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Vocabulary Review Here is a list of the words and terms for this chapter: account form balance sheet deficit liquidation mutual agency
partnership deficit profit-loss ratio realization unlimited liability
Fill in the blank with the correct word or term from the list.
1. The total process of going out of business is LIQUIDATION . 2. A/an PARTNERSHIP is an association of two or more competent persons who agree to do business as co-owners for profit. 3. The ability of each partner, acting as an agent of the business, to enter into and bind it to contracts within the apparent scope of the business is MUTUAL AGENCY 4. REALIZATION is the conversion of noncash assets to cash. 5. The method used by the partners to divide profits or losses in the PROFIT-LOSS RATIO . 6. A/an DEFICIT is an abnormal balance in a capital account. 7. The principle that each partner is personally liable for the debts of the business is called UNLIMITED LIABILITY. 8. ACCOUNT FORM BALANCE SHEET shows the three major categories—assets, liabilities, and owner’s equity—in a horizontal manner.
Match the words and terms on the left with the definitions on the right. h 9. Account form balance sheet a. the method used by the partners to divide profits or losses d 10. deficit b. each partner is personally liable for the debts of the business f 11. liquidation c. an association of two or more competent persons who agree to do business as co-owners for profit G 12. Mutual agency d. an abnormal balance in a capital account C 13. Partnership e. the conversion of noncash assets to cash A 14. Profit-loss ratio f. the total process of going out of business e 15. Realization g. the ability of each partner, acting as an agent of the business, to enter into and bind it to contracts within the apparent scope of the partnership b 16. Unlimited liability h. the format of a balance sheet that shows the assets, liabilities, and owners’ equity in a horizontal manner
EXERCISES EXERCISE 14.1 Morton and Long plan to enter into a law partnership, investing $30,000 and $20,000, respectively. They have agreed on everything but how to divide the profits. Calculate each partner’s share of the profit under each of the following independent assumptions. a. If the first year’s net income is $50,000 and they cannot agree, how should the profits be divided? GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Income Summary Morton, Capital Long, Capital To Close Income Summary to Capital
Page DEBIT
CREDIT
5 0 0 0 0 00 2 5 0 0 0 00 2 5 0 0 0 00
-Since Morton and Long cannot agree how the profits should be divided then it should be divided equally. As the law states that if there’s no contract, profits must divide equally. So Morton and Long will receive 25,000 each.
b. If the partners agree to share net income according to their investment ratio, how should the $50,000 be divided? Profits to be Divided
Ratio Morton
30,000 50,000
20,000 50,000 Total to be allocated Long
=
3 5
×
=
2 5
×
Total Allocated
$50,000
=
$30,000
$50,000
=
$20,000 $50,000
-In dividing the net income based on their investment ratio, the denominator is the total amount invested of the partners which is $50,000 and the numerator is the individual investment of each partners. And when the fractions are already determined, these will be multiplied to the net income which is $50,000. So Morton will receive $30,000 net income while Long will have $20,000.
c. If the owners agree to share net income by granting 10 percent interest on their original investments, giving salary allowances of $10,000 each, and dividing the remainder equally, how should the $50,000 be divided? Share to Morton
Share to Long
Total
Total Amount to Be Divided Allocated as Interest: Morton (10% × $30,000) Long (10%× $20,000) Total Interest Balance Salary Allowances Balance Remainder divided to 2
$50,000
10,000
10,000
$12,500
$12,500
-5,000 $45,000 -20,000 25,000 25,000
Totals
$25,500
$24,500
0
$ 3,000 $ 2.000
-After multiplying the interest of 10% to their individual investments, the salary allowance of $10,000 will be added. And since there’s a remainder amounting to $25,000, this will be divided equally, which is $12,500 each. As a result, Morton will receive $25,500 and Long will receive $24,500.
EXERCISE 14.2 Assume Morton and Long from Exercise 14.1 use method c to divide profits and net income is $20,000. How should the income be divided? Share to Morton
Share to Long
Total Amount to Be Divided Allocated as Interest: Morton (10% × $30,000) Long (10%× $20,000) Total Interest Balance Salary Allowances Balance Remainder divided to 2
10,000
10,000
$(2,500)
$(2,500)
Totals
$10,500
$9,500
Total $20,000
$ 3,000 $ 2.000 -5,000 $15,000 -20,000 $(5,000) 5,000 0
-The sum of their total interest and total salaries is $25,000 since the income is only $20,000 this will result to a negative deficit amount which is $5,000; and this will be divided equally to the both of them which are 2,500 each. Moreover, this deficit will be subtracted in the calculation rather than added.
