Marvin and Chiquita (see previous case studies) have been working very successfully
together, so on 1 July 2013, the start of Marvin’s third year in business, they decided
to form a ‘conventional’ partnership (i.e. not an LLP), to be called Machiq Partners,
sharing profits or losses in the ratio Marvin 3/5 and Chiquita 2/5. All of Marvin’s assets
and liabilities are transferred to the partnership at their depreciated value. This totals
£17,570, which is transferred to Marvin’s capital account. Chiquita pays in £10,000 as
her capital. No payment was required for any goodwill built up by Marvin in the previous
two years.
They agree that no interest should be charged on their drawings or credited on their
capital balances. No salaries are to be paid to either partner. During a successful year
together the partnership earned an operating profit of £58,800. Marvin had drawings of
£32,850 and Chiquita drew £18,520.
Required
(a) Show the relevant extracts from the partnership income statement for the year
ended 30 June 2014 (appropriation section) and its statement of financial position at
that date.
On 30 June 2014, the partners received the following letter from Esmeralda, Marvin’s
former assistant:
Dear Marvin
My seven brothers and sisters and I have consulted legal advice and are going to sue
you for £10 million as compensation for wrongful dismissal when you sacked us two
years ago. We would have written sooner but it has taken us this long to recover from
the shock of losing our jobs.
Hope you are keeping well.
Esmeralda
Marvin thinks (incorrectly) that the only protection from this claim is to immediately
form a limited company, so Machiq Partners became Machiq Limited with effect from
1 July 2014. The company took over all the assets and liabilities of Machiq Partners at
their book values, and had a share capital of 14,000 ordinary shares of £1 each. The
shares, which were issued at a premium, were allocated to Marvin and Chiquita in
the same proportions as their closing capital balances in the partnership. During the
year ended 30 June 2015, Machiq Limited made an operating profit before taxation of
£92,000. Taxation was to be provided on this amount at 20%, and a dividend of £2.25
per share was paid. Nothing further was heard from Esmeralda or her family during the
year, although there were rumours that she had rejoined her former employer, Kaboosh
Limited.
Required
(b) Show Machiq Limited’s income statement (starting with the operating profit before
taxation) for the year ended 30 June 2015, and the ‘total equity’ section of the statement
of financial position as at that date.
