the lease, the minimum lease payments are the rentals due
of GH54,000 i.e. (GH13,500 * 4) plus the guaranteed residual of GH6,000
giving GH60,000. BAL has agreed to buy the lorry back at an amount
estimated at GH9,000. GH3,000 (GH9,000- GH6,000) is the unguaranteed
residual value so the gross investment in the lease is GH63,000.
NB: Net investment in the lease is the gross investment in the lease discounted
at the interest rate implicit in the lease.
Illustration : Subsequent Measurement
Prosperity Ltd leased an asset to Samanpa Ltd on the following terms:
Lease term 4 years
Inception of lease 1st January, 2015
Annual payments in advance GH 22,000
Residual value of assets guaranteed by lessee GH 10,000
Expected residual value at the end of the lease GH 12,000
Fair value of the asset at the inception of the lease GH 82,966
Indirect costs incurred by the lessor GH 700
Annual interest rate implicit in lease 11%
Required:
a) Calculate the unguaranteed residual value and the Net Investment in the lease
as at 1st January, 2015.
b) Prepare extracts from the financial statements of the lessor for the year ended
31st December, 2015 excluding notes.
Suggested Solution
Remember unguaranteed residual value is that portion of the residual value of the
leased asset, the realization of which by the lessor is not assured or is guaranteed
solely by a party related to the lessor.
(a) The unguaranteed residual value is GH 2,000 (GH 12,000 - GH 10,000)

The net investment in the lease is computed as :
Date Receipt Gross Discount Net
Investment factor @ 11% investment
GH GH
1/1/2015 1st installment 22,000 1.0000 22,000
1/1/2016 2nd installment 22,000 0.9009 19,820
1/1/2017 3rd installment 22,000 0.8116 17,856
1/1/2018 4th installment 22,000 0.7312 16,086
31/12/2018 Guaranteed 10,000 0.6587 6,587
Residual value
Total Minimum 98,000 82,347
lease payment
Unguaranteed 2,000 0.6587 1,317
Residual value 100,000 83,666
Workings
Net Investment in the lease GH
Year ended 31st December, 2015
1st January, 2015 Net Investment 83,666
Ist installment in advance (22,000)
61,666
1st Jan 2015 31st Dec, 2015 Interest income @ 11% 6,783
Balance at 31st December, 2015 68,449
Year ended 31st December, 2016
1st January, 2016 2nd installment in advance (22,000)
Due in more than 1 year 46,449
Financial statements extracts
GH
Income Statement( Extracts)
Finance Income (w1) 6,783
Statement of Financial Position ( Extract)
Non- current assets
Finance lease receivable (w1) 46,449
Current Assets
Finance lease receivable ( 68,449- 46,449) 20,000
Disclosure
Lessors shall, in addition to meeting the requirements in IAS 32,
disclose the following for finance leases;
(a) a reconciliation between the gross investment in the lease at the
statement of financial position date, and the present value of minimum
lease payments receivable at the statement of financial position date.
In addition, an entity shall disclose the gross investment in the lease
and the present value of minimum lease payments receivable at the
statement of financial position date, for each of the following periods:
(i) Not later than one year;
(ii) Later than one year and not later than five years;
(iii) later than five years.
Disclosure
(b) Unearned finance income.
(c) the unguaranteed residual values accruing to the benefit of the lessor.
(d) the accumulated allowance for uncollectible minimum lease payments
receivable.
(e) contingent rents recognized as income in the period.
(f) a general description of the lessors material leasing arrangements.
As an indicator of growth it is often useful also to disclose the gross
investment less unearned income in new business added during the
period, after deducting the relevant amounts for cancelled leases.
Operating leases
Lessors shall present assets subject to operating leases in their

statement of financial positions according to the nature of the asset
Lease income from operating leases shall be recognized in income