EXERCISE 14.3 After a number of years, Long, from Exercise 14.1, decided to go with a large law firm and wishes to sell his interest to Brown. Long’s equity at this time is $35,000. Morton agrees to take Brown as a partner, and Long sells his interest to Brown for $40,000. Prepare the general journal entry on December 31, 20XX to record the sale of Long’s interest to Brown. GENERAL JOURNAL DATE
PAGE
POST REF.
DESCRIPTION
20XX Dec. 31 Long, Capital Brown, Capital To Record the Transfer of Long’s Equity in the Partnership to Brown
DEBIT
CREDIT
3 5 0 0 0 00 3 5 0 0 0 00
-The payment of $40,000 by brown to long is a personal transaction between them. Thus, this will not affect the partnership records. So the $35,000 will only be recorded since this is the balance amount of capital of Long.
EXERCISE 14.4 Smith, White, and Saint are partners owning the Book Nook. The equities of the partners are $60,000, $50,000, and $40,000, respectively. They share profits and losses equally. White wishes to retire on May 31, 20XX. Prepare the general journal entries to record White’s retirement under each independent assumption.
a.
White is paid $50,000 in partnership cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX May. 31 White, Capital Cash To Record the Withdrawal of White who Receives Cash Equal to His Equity
POST REF.
PAGE DEBIT
CREDIT
5 0 0 0 0 00 5 0 0 0 0 00
-Since white is paid equal to his equity which is $50,000 his withdrawal will not jeopardize the firm’s cash position.
b.
White is paid $40,000 in partnership cash. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX May. 31 White, Capital Cash Smith, Capital Saint, Capital To Record the Withdrawal of White who Receives Cash Less Than His Equity
Page DEBIT
CREDIT
5 0 0 0 0 00 4 0 0 0 0 00 5 0 0 0 00 5 0 0 0 00
- In this situation, white is paid less than to his equity; as a result, the remaining $10,000 equity of white will be transferred equally to the capital accounts of the remaining partners. c.
White is paid $55,000 in partnership cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX May. 31 White, Capital Smith, Capital Saint, Capital Cash To Record the Withdrawal of White Who Receives Cash more than his equity
POST REF.
Page DEBIT
CREDIT
5 0 0 0 0 00 2 5 0 0 00 2 5 0 0 00 5 5 0 0 0 00 1
-Considering that white is paid more than to his equity, the remaining partners share the additional equity given to Abdullah as a loss to them. EXERCISE 14.5 Hall and Mason share profits and losses equally and have capital balances of $60,000 and $40,000, respectively. Taylor is to be admitted on January 2, 20XX, and is to receive a one-third interest in the firm. Prepare the general journal entries to record the addition of Taylor as a partner under the following unrelated circumstances.
a.
Taylor invests $50,000. Equities of the present partners Add investment of new partner Total equities of the new partnership Equity of Taylor (1/3 × $150,000 = $50,000)
$100,000 50,000 150,000 $ 50,000
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Jan. 2 Cash Taylor, Capital To Record the Addition of Taylor as Partner with a One-third Interest
Page DEBIT
CREDIT
5 0 0 0 0 00 5 0 0 0 0 00
-After Taylor’s investment of $50,000 and the total equity will be $150,000, one- third of $150,000 is 50,000, the equity of the new partner. b.
Taylor invests $62,000. Equities of the present partners Add investment of new partner Total equities of the new partnership Equity of Taylor (1/3 × $162,000 = $54,000)
$100,000 62,000 162,000 $ 54,000
GENERAL JOURNAL DATE
DESCRIPTION
20XX Jan. 2 Cash Taylor, Capital Hall, Capital Mason, Capital To Record the Addition of Knight as Partner with a One-Fifth Interest
POST REF.
Page DEBIT
CREDIT
6 2 0 0 0 00 5 4 0 0 0 00 4 0 0 0 00 4 0 0 0 00
-After Taylor’s investment of $62,000 and the total equity is $162,000, one- third of $162,000 is 54,000, which is his equity. There is $8,000 difference between the cash given by Taylor ($62,000) and his equity ($54,000). The bonus of $8,000 will be divided equally and the capital accounts of the present partners will each be increased by $4,000.
c.
