Level: HOTS (KBAT)
HOTS (KBAT) Worked Examples: Accounting for Partnerships
Six escalating higher-order examples on the Appropriation Account, Capital and Current Accounts and partnership dissolution that require candidates to analyse, correct errors and interpret, not just record.
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Example 1: Interest on Drawings by Date
Question
Solution plan
Interest on drawings must be time-apportioned: Aiman 1 Jul–31 Dec = 6 months (10,000 x 6% x 6/12 = 300); Balqis 1 Oct–31 Dec = 3 months (8,000 x 6% x 3/12 = 120). Interest on drawings increases profit, so it goes on the credit side. Interest on capital (Aiman 4,000; Balqis 3,000) and Balqis's salary 12,000 reduce profit, so they go on the debit side. The residue (50,420 - 7,000 - 12,000 = 31,420) is shared 3:2.
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Interest on capital: Aiman | 4,000 | Net profit | 50,000 |
| Interest on capital: Balqis | 3,000 | Interest on drawings: Aiman | 300 |
| Salary: Balqis | 12,000 | Interest on drawings: Balqis | 120 |
| Share of profit: Aiman | 18,852 | ||
| Share of profit: Balqis | 12,568 | ||
| 50,420 | 50,420 |
Answer
The distributable profit is RM31,420. Aiman's share is RM18,852 and Balqis's is RM12,568. Both sides of the account total RM50,420.
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Example 2: Correcting a Faulty Appropriation Account
Question
Solution plan
Correct the three errors: (1) reinstate Zaki's salary RM9,000 on the debit side; (2) place interest on drawings (total RM1,000) on the credit side because it increases profit, instead of deducting it; (3) share the residue in the 2:1 ratio. Distributable residue = 39,000 - 6,000 - 9,000 = 24,000; Halim 16,000 and Zaki 8,000.
| Item | Wrong treatment | Correct treatment |
|---|---|---|
| Zaki's salary | Omitted | Debit RM9,000 |
| Interest on drawings | Deducted (debit) | Credit RM1,000 |
| Share of profit | Equally | Ratio 2:1 |
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Interest on capital: Halim | 4,000 | Net profit | 38,000 |
| Interest on capital: Zaki | 2,000 | Interest on drawings: Halim | 600 |
| Salary: Zaki | 9,000 | Interest on drawings: Zaki | 400 |
| Share of profit: Halim | 16,000 | ||
| Share of profit: Zaki | 8,000 | ||
| 39,000 | 39,000 |
Answer
After correction, the distributable profit is RM24,000; Halim RM16,000 and Zaki RM8,000. Both sides total RM39,000. The clerk's original account had misstated both partners' shares because of the three errors.
Where marks are usually lost
Example 3: Interest on a Partner's Loan (Section 26)
Question
Solution plan
Because the Agreement is silent on the loan rate, Section 26 of the Partnership Act 1961 applies at 8% per annum. Loan interest = 20,000 x 8% x 9/12 (1 Apr–31 Dec) = 1,200. This is a business expense, deducted from net profit first: 45,000 - 1,200 = 43,800, which then enters the Appropriation Account. Loan interest is credited in Nadia's Current Account, not in the Appropriation Account. Residue 43,800 - 5,000 (interest on capital) - 10,000 (salary) = 28,800 shared equally, 14,400 each.
| Particulars | RM |
|---|---|
| Net profit before loan interest | 45,000 |
| Less: Interest on Nadia's loan (20,000 x 8% x 9/12) | 1,200 |
| Net profit entering Appropriation Account | 43,800 |
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Interest on capital: Nadia | 3,000 | Net profit (after loan interest) | 43,800 |
| Interest on capital: Farah | 2,000 | ||
| Salary: Farah | 10,000 | ||
| Share of profit: Nadia | 14,400 | ||
| Share of profit: Farah | 14,400 | ||
| 43,800 | 43,800 |
| Particulars (Debit) | Nadia | Farah | Particulars (Credit) | Nadia | Farah |
|---|---|---|---|---|---|
| Drawings | 6,000 | 5,000 | Interest on capital | 3,000 | 2,000 |
| Balance c/d | 12,600 | 21,400 | Salary | 10,000 | |
| Interest on loan | 1,200 | ||||
| Share of profit | 14,400 | 14,400 | |||
| 18,600 | 26,400 | 18,600 | 26,400 |
Answer
Nadia's loan interest of RM1,200 is treated as an expense and recorded on the credit side of her Current Account. The distributable profit is RM28,800; RM14,400 each. Current Account balances: Nadia RM12,600 credit and Farah RM21,400 credit.
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Example 4: Owner's Equity: Fixed Capital and Current Accounts
Question
Solution plan
Opening capital ratio 90,000:60,000 = 3:2. Interest on capital: Zainal 5,400; Rosli 3,600. Interest on drawings: Zainal 600; Rosli 450 (total 1,050 added to profit). Residue = 55,000 + 1,050 - 9,000 - 8,000 = 39,050; shared 3:2, i.e. Zainal 23,430 and Rosli 15,620. The Current Accounts collect interest on capital, salary and share of profit (credit) less drawings and interest on drawings (debit). Owner's Equity = fixed capital RM150,000 + total current balances RM34,000.