on a straight line basis over the lease term, unless another systematic
basis is more representative of the time pattern in which use benefit
derived from the leased asset is diminished.
Illustration : Lessor Accounting Operating Lease
Boateng Ltd acquired a new car with a view to renting it out to foreign
students who come on study tour for two years and then dispose of it.
The car cost GH 40,000 on 1st July, 2015 and the residual value at the
end of the two years was estimated at GH 12,000.
On that date Boateng Ltd rented the car out on a one year lease and the
payments of GH 2,000 due monthly in advance were all received on
time. The cost of negotiating the lease was GH 800.
Required:
What amounts should be recognized in Boatengs statement of financial
position at 31st December, 2015 and its income statement for the year
ended 31st December, 2015?
Suggested Solution
Statement of financial position (extract)
GH
Non-current:
Motor vehicle at cost 40,800
Depreciation (workings) 7,400
Net Book Value 33,400
Income Statement ( extract) GH
Other Income ( Rental Income)[2,000 * 6) 12,000
Expenses (Depreciation charge on motor vehicles (7,400)
Workings
GH GH
Cost of vehicle 40,000
Less: Residual value (12,000)
28,000
Depreciated over 2 years
[ 6/24 * 28,000] 7,000
Cost of negotiating one year lease 800
7,800
Amortized over the lease term
( 6/12 * 800 ) (400) 7,400
Sale and leaseback transactions
A sale and leaseback transaction involves the sale of an asset and the leasing
back of the same asset. The lease payment and the sale price are usually
interdependent because they are negotiated as a package. The accounting
treatment of a sale and leaseback transaction depends upon the type of lease
involved.
If a sale and leaseback transaction results in a finance lease [it means the sale
was not genuine, the asset remains the lessees and the arrangement is merely
financing], any excess of sales proceeds over the carrying amount shall not be
immediately recognized as income by a seller-lessee. Instead, it shall be
deferred and amortized over the lease term.
ie. Sale Proceeds > Carrying value; the excess is not recognized immediately
as income, but amortised over the lease term!
Dr Cash/Bank and Cr Finance Lease Liability
Sale and leaseback transactions
If a sale and leaseback transaction results in an operating lease [meaning the sale was
genuine, the asset is derecognized from the lessees books], and it is clear that the
transaction is established at fair value, any profit or loss shall be recognized
immediately.
ie. If sale proceeds (SP) = Fair Value [arms length transaction], recognize any profit
or loss immediately!
If the sale price is below fair value, any profit or loss shall be recognized immediately
except that, if the loss is compensated for by future lease payments at below market
price, it shall be deferred and amortized in proportion to the lease payments over the
period for which the asset is expected to be used.
ie. If SP<FV, recognize profit or loss immediately, unless the apparent loss is
compensated by future rentals at below market price, in which case, defer and amortise
If the sale price is above fair value, the excess over fair value shall be deferred and
amortized over the period for which the asset is expected to be used
ie. If SP>FV, defer the excess and amortise over lease term
Illustration: Sale and Finance Lease Back Transaction
Adwumapa Ltd entered into a sale and lease back arrangement on 1st
January, 2015 when :
The carrying amount of the asset was GH 140,000
The sale proceeds were at fair value of GH 240,00
The remaining useful life of the asset was five years
The lease provided for five annual rental of GH 60,000 payable in
arrears on 31st December of each year. The interest rate implicit in the
lease was 8% per annum and the present value of the minimum lease
payments was GH 240,000
Required: Set out the journal entries at the date of disposal and calculate
the amounts to be recognized in Income Statement and the statement of
financial position as at 31st December, 2015.
Suggested solution
Journal Entries at the date of Disposal
DR CR
GH GH
Cash 240,000
Non-current asset ( carrying amount) 140,000
Deferred Income 100,000
Non-current asset 240,000
Lease Liability ( obligation under finance lease) 240,000
Solution
Income Statement for the year ended 31st December, 2015 ( Extract)
GH
Expenses:
Depreciation charge ( 240,000/ 5) 48,000
Interest/ Finance charge ( 240,000 * 8%) 19,200
Other Income
Release of deferred profit ( 100,000/ 5) (20,000)
Solution
Statement of financial position as at 31st December, 2015 ( Extract)
GH
Non-current assets
Carrying amount at 1st January, 2015 240,000
Depreciation (48,000)
Carrying value at 31st December, 2015 192,000
Non- current liabilities
Obligation under finance lease ( workings) 155, 136
Deferred Income ( 100,000 * 3/5) 60,000
Solution
GH
Obligation under finance lease ( 60,000 15,936) [working] 44,064
Deferred Income ( 100,000/5) 20,000
Solution : Workings
Year Obligation Finance Lease Obligation