Taylor invests $47,000. Equities of the present partners Add investment of new partner Total equities of the new partnership Equity of Taylor (1/3 × $147,000 = $49,000)
$100,000 47,000 147,000 $ 49,000
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Jan. 2
Cash Hall, Capital Mason, Capital Taylor, Capital To Record the Addition of Taylor as a Partner with a One-Third Interest
Page DEBIT
CREDIT
4 7 0 0 0 00 1 0 0 0 00 1 0 0 0 00 4 9 0 0 0 00
-There is $2,000 difference between the $47,000 cash invested by Taylor and the equity of $49,000 he received. The $2,000 is a bonus to Taylor. This bonus must be shared equally by the present partners as a reduction in their capital accounts which is $1,000 each.
EXERCISE 14.6 Martin, Pearson, and Henderson are partners sharing profits and losses in a 2:1:1 ratio. Their capital balances are $30,000, $25,000, and $20,000, respectively. Because of an economic turndown, they have decided to liquidate. After all assets are sold and the creditors paid, $43,000 cash remains in the business chequing account. a.
Determine the amount of their losses by using the accounting equation.
Assets= Liabilities + Owners’ Equity Owners’ Equity-Assets = Liabilities ($30,000+$25,000+$20,000) - $43,000 = Liabilities 75,000 - $43,000= $32,000 - We can determine the amount of the total loss of the partners by using the accounting equation which is Assets= Liabilities + Owners equity, since the capital balances of the partners are $30,000, $25,000 and $20,000 then the total capitals is $75, 000 and the asset remaining is $43,000, we will subtract the total capital balances $75,000 to the remaining asset which is $43,000. Hence, the loss will be $32,000.
b.
Using the profit-loss ratio, determine the amount of loss to be distributed to each
partner, and determine their new capital balances.
Martin Pearson Henderson
2/4 or 1/2 1/4 1/4
Loss to be Divided
Fraction Martin Pearson Henderson Total
½ ¼ ¼
× × ×
$32,000 $32,000 $32,000
Total Allocated = = =
$16,000 8,000 8,000 $32,000
-The sharing of losses will be divided based on the ratio which is 2:1:1, in determining the fraction from the ratio, add 2+1+1= 4. Then, 6 becomes the denominator of the fraction and the numerator will be the individual numbers in the ratio. Hence, Martin will have a fraction of 2/4 or 1/2 , and both Pearson and Henderson is 1/4. Their individual fractions will be multiplied to the loss amounting to $34,000. After these calculations, Martin will have a total loss of $16,000, while Pearson and Henderson have an individual loss of $8,000 each. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Martin, Capital Pearson, Capital Henderson, Capital Loss or gain on realization To record the closing of the loss to the partners’ capital accounts on a 2:1:1 ratio
c.
Page DEBIT
CREDIT
$ 1 6 0 0 0 00 8 0 0 0 00 8 0 0 0 00 $ 3 2 0 0 0 00
Determine the amount of cash each partner will receive in the final distribution.
Individual Loss
Capital balances Martin Pearson Henderson Total
$30,000 $25,000 $20,000
-
$16,000 $8,000 $8,000
Cash that will received = = =
$14,000 17,000 12,000 $43,000
-Since the individual losses of the partners are already determined, we can now calculate for the cash that they will be received by deducting their capital balances to their individual losses. Martin will receive cash amounting to $14,000, while Pearson will receive $17,000 and Henderson will receive $8,000. The total of cash that they will receive is $43,000.
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Martin, Capital Pearson, Capital Henderson, Capital Cash To record the closing of the partnership book
Page DEBIT
CREDIT
$ 1 4 0 0 0 00 1 7 0 0 0 00 1 2 0 0 0 00 $ 4 3 0 0 0 00
EXERCISE 14.7 Baker, Marshall, and Perryman share profits and losses equally and begin their business with investments of $20,000, $15,000, and $8,000, respectively. They have been unprofitable in their business venture and decide they must liquidate. After all the assets are sold and all debts paid, $16,000 cash remains in the business chequing account. a.
Determine the amount of their losses by using the accounting equation.
Assets= Liabilities + Owners’ Equity Owners’ Equity-Assets = Liabilities ($20,000+$15,000+$8,000) - $16,000 = Liabilities 43,000 - $16,000= 27,000 - We can determine the amount of the total loss of the partners by using the accounting equation which is Assets= Liabilities + Owners equity, since the capital balances of the partners are $20,000, $15,000 and $8,000 then the total capitals is $43, 000 and the asset remaining is $16,000, we will subtract the total capital balances $43,000 to the remaining asset which is $16,000. Hence, the loss will be $27,000.
b.