| Particulars | RM | RM |
|---|---|---|
| Net profit | 55,000 | |
| Add: Interest on drawings (Zainal) | 600 | |
| Add: Interest on drawings (Rosli) | 450 | |
| 56,050 | ||
| Less: Interest on capital (Zainal) | 5,400 | |
| Less: Interest on capital (Rosli) | 3,600 | |
| Less: Salary (Zainal) | 8,000 | |
| 17,000 | ||
| Distributable profit | 39,050 | |
| Share of profit: Zainal (3/5) | 23,430 | |
| Share of profit: Rosli (2/5) | 15,620 | |
| 39,050 |
| Particulars (Debit) | Zainal | Rosli | Particulars (Credit) | Zainal | Rosli |
|---|---|---|---|---|---|
| Drawings | 12,000 | 9,000 | Interest on capital | 5,400 | 3,600 |
| Interest on drawings | 600 | 450 | Salary | 8,000 | |
| Balance c/d | 24,230 | 9,770 | Share of profit | 23,430 | 15,620 |
| 36,830 | 19,220 | 36,830 | 19,220 |
| Particulars | RM | RM |
|---|---|---|
| Fixed Capital | ||
| Zainal | 90,000 | |
| Rosli | 60,000 | |
| 150,000 | ||
| Current Accounts | ||
| Zainal | 24,230 | |
| Rosli | 9,770 | |
| 34,000 | ||
| Total Owner's Equity | 184,000 |
Answer
Distributable profit RM39,050; Zainal RM23,430 and Rosli RM15,620. Current Account balances: Zainal RM24,230 credit and Rosli RM9,770 credit. Total Owner's Equity is RM184,000 (fixed capital RM150,000 + current accounts RM34,000).
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Example 5: Interpreting a Debit Balance in the Current Account
Question
Solution plan
Interest on capital 4%: RM2,000 each. Residual profit = 24,000 - 4,000 = 20,000; RM10,000 each. Hakim starts with a debit balance of RM1,500 (he already owes the firm) and draws RM28,000, far above his entitlement (RM2,000 + RM10,000 = RM12,000). Hakim's closing balance = 29,500 - 12,000 = RM17,500 debit; Suraya remains RM4,000 credit. Interpretation: a debit balance means Hakim owes RM17,500 to the partnership and it reduces total equity.
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Interest on capital: Suraya | 2,000 | Net profit | 24,000 |
| Interest on capital: Hakim | 2,000 | ||
| Share of profit: Suraya | 10,000 | ||
| Share of profit: Hakim | 10,000 | ||
| 24,000 | 24,000 |
| Particulars (Debit) | Suraya | Hakim | Particulars (Credit) | Suraya | Hakim |
|---|---|---|---|---|---|
| Balance b/d | 1,500 | Balance b/d | 2,000 | ||
| Drawings | 10,000 | 28,000 | Interest on capital | 2,000 | 2,000 |
| Balance c/d | 4,000 | Share of profit | 10,000 | 10,000 | |
| Balance c/d | 17,500 | ||||
| 14,000 | 29,500 | 14,000 | 29,500 |
Answer
Closing Current Account balances: Suraya RM4,000 credit and Hakim RM17,500 debit. Hakim's debit balance shows he has drawn more than his interest on capital and share of profit, meaning Hakim owes RM17,500 to the partnership and total owners' equity is reduced by that amount.
Where marks are usually lost
Example 6: Dissolution with a Debit Capital Balance
Question
Solution plan
Transfer assets (other than bank) to the debit of the Realisation Account at book value and creditors to the credit. Sale proceeds and collections go on the credit side; dissolution expenses and payment to creditors go on the debit side. Loss on realisation = 115,000 - 81,000 = 34,000; shared 1:1, RM17,000 each, transferred to the debit of the capital accounts. Osman: 70,000 - 17,000 = credit balance 53,000 paid in cash. Latif: 12,000 - 17,000 = debit balance 5,000; Latif brings in cash RM5,000. The Bank Account balances all receipts and payments.
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Premises | 60,000 | Creditors | 18,000 |
| Inventory | 20,000 | Bank (sale of premises) | 45,000 |
| Debtors | 15,000 | Bank (sale of inventory) | 10,000 |
| Bank (pay creditors) | 18,000 | Bank (debtors collected) | 8,000 |
| Bank (dissolution expenses) | 2,000 | Loss on realisation: Osman | 17,000 |
| Loss on realisation: Latif | 17,000 | ||
| 115,000 | 115,000 |
| Particulars (Debit) | Osman | Latif | Particulars (Credit) | Osman | Latif |
|---|---|---|---|---|---|
| Realisation (loss) | 17,000 | 17,000 | Balance b/d | 70,000 | 12,000 |
| Bank (final payment) | 53,000 | Bank (cash brought in) | 5,000 | ||
| 70,000 | 17,000 | 70,000 | 17,000 |
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Balance b/d | 5,000 | Realisation (pay creditors) | 18,000 |
| Realisation (sale of premises) | 45,000 | Realisation (dissolution expenses) | 2,000 |
| Realisation (sale of inventory) | 10,000 | Capital: Osman | 53,000 |
| Realisation (debtors collected) | 8,000 | ||
| Capital: Latif (cash in) | 5,000 | ||
| 73,000 | 73,000 |
Answer
The loss on realisation is RM34,000, shared equally at RM17,000 each. Latif ends with a debit capital balance of RM5,000 and brings in cash RM5,000 to settle it. Osman receives a final payment of RM53,000. The Bank Account balances at RM73,000. Had Latif been unable to bring in cash, the deficiency would be borne by Osman (the solvent partner) under the relevant rules.
Where marks are usually lost
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