at start charge @ payment at close
GH 8% GH GH
2015 240,000 19,200 (60,000) 199,200
2016 199,200 15,936 (60,000) 155,136
Sale and Operating Lease Back
Six different companies, each sold an asset and immediately entered into an
operating leaseback for five years. There are different sets of circumstances
with respect to each asset for the six companies.
Company Carrying amount Proceeds Generated Fair value
GH GH GH
1 720,000 600,000 800,000
2 800,000 600,000 720,000
3 600,000 720,000 800,000
4 600,000 800,000 720,000
5 720,000 800,000 600,000
6 800,000 720,000 600,000
Illustration
Required :
Assess the impact of the sale and operating leaseback arrangement on
profit or loss for each of the six companies for all years affected by the
arrangements
Suggested solution
1) Loss of GH 120,000 (carrying value less proceeds = GH 720,000 -
GH 600,000) should be recognized immediately unless lease rentals are
below market rentals in which case it should be deferred and amortized
over the five year lease period at GH 24,000 per year.
2) A loss of GH 80,000 based on fair value (carrying amount fair value
= GH 800,000 - GH 720,000) should be recognized immediately. The
remaining GH 120,000 of the loss (fair value the proceeds = GH
720,000 - GH 600,000) should also be recognized immediately unless
the future rentals payable are below market levels, in which case it
should be deferred and amortized over the lease term.
Suggested solution
3) The profit of GH120,000 (proceeds carrying amount = GH720,000
-GH600,000) should be recognized immediately.
4) A profit of GH120,000 based on fair value carrying amount = GH
720,000 - GH600,000) should be recognized immediately. The
remaining GH80,000 of the profit should be deferred and recognized
over the five years lease period at GH16,000 per year.
5) A loss of GH120,000 based on fair value ( carrying value fair value
= GH720,000 - GH600,000) should be recognized immediately. The
profit of GH200,000 (proceeds fair value = GH800,000 -GH
600,000) should be deferred and recognized over the five years lease
period at GH40,000 per year.
Solution
6) A loss of GH200,000 based on fair value (carrying amount fair
value = GH800,000 - GH600,000) should be recognized immediately.
The profit of GH 120,000 (proceeds fair value = GH720,000 -GH
600,000) should be deferred and recognized over the five years lease
period at GH24,000 per year.
SELF-STUDY
On 1st January, 2010, AK Limited entered into a lease agreement to rent a tractor from Ako Limited for a
six year period after which it will be returned to the lessor and scrapped. The agreement provides for an
annual payments of GH 9,210 made in advance (the first payment made on 1st January, 2010). The
market price of equipment on the date of the transaction was GH 43,000. The present value of minimum
lease payments amounts to GH 42,000 (discounted at the implicit interest rate of 12.5% per annum).
AK Ltd expects to be in the construction business during the first 5 years of the lease term only but has
leased the equipment for 6 years as this is the requirement of the lessor.
Required:
i. Justify why the above transaction is an operating or finance lease.
ii) Show the relevant extract of the statement of comprehensive income for the relevant years.
iii) Differentiate between a finance and an operating lease.
SELF-STUDY
AA Limited took a non-cancellable lease contract with a primary term of 5years from
1st January, 2011. The rental is GH 25,000 per annum payable in advance. AA
Limited has the right to continue to lease the asset after the end of the primary period
for as long as it wishes at a nominal rent. In addition, AA Limited is required to pay
all the maintenance costs and insurance as they rise.
The leased asset could have been purchased at the start of the lease for GH 104,250.
The estimated useful life of the asset is 5 years. Depreciation is to be charged on a
straight-line basis with no residual value. The interest rate implicit in the lease is
10%, and the company uses the actuarial method for the allocation of finance charge.
You are required to record the financial effect of the leasing transaction in the
financial statements of AA Limited for all relevant years (2011-2015) with respect to:
Statement of comprehensive income and
Statement of financial position (extracts)
End of lecture twelve
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Office: G13
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Lecture 13 Investment Property IAS 40
Lecture Hall: A1
Office: G13
Mobile: 0266225129
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Lecturer: Cletus Agyenim-Boateng (PhD, MSc, BSc, FCCA)A
Objectives:
Discuss the nature and accounting treatment of investment property.
Describe the criteria for the initial recognition and measurement of investment
property.
Describe the subsequent accounting treatment, including the principle of
impairment tests in relation to investment property.
Describe and apply the requirements of IAS 16 to account for investment
property.
IAS 40 Objective and Scope
IAS 40 identifies what an investment property is, how it differs from
property, plant and equipment (owner-occupied property); and what
recognition, measurement and disclosure standards apply to
investment properties
485
Investment property is defined as:
property held to earn rentals or for capital appreciation or both, rather than for
(a) use in the production or supply of goods or services or for administrative
purposes; or
(b) sale in the ordinary course of business
Examples of investment property: [IAS 40.8]