Using the profit-loss ratio, determine the amount of loss allocated to each
partner, and determine their new capital balances.
Loss to be Divided
Fraction Baker Marshall Perryman Total
1/3 1/3 1/3
× × ×
$27,000 $27,000 $27,000
Total Allocated = = =
$9,000 9,000 9,000 $27,000
-Baker, Marshall and Perryman share profits and losses equally. The loss amounting to $27,000 is divided by three which results to $9,000 equal losses to each partner.
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Baker, Capital Marshall, Capital Perryman, Capital Loss or gain on realization To record the closing of the loss to Partners’ Capital accounts
c.
Page DEBIT
CREDIT
$ 9 0 0 0 00 9 0 0 0 00 9 0 0 0 00 $ 2 7 0 0 0 00
Calculate the amount of cash, if any, each partner will receive under the different
assumptions below. (1)
Perryman has personal assets and pays the amount she owes to the partnership. a. Payment of cash by Perryman. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Perryman, Capital To Record the Cash Contribution of Perryman to Cover His Liability
PAGE DEBIT
CREDIT
1 0 0 0 00 1 0 0 0 00
-Since the capital balance of Perryman is $8,000 which is less than to the amount of his loss which is $9,000 he is liable to the partnership for his deficit amounting to $1,000.
b.
Distribute remaining cash. GENERAL JOURNAL
DATE
DESCRIPTION
POST REF.
20XX Dec. 31 Baker, Capital Marshall, Capital Cash To Record the Closing of the Partnership Books
Page DEBIT
CREDIT
8 5 0 0 00 8 5 0 0 00 1 7 0 0 0 00
- Since the remaining cash amounting to $16,000 is increased by $1,000 which is equals to a total of $17,000, this will be divided equally by Baker and Marshall.
(2)
Perryman has no personal assets and does not pay the amount she owes to the
partnership. a.
Payment of cash by Perryman. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Baker, Capital Marshall, Capital Cash To Record Perryman’s liability as a loss to The remaining partners
Page DEBIT
CREDIT
5 0 0 00 5 0 0 00 1 0 0 0 00
-Because Perryman has no personal and cannot pay the amount of $1,000 she owes to the partnership, because of unlimited liability Baker and Marshall must share this additional loss equally. b.
Distribute remaining cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX Dec. 31 Baker, Capital Marshall, Capital Perryman, Capital To Record the closing of the partnership books
POST REF.
Page DEBIT
CREDIT
8 0 0 0 00 8 0 0 0 00 1 6 0 0 0 00
PROBLEMS PROBLEM 14.1 Jones, Brady, and Bell formed a partnership making investments of $40,000, $60,000, and $80,000, respectively. They believe the net income from their business for the first year will be $81,000. They are considering several alternative methods for sharing this expected profit, which are: (1) divide the profits equally; (2) divide the profits according to their investment ratio; (3) divide the profits by giving an interest allowance of 10 per- cent on original investments, granting $10,000 salary allowance to each partner, and dividing any remainder equally. Round to the nearest dollar where required.
In st r uc t io n s
a. Prepare a schedule showing distribution of net income under methods 1, 2, and 3. It should have the following headings.
