(a) Briefly explain to Mendel the importance of preparing a Partnership Agreement when the business is formed with Jabez and Jerome. In your answer state three factors that should be included in the Partnership Agreement.
Mendel should prepare a Partnership Agreement with Jabez and Jerome to establish the rights, rules and responsibilities of each partner.
Three factors that should be included in the agreement are:
How much capital each partner is to contribute
How the profits and losses are to be shared.
If any salaries are to be paid to the partners.
Hours of work, holidays.
Interest on Contributed Capital and Current Capital


(a) Explain how the amount received as a discount in Nahanaha Enterprises Income Statement meets the following definition of income.
“Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.”
The amount of discount is a decrease in liabilities (accounts payable) without a corresponding increase to another liability or decrease to an asset.
The increase in equity has not been contributed by the owners.
There is an increase in economic benefits as the money does not have to be paid to the accounts payable.


Explain fully what the percentage change in net sales for 2010 tells Charles about
his business.
The 10.51% increase in net sales means that the business sales/business are/is growing/improving.
Possible also that sales volume is steady but increase to revenue came from price increases.
Inventory turnover decreased. Perhaps the firm is getting charged more for stock and passing that onto customers. (Unlikely but possible).
The increased prices – Mark up increased from 120.26% to 122.90%
have not harmed sales.
The increase in net sales percentage is a favourable trend as it is helping to increase profit.


(iii) Carefully examine the worksheet analysing the trading results of Bathroom
Ware Enterprises on page 11. Explain ONE unsatisfactory trend in the
results from 2009 to 2010.
One unsatisfactory trend is the decrease in the rate of Inventory Turnover. ½ mark
This means that in 2010 it takes 67 days to sell the inventory whereas in 2009 it took only 58 days. ½ mark


(b) Goodwill is included in the assets of Poti Tara. Briefly explain why Goodwill is
an asset of the new partnership.
It is likely there will be future economic benefits flowing to the entity because Arataki’s Maori hangi business is already profitable and so must have a client base.
When the partnership is formed the goodwill is measured as the excess of the agreed value above the fair value of the net assets. The agreement of the two partners is the past event that created the asset.
Before the partnership was formed goodwill was a resource but not recorded because it was unmeasured. There are benefits from goodwill because hopefully the new business will continue to attract customers because of the reputation established by Arataki.


(c) What is the purpose of the Income Summary Account for a sole proprietor?
(3 marks)
The purpose of the Income Summary account is to create a temporary account into which all income and expense accounts can be closeda
at the end of an accounting period. a
The balance represents the profit or loss from the business operations which is closed to the capital account. a


(f) Why are Accounts Receivable adjusted for doubtful debts? (2 marks)
From past experience, it is likely that a certain amount of Accounts Receivable at the end of the reporting period may go bad in future. The full amount owing by customers may not be received as an inflow to the business in the next reporting period. Therefore an allowance for doubtful debts is created to provide a more faithful representation of the expected future economic benefits to the business.


(ii) Explain the meaning of the Inventory Turnover in 2010. 2 marks
An inventory turnover of 6.29 times per annum means that on average the inventory turned into cash or Accounts Receivable 6.29 times during the year.
The inventory was sold and replaced 6.29 times during the year.
It can also be converted to the number of days the business takes to sell its inventory. 6.29 x p.a. means that it took 59 days on average to sell its inventory in 2010. It could be noted that 59 days to sell the chocolate could result in a significant amount of stale chocolate.


(iii) Describe the trend in the Inventory turnover from 2010 to 2011. Fully explain
ONE possible reason for this trend. 2 marks
The trend in inventory turnover shows an increasea
from 2010 to 2011 which means the inventory turnover has improved.a 2/2 = 1 mark
A reason for the trend could be the significant decrease in the mark-up %. The mark-up% has halved from 2010 and would have attracted more customers which helped the chocolates to sell more quickly.
The business sold more units but that did not offset the decrease in revenue from marking down the price.
One reason clearly explained = 1 mark


Goodwill has arisen because we bought a business as a going concern and paid well above the fair market value of the net assets.
Is there an asset?
Future economic benefits or service potential
The goodwill will benefit the new business in terms of future profits to be earned from existing customers and reputation gained by the previous business.
Present control?
Yes. The business is owned by the new owners and so they maintain the reputation and existing customers if they have the necessary skills.
Past transactions or event?
The goodwill arose when the purchase transaction for the business was completed.
The goodwill should be recognised as an asset because it has a cost that can be reliably measured and it is probably that future economic benefits will occur. Over time the asset will be amortised (treated as expense).

(v) Recommend TWO strategies that Charles can use to correct the unsatisfactory
trend in the next reporting period.
A decrease in mark-up to eliminate slow moving lines.
Investigate purchasing policy.
Conduct an advertising campaign.
Provide incentives for sales staff.

Materiality: an iteam should be shown separately if its amount or nature is significant enough to change users' decisions.
Stright line: depreciation is calculated as a fixed percentage of cost each year
Goodwill: the excess of the price paid for a business above the fair value of total net assets.
Historical Cost: assets are recorded at their price at the time of acquisition. this is their original purchase price.
Depreciation: the systematic allocation of the cost of an asset less its residual value over its useful life.
Assets: a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Relevence: information which can be used to evaluate the past or assist in predicting future events. information which is helpful in making a decision must be presented on time.
Reducing Balance: depreciation is calucated as a percentage of the carrying amount each year.
Expense: decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Accounting: the process of identifying, measuring, recording and communicating financial information in order to permit informed decisions to be made by the users of the information.
Liability: a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Income: incerases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Faithful representation: information which a reader sees as matching the underlying transaction or event

Accrual basis :states that the effects of transactions and other events are recoqinized when they occur and are reported in the financial statements of the periods to which they relate.
Monetary Measurement Concept：all transactions, assets , liabilities, income, expenses and equity are recorded in a common dollar unit such as the $NZ