land held for long-term capital appreciation
land held for undetermined future use
building leased out under an operating lease
vacant building held to be leased out under an operating lease
property that is being constructed or developed for future use as investment
property
486
The following are not investment property and, therefore, are outside the scope
of IAS 40: [IAS 40.5 and 40.9]
property held for use in the production or supply of goods or services or for
administrative purposes
property held for sale in the ordinary course of business or in the process of
construction of development for such sale (IAS 2 Inventories)
property being constructed or developed on behalf of third parties (IAS 11
Construction Contracts)
owner-occupied property (IAS 16 Property, Plant and Equipment), including
property held for future use as owner-occupied property, property held for
future development and subsequent use as owner-occupied property, property
occupied by employees and owner-occupied property awaiting disposal
property leased to another entity under a finance lease 487
IAS 40 - Recognition
Investment property is recognized as an asset when:
- it is probable that its future economic benefits will flow to the entity,
and
- its cost can be measured reliably
488
IAS 40 Measurement at Recognition
Investment property is recognized initially at cost
applying the cost model of IAS 16 Property,
Plant and Equipment including what is
capitalized in cost and the principles for non-
monetary transactions
Leased investment property is measured according
to IAS 17 Leases
489
IAS 40 Measurement after Recognition
After initial recognition, an entity has a choice of methods to account
for investment property:
- Fair value model (FVM), or
- Cost model (CM)
Must apply one model to all of its investment property
490
Fair value model (FVM):
- Assets are measured at fair value

- Changes in fair value are recognized in profit or loss in the period of
change
- No depreciation is recorded
- Fair values continue to be used even if difficult to measure reliably
491
Fair value:
Price at which property could be exchanged between knowledgeable,
willing parties in an arms length transaction, without any special
concessions or deductions for transaction costs
Best evidence is current prices in an active market for similar property
in the same location and condition
If not available, other methods can be used to determine
492
FVM example:
Investment property is acquired August 11, 2013, at a cost of GhC200,000.
Fair values:
December 31, 2013 - GhC190,000
December 31, 2014 - GhC198,000
December 31, 2015 - GhC205,000
493
FVM example: DR CR
Dec.31/13 Loss in value GhC10,000
Investment property GhC10,000
Dec.31/14 Investment property GhC 8,000
Gain in value GhC 8,000
Dec.31/15 Investment property GhC 7,000
Gain in value GhC 7,000
494
Cost model (CM)

