Student 1: Low Excellence Notes to the Statement of Financial Position Note 1 Accounts Receivable (1) Accounts Receivable 17 400 Less allowance for doubtful debts 1 740 15 660 Explain what goodwill represents for the new partnership. You are not required to discuss how goodwill is calculated. Goodwill not only represents the tangible net worth of assets of the new partnership, but considers Hardie’s Hardware’s market share, location, reputation and clientele base, meaning Goodwill represents the ability of Hardie’s Hardware to make future economic benefits as a going concern. Hardie’s Partnership Agreement states that ‘residual profits are to be shared in proportion to initial capital invested’. How would profits be distributed between partners if there was no Partnership agreement in place for Hardie’s Hardware. Explain your answer. You are not required to discuss how the distribution was calculated. If Hardie’s Hardware did not create their own Partnership Agreement, profits would be split evenly between Moana and Pippa, as governed by the Partnership Act of 1908. This is because, if partners choose not to draw up their own agreement, the law dictates that Hardie’s Hardware must operate under the clauses of the Partnership Act 1908, which states profits must be split evenly. With reference to the Partnership Agreement for Hardie’s Hardware:  Explain the purpose of each clause in the partnership agreement  Explain the benefits of the clause to the partnership Interest on Capital is earned at 6% on their closing balances The purpose of rewarding Pippa and Moana with interest on capital is to encourage them to invest more economic benefits into the business, as they know they will make a 6% return on their investment each year. This would benefit Hardie’s Hardware as the investment can be used for business expansion or improvements, which could eventually result in Hardie’s Hardware becoming more profitable which benefits both Moana and Pippa. (2) Interest on Current is charged or credited at 5%pa on the opening current balances A credit-balanced current account would be credited with interest at 5% pa to encourage Pippa and Moana to retain some profit in the business rather than investing it somewhere else outside the business (such as a bank deposit). By retaining cash in the business, Pippa and Moana can use the money to improve or expand Hardies Hardware. Debit-balanced current accounts are charged interest at 5% pa as a debit balance represents a loss to the partnership and the interest rate charged would therefore discourage Pippa and Moana from incurring a negative current account balance, potentially increasing the cash available for the partnership to improve and expand. Moana’s salary is $10,000 and Pippa’s is $12,000 Moana and Pippa included a salary clause as the Partnership Act 1908 dictates partners receive no salaries. To have a salary means Moana and Pippa will definitely receive an income from their work, and do not have to rely on splitting any profits made by Hardie’s Hardware (which is risky). The difference in salary could be a reflection of each partner’s role in the business – Pippa could be working more hours than Moana, for example, and partners will be satisfied they are earning a fair amount based on the amount of work that they do. Interest on Drawings is charged at 10% The purpose of charging interest on drawings at 10% is to discourage partners from taking cash out of the business for personal use. The high interest rate (compared with interest earned on capital and current accounts) will discourage Pippa and Moana from taking large amounts of drawings as they will not want to pay the 10% interest. By applying a 10% interest rate on drawings, and therefore reducing the amount of drawings, more cash is retained in Hardie’s Hardware to use for expansion and improvement. Moana received a bonus of 5% for sales over $300,000 The purpose of rewarding Moana with a bonus of 5% for sales over $300,000 is to provide Moana with an incentive to work hard and earn Hardie’s Hardware more sales. Both partners will benefit from increased sales figures, as profits will increase also, meaning both Pippa and Moana will receive more profit. Residual profits are shared in proportion of the initial capital invested by each partner The partnership agreement act 1908 states that all profits are to be shared equally between partners. Pippa and Moana have opted to alter this clause in their personalised Partnership agreement to show that they wish to distribute residual profits in the manner that they see most fit and fair – which is initial capital invested by each partner. (3)