Share to Jones
Share to Brady
Share to Bell
Divided by 3
27,000
27,000
27,000
-81,000
Totals
$27,000
$27,000
$27,000
0
Plan
Calculations
EQUALLY
Total Amount to be divided
INVESTMENT RATIO
(
Brady
(
Bell
$81,000
18,000
-18,000
27,000
(
Totals
Paying interest on investment and salary allowance
$81,000
Total Amount to be divided Jones
Total Allocated
$18,000
$27,000
-27,000
36,000
-36,000
$36,000
0
Total Amount to be divided
$81,000
Allocated as interest: Jones (10% x $40,000)
$4,000
Brady (10% x $60,000)
$6,000
Bell (10% x $80,000)
$8,000
Total Interest
-18,000
Balance
$63,000
Salary Allowance
10,000
10,000
10,000
Balance
-30,000 33,000
Remainder divided by 3
11,000
11,000
11,000
Totals
$25,000
$27,000
$29,000
-33,000 0
b. Using method 3 above, prepare a partial income statement showing the allocation of net income to the partners (see income statement on page 384 for example). Jones. Brady and bell, Accountants Income Statement For Year Ended December 31, 20XX Net Income
$ 8 1 0 0 0 00
Allocation of Net Income to the Partners: Jones Interest at 10% (.1 × $40,000) Salary Allowance 1/3 of Remaining Net Income Total
$
4 0 0 0 00 1 0 0 0 0 00 1 1 0 0 0 00 $ 2 5 0 0 0 00
Brady Interest at 10% (.1 × $60,000) Salary Allowance 1/3 of Remaining Net Income Total
$
6 0 0 0 00 1 0 0 0 0 00 1 1 0 0 0 00 $ 2 7 0 0 0 00
Bell Interest at 10% (.1 × $80,000) Salary Allowance 1/3 of Remaining Net Income Total
$
8 0 0 0 00 1 0 0 0 0 00 1 1 0 0 0 00 $ 2 9 0 0 0 00
Net Income Allowed
$ 8 1 0 0 0 00
c. Journalize the closing of the Income Summary account on December 31, 20XX using the information from b above. GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Income Summary Jones, Capital Brady, Capital Bell, Capital To Record the Closing of the Income Summary to Capital
POST REF.
Page DEBIT
CREDIT
8 1 0 0 0 00 2 5 0 0 0 00 2 7 0 0 0 00 2 9 0 0 0 00
PROBLEM 14.2 Abner, Black, and Cobb share profits and losses equally and have capital balances of $60,000, $50,000, and $50,000, respectively. Cobb wishes to sell his interest and leave the business on July 31 of this year. Cobb is to sell his interest to Williams with the approval of Abner and Black. Instructions Prepare the general journal entries, without explanations, to record the following independent assumptions. a.
Cobb sells his interest to Williams for $50,000. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX July 31 Cobb, Capital Williams, Capital To Record the Transfer of Cobb’s Equity in the Partnership to Williams
b.
PAGE DEBIT
5 0 0 0 0 00 5 0 0 0 0 00
Cobb sells his interest to Williams for $40,000. GENERAL JOURNAL
DATE
CREDIT
DESCRIPTION
20XX July 31 Cobb, Capital Williams, Capital To Record the Transfer of Cobb’s Equity in the Partnership to Williams
POST REF.
PAGE DEBIT
CREDIT
5 0 0 0 0 00 5 0 0 0 0 00
-The $40,000 Williams paid Cobb was a personal transaction between the two and does not affect the partnership records. The $50,000 equity of Cobb is transferred to Williams.
c.
Cobb decides to stay in the partnership but sell one-half of his interest to
Williams for $30,000. (Hint: What is the value of half of Cobb’s capital account?) GENERAL JOURNAL DATE
DESCRIPTION
20XX July 31 Cobb, Capital Williams, Capital To Record the Transfer of Cobb’s Equity in the Partnership to Williams
POST REF.
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
-The $30,000 Williams paid Cobb was a personal transaction between the two and does not affect the partnership records. The one-half of his equity which is $25,000 is transferred to Williams’ capital account.
d.
If Williams is admitted as a new partner, must a new partnership agreement be
written? Why? -Partnership agreement because it spells out the rules and regulations of the business. Written agreement avoids internal conflicts in the partnership because this outlines the procedure on how to allocate the profits and losses, procedure for admitting new partners and procedure governing a partner who wishes to withdraw from the business. Moreover, this written partnership agreement will be your guide or direction on every decision –making processes.
PROBLEM 14.3 Coleman and Simmons are partners and own the ABC Gift Shop. They formed their partnership on January 2, 20XX, with investments of $50,000 and $25,000. Simmons invested an additional $5,000 on July 7. They share profits giving 10 percent interest allowance on beginning investments and dividing the remainder on a 2:1 ratio. Following is their trial balance before closing.
Coleman and Simmons Trial Balance December 31, 20XX Cash Accounts Receivable Merchandise Inventory Equipment Accumulated Amortization: Equipment Accounts Payable Coleman, Drawing Simmons, Drawing Coleman, Capital Simmons, Capital Sales Operating Expenses
$
1 9 5 6 0 2 0
0 0 0 0
0 0 0 0
0 0 0 0
00 00 00 00 $
1 0 0 0 0 00 1 0 0 0 0 00
1 0 0 0 0 00 1 0 0 0 0 00 5 0 0 0 0 00 3 0 0 0 0 00 1 0 0 0 0 0 00 7 6 0 0 0 00 $ 2 0 0 0 0 0 00 $ 2 0 0 0 0 0 00
a. Prepare the general journal entries, without explanations, to record the closing of all the nominal accounts (revenue and expense) using the Income Summary account. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Sales Income summary To Record the Closing of the Sales to income summary
Page DEBIT
1 0 0 0 0 0 00 1 0 0 0 0 0 00
GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Income summary Operating Expenses To Record the Closing of the expenses to income summary
CREDIT
POST REF.
