Q.1 The Abdullah and Ahad partnership has the following plan for the distribution of partnership net income (loss):
Particulars
Abdullah
Ahad
Salaries
80000
100000
Bonus on Net Income
6%
12%
Interest on average Capital Balance
7%
7%
Remainder (if Positive Balance)
60%
40%
Remainder (if Negative Balance)
50%
50%
Required:
Calculate the distribution of partnership net income (loss) for each independent situation below (for each situation, assume the average capital balance of Abdullah is $140,000 and of Ahad is $240,000).
- Partnership net income is $360,000. (2 Marks)
- Partnership net income is $240,000. (2 Marks)
- Partnership net loss is $40,000. (2 Marks)
On Jan, 1 2014, Peter Corp. (a U.S. based company) formed a new subsidiary in Saudi Arabia, Saeed Inc., with an initial investment of 30,000 SAR.
Assume Saeed Inc.
Purchases inventory evenly throughout 2014. The ending inventory is purchased Nov. 30, 2014.
Uses straight-line depreciation on fixed assets.
Declares and pays dividends on Nov. 30, 2014.
Purchased the fixed assets on April 1, 2014.
Uses SAR as the functional currency.
Exchange Rates are given:
Jan 1, 2014 0.260
April 1, 2014 0.255
Nov. 30, 2014 0.240
Dec. 31, 2014 0.238
Saeeds financial statements on Dec. 31, 2014
Accounts
SAR
Cash
5000
Account Receivable
12000
Inventory
32000
Note Receivables
5000
Plant & Equipment
70000
Cost of Goods sold
32000
Depreciation
2000
Other Expenses
18000
Dividends
16000
Total Debits
192000
ACC. OC Translation Adjustment (Debit)
Adjusted Total Credit
Accumulated Depreciation
2000
Account Payable
12000
Bonds Payable
36000
Mortgage Payable
46000
Common Stock
30000
Sales
66000
Total Credits
192000
REQUIRED
Prepare a schedule to translate Saeeds financial statements on Dec. 31, 2014 to U.S. dollars. (6 Marks)
Q.3 Anwar and Bravo wish to form the A&B partnership. Anwar contributes land with a book value of $ 175,000 (current value of $200,000) and a building with a book value of $200,000 (current value of $300,000). Bravo will contribute cash. If the partners plan to share profits and losses equally after the formation of the partnership and assuming they have agreed to equal capital contributions, how much cash will Bravo have to contribute to form the partnership? Pass Journal entry to be recorded in A&B Firm. (3 Mark)
Full Answer Section
- Abdullah: $80,000 + $21,600 + $9,800 + $53,160 = $164,560
- Ahad: $100,000 + $43,200 + $16,800 + $35,440 = $195,440
Situation 2: Net Income of $240,000
- Salaries: Abdullah: $80,000; Ahad: $100,000
- Bonus: Abdullah: 6% of $240,000 = $14,400; Ahad: 12% of $240,000 = $28,800
- Interest: Abdullah: 7% of $140,000 = $9,800; Ahad: 7% of $240,000 = $16,800
- Remainder: $240,000 - $80,000 - $100,000 - $14,400 - $28,800 - $9,800 - $16,800 = -$29,800
- Abdullah: 50% of -$29,800 = -$14,900
- Ahad: 50% of -$29,800 = -$14,900
Total:
- Abdullah: $80,000 + $14,400 + $9,800 - $14,900 = $89,300
- Ahad: $100,000 + $28,800 + $16,800 - $14,900 = $130,700
Situation 3: Net Loss of $40,000
- Salaries: Abdullah: $80,000; Ahad: $100,000
- Bonus: None (since there's a net loss)
- Interest: Abdullah: 7% of $140,000 = $9,800; Ahad: 7% of $240,000 = $16,800
- Remainder: -$40,000 - $80,000 - $100,000 - $9,800 - $16,800 = -$246,600
- Abdullah: 50% of -$246,600 = -$123,300
- Ahad: 50% of -$246,600 = -$123,300
Total:
- Abdullah: $80,000 + $9,800 - $123,300 = -$33,500
- Ahad: $100,000 + $16,800 - $123,300 = -$7,500
Q2: Translation of Saeed Inc.'s Financial Statements
Step 1: Translate Monetary Assets and Liabilities at the Current Exchange Rate
- Cash: 5,000 SAR * 0.238 = $1,190
- Accounts Receivable: 12,000 SAR * 0.238 = $2,856
- Inventory: 32,000 SAR * 0.240 = $7,680
- Note Receivables: 5,000 SAR * 0.238 = $1,190
- Accounts Payable: 12,000 SAR * 0.238 = $2,856
- Bonds Payable: 36,000 SAR * 0.238 = $8,568
- Mortgage Payable: 46,000 SAR * 0.238 = $10,948
- Common Stock: 30,000 SAR * 0.260 (historical rate) = $7,800
Step 2: Translate Non-Monetary Assets at Historical Exchange Rate
- Plant & Equipment: 70,000 SAR * 0.255 (historical rate) = $17,850
- Accumulated Depreciation: 2,000 SAR * 0.255 (historical rate) = $510
Step 3: Translate Income Statement Items at Average Rate
- Sales: 66,000 SAR * [(0.260+0.255+0.240)/3] = $16,500
- Cost of Goods Sold: 32,000 SAR * [(0.260+0.255+0.240)/3] = $8,000
- Depreciation Expense: 2,000 SAR * 0.255 (historical rate) = $510
- Other Expenses: 18,000 SAR * [(0.260+0.255+0.240)/3] = $4,500
- Dividends: 16,000 SAR * 0.238 = $3,808
Step 4: Calculate Translation Adjustment
- Translation Adjustment = $19,914 - $17,850 = $2,064 (debit)
Translated Financial Statements:
Q3: Partnership Formation
Calculation of Cash Contribution by Bravo:
- Total Capital Required: $200,000 (Anwar's land) + $300,000 (Anwar's building) = $500,000
- Anwar's Contribution: $200,000 (land) + $300,000 (building) = $500,000
- Bravo's Contribution: $500,000 - $500,000 = $0
Journal Entry: