State the reasons why a company would not wish to distribute all its profits to its

shareholders. (5 marks)

 

ii) Explain two circumstances under which “goodwill” can be recorded in a business firm’s

books of account. (4 marks)

 

a)Kamau and Kimani are partners sharing profits and losses in the ratio 3:2 respectively. The partnership agreement provides for Kimani to receive a salary of Sh.4,000,000 per annum, and interest on capitals for both partners at 5% per annum. The partnership balance sheet as at 31 December 1998 was as follows:

 

	Sh.‘000’	Sh.‘000’		Sh.‘000’	Sh. ‘000’
Capital accounts			Premises		20,800
Kamau	16,000		Equipment at cost	8,000

Kimani 10,000 26,000 Depreciation (4,800)

Current accounts

Kamau	3,200		Current Assets
Kimani	(300)	2,900	Stock	5,600
			Debtors	2,200
Reserves		1,000	Cash	400	8,200
Loan -Kamau		1,000
Current Liabilities

Accruals

32,200

 

On Ist January 1999Kimata was admitted to the partnership. The terms of his admission to the partnership were as follows:

 

a. Kimata should introduce an amount in cash as capital which should equal Kamau’s capital in the new partnership.

b. Goodwill should be valued at Sh.14, 000,000 for the purpose of his admission. It was agreed that goodwill should not be included in the balance sheet of the new partnership.

c. Certain assets are to be revalued as follows: Premises to be appreciated by shs 5,000,000: Equipment to be written down to shs 2,000,000: Provisions for bad debts of 5% is to be provided.

d. An investment of shs. 500,000 which had not been recorded is to be put to book.

e. Kamau’s loan is to be paid in full and the reserve should be written off.

f. The new profit sharing ratio for Kamau, Kimani and Kimata should be 4:2:1 respectively.

 

Required:

(a) Revaluation account. (4 marks)

(b) The current accounts of the partners for the year ended 31 December 1999. (3 marks)

(c) Capital Accounts of the partners for the year ended 31 December 1999. (7 marks)

(c) Balance Sheet as at 31 December 1999