- Applies cost model described in IAS 16
- Assets reported at cost less accumulated depreciation and accumulated
impairment losses
- Depreciation expense recognized each period
495
IAS 40 Transfers
Change in Use Circumstances Accounting
From Investment Owner occupies or Deemed cost in IAS 16
Property to owner- begins to develop the or IAS 2 is Fair Value at
occupied or to inventory property for sale the date of change in use
From owner-occupied End of owner- Depreciate to the date of
property IAS 16 to occupation change in use. The
investment property Fair difference between
Value Model in IAS 40 carrying amount (Net
Book Value) and Fair
Value is accounted for
according to the
revaluation model in 496
IAS 40 Transfers
Change in Use Circumstances Accounting
From Inventory in IAS 2 Owner enters into Difference between IAS
to Investment Property operating lease with a 2 carrying amount and
Fair Value Model in IAS third party IAS 40 Fair Value is
40 recognised in Income
Statement
In progress Investment Owner finishes Difference between
Property Cost Model in construction or carrying amount and
IAS 40 to Investment development Fair Value is recognised
Property Fair Value in Income Statement
Model in IAS 40
497
IAS 40 - Disclosures
General disclosures:
whether the FVM or the CM is applied
if FVM, whether and when any operating leases are classified as investment
property
criteria used to distinguish between owner-occupied investment property and
property held for sale where judgment is needed
methods and assumptions underlying fair value measurements, including
extent to which market-related evidence is used
extent to which the fair values were determined by an experienced,
professional, and independent appraiser
existence of restrictions and contractual obligations related to the properties
amounts and specific types of income and expense recognized in profit or loss
498
Illustration 1
On 30th June, 2013, QRS Ltd acquired a site to construct a complex
office building at a cost GH 600,000. The complex structure is to be
rented out to companies to be used as offices. Construction started on
1st September, 2013 and was substantially completed on 30th June, 2014
at a cost of GH 1,000,000, at which stage, tenants could move in. The
first lease arrangement with tenants were signed on 1st October, 2014,
but the building was not fully let until July, 2015.
Required:
Describe the recognition and measurement of this property
Suggested solution
The property was developed for future use as an investment property
and should be recognized as such from 30th June , 2013 when the land
was acquired. The final cost of the asset should be measured at GH
1,600,000 incurred up to 30th June, 2014 when the offices were ready to
be occupied. Costs incurred after this date should be recognized as an
expense in income statement, even though the entity did not start to
receive rentals until 1st October, 2014. Any losses incurred during this
idle period and up to the point the building is fully let are part of the
entitys normal business operations and do not form part of the cost of
the investment property.
Illustration 2
Scotty Ltd prepares accounts to 31st December. It acquired an
administration block with an estimated useful life of 50 years at a cost of
GH 22 million on 1st January, 2010. The entity used the building for five
years until 31st December, 2014, when it moved its office to a new
building at the factory site. The building was reclassified as an investment
property and leased out under a 40 year lease. The fair value of the
building at 31st December, 2014 was GH 24 million. As at 31st
December, 2015, the fair value was GH 24.4 million.
Required: Explain the treatment of the building in 2015 financial
statements on the assumption that:
(a) The entity uses the cost model for investment properties
(b) The entity uses the fair value model for investment properties.
Suggested solution
(a) Cost model
Until 31st December, 2014, the building should be recognized as
property, plant and equipment under IAS 16. As it has 50 years useful
life, it would have depreciated to 19.8million [ie. at 31st December,
2014, the building has a carrying amount of GH 22million * 45/ 50
years = GH 19.80 million]
On 31st December, 2014, the property should be recognized as an
investment property at its IAS 16 carrying amount of GH 19.80
million and should continue to be depreciated over its remaining 45
year life.
(b) Fair value model
Depreciate to the date of change in use. Therefore, at 31st December,
2014, the building has a carrying amount of GH 19.80 million in
accordance with IAS 16.
On 31st December, 2014, the building should be recognized as an
investment property. The building should be revalued to fair value at 31st
December, 2014. The difference between carrying amount (Net Book
Value) and Fair Value is accounted for according to the revaluation
model in IAS 16.
Therefore, the building should be recognized at a carrying amount of
GH 24 million and the difference of GH 4.20 million [GH 24 million
- GH 19.8 million] should be recognized in other comprehensive
income as a revaluation surplus.
(b) Fair value model
In subsequent periods (unless there is a further change in use, the
building should be measured at fair value with any gain or loss
recognized directly in income statement in accordance with IAS 40.
As at 31st December, 2015, the fair value was GH 24.4 million.
Therefore, a gain in value of GhC400,000 [GhC24.4million
GhC24million] should be recognised directly in income statement in
accordance with IAS40
Disposals
An investment property should be derecognized:
on disposal either through sale or creation of a finance lease.
when the property is permanently withdrawn from use and no future
economic benefits are expected from its disposal.
Gains or losses, arising from retirement or disposal, represent the
difference between the net disposal proceeds; and the carrying amount of
the asset [in the case of cost model] and Fair Value [in the case of Fair
Value Model
Gains or Losses should be recognized as profits or losses respectively
in the income statement in the period of that retirement or disposal.
Illustration 3
ABC Ltd purchased an investment property on 1st January,
2012 at a cost of GH7 million, The property was estimated to
have a useful life of 50 years with nil residual value. The
company adopted fair value model for subsequent
measurement. As at 31st December, 2014, it was fair valued at
GH 8.4 million. On Ist January, 2015, the property was
disposed of for net proceeds of GH 8million.
Required:
Calculate the profit or loss on disposal under both the cost
and fair value model.
Suggested solution
(a) Cost model GH m
Net proceeds 8.00
Carrying amount (GH 7m * 47/50) (6.58)
Profit on disposal 1.42
(b) Fair value model GH m
Net proceeds 8.00
Carrying amount (8.40)
Loss on disposal (0.40)
END
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University of Ghana Business School

ACCT 301: Financial Reporting 1

Lecture 1: Overview of Module and Basics of Partnership Accounting and

The course examines accounting for partnerships arrangements and

Lecture one: Overview of Module and Basics of Partnership Accounting

Lecture two: accounting for changes in partnership admission of a new partner

Lecture four: accounting for changes in partnership - Amalgamation

Lecture five: Accounting for Changes in Partnerships Dissolution: One-off/one-stage

Lecture seven: Accounting for Changes in Partnership Sale of a Partnership to a Limited

Lecture eight: Accounting for Hire-Purchase: High Value items

Lecture eleven: Accounting for Construction Contracts: Further Accounting Complications

Lecture twelve: Accounting for Lease Transactions: Background, Definitions, Classifications,

1. A R Jennings 1993 Financial Accounting Reprinted 2006 By Thomson Learning

2. Frank Wood (2008) Business Accounting Volume 1 & 2, Financial Times

International Financial Reporting Standards (IFRS)

Companys Code, Act 179, 1963

Incorporated Private Partnership Act, (IPPA), Act 1952, 1962

Lecture slides and tutorial questions

Similar to sole proprietorship

Business income is divided among partners

The Closing Balance XX cr get carried forward to The

The Closing Balance XX cr get carried forward to The

+ New capital Introduced X X cr

The Closing Balance XX cr get carried forward to The

+ New capital Introduced X X cr

The Closing Balance XX cr get carried forward to The

sharing plan regardless of the amount of their

The Partnership Act states that if partners fail

to specify a plan for sharing net income/loss, it

Allowing salaries to partners and dividing the remaining

Interest on Capital 1,800 31,800

Share of Profit 10,000 41,800

Drawings 8,000 33,800

Salary 6,000 26,000

Interest on Capital 1,200 27,200

Share of Profit 6,000 33,200

Drawings 10,000 23,200

Drawings 8,000 22,000

Interest on Capital 1,800 1,800

The treatment of drawings depends on the nature of the drawings,

The following entries have not been made

Bal. b/d 100,000 Bal. b/d 400,000 225,000

Goods drawings 175,000 Salary-Pound 75,000

Cash drawings 150,000 100,000 75,000 Interest on loan 50,000

General expenses 37,500

582,100 263,700 564,200 582,100 263,700 564,200

Bal. b/d 240,850 54,950 484,200

Other changes will be dealt with in the six

Upon an admission of a new partner, goodwill

GOODWILL YOU ARE WELCOME!

BUT WHO ARE YOU?

Net profit basis/ Average annual profit

Gross Income / Fees / Revenue

Valuation of Internally generated goodwill:

Valuation of Internally generated goodwill:

Goodwill [4*15] = GH60m

Valuation of Internally generated goodwill:

Total 200m 200m

On the1st of January, 2016 they agreed to admit Kwabena

Prepare Separate Statement of financial Position to reflect:

A situation where goodwill is maintained in the books of the partnership

Yaw: * 50,000 = GH25,000

Kofi: * 50,000 = GH25,000

Therefore, the new Statement of Financial Position will be as follows