Page DEBIT
CREDIT
7 6 0 0 0 00 7 6 0 0 0 00
b. Prepare a schedule showing the distribution of net income to the partners. It should have the following headings. Calculations Total amounts to be divided Allocated as Interest: Coleman (10% x $50,000) Simmons (10% x $25,000) Total Interest Balance Remainder divided by 2:1 ratio Totals
Share to Coleman
Share to Simmons
Total Allocated
$24,000 $5,000 $2,500 -7,500 $16,500 11,000
5,500
$16,000
$8,000
-16,500 0
c. Prepare the general journal entries to record the closing of the Income Summary account to the capital accounts, and close the drawing accounts to the capital accounts. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Income summary Coleman, Capital Simmons, Capital To Record the Closing of the income summary to capital account
Page DEBIT
2 4 0 0 0 00 1 6 0 0 0 00 8 0 0 0 00
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Coleman, Capital Coleman, Drawing To Record the Closing of the drawing to the capital account
Page DEBIT
DATE
DESCRIPTION
CREDIT
1 0 0 0 0 00 1 0 0 0 0 00
GENERAL JOURNAL
20XX Dec. 31 Simmons, Capital Coleman, Drawing To Record the Closing of the drawing to the capital account
CREDIT
POST REF.
Page DEBIT
CREDIT
1 0 0 0 0 00 1 0 0 0 0 00
d. Prepare the partnership income statement showing the allocation of net income. Coleman and Simmons, Accountants Income Statement For Year Ended December 31, 20XX Sales Operating Expenses Net Income
$ 1 0 0 0 0 0 00 7 6 0 0 0 00 $ 2 4 0 0 0 00
Allocation of Net Income to the Partners: Coleman Interest at 10% (.1 × $50,000) 2/3 of Remaining Net Income Total
$
5 0 0 0 00 1 1 0 0 0 00 $ 1 6 0 0 0 00
Simmons Interest at 10% (.1 × $25,000) 1/3 of Remaining Net Income Total
$
2 5 0 0 00 5 5 0 0 00 $
Net Income Allowed
$ 2 4 0 0 0 00
e. Prepare the statement of owners’ equity.
Capital, January 2 Add: Additional Invest. Add: Net Income Subtotals Deduct: Withdrawals Capital, December 31
8 0 0 0 00
Coleman 5 00 00 0 116 0 0 0 66 0 00 10 0 00 5 60 00
00 00 00 00 00 00
Simmons 2 5 0 0 0 00 5 0 0 0 00 8 0 0 0 00 3 8 0 0 0 00 1 0 0 0 0 00 2 8 0 0 0 00
Total 7 5 0 0 0 00 5 0 0 0 00 24 10 4 20 84
0 0 0 0
0 0 00 0 0 00 0 0 00 0 0 00
f. Prepare a balance sheet.
Coleman and Simmons, Accountants Balance Sheet December 31, 20XX Assets Cash Accounts Receivable Merchandise Inventory Equipment Less: Accumulated Amortization: Equipment Total Assets
$ 1 9 5 6 0 2 0 - 1 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
00 00 00 00 00 $ 9 4 0 0 0 00
Liabilities Accounts Payable
$ 1 0 0 0 0 00 Owners’ Equity
Coleman, Capital Simmons, Capital Total Liabilities and Owner’s Equity
$ 5 6 0 0 0 00 2 8 0 0 0 00 $ 9 4 0 0 0 00
PROBLEM 14.4 Arnold, Cole, and Yamaguchi are partners, owning Pizza Plus and sharing profits and losses in a 3:2:1 ratio. The balance sheet, presented in account form format for this business, is as follows.
Arnold wishes to withdraw from the firm. Cole and Yamaguchi agree. Prepare the general journal entries, without explanations, to record the June 30 withdrawal of Arnold under the following independent assumptions. a.
Arnold withdraws taking partnership cash of $60,000. GENERAL JOURNAL
DATE
DESCRIPTION
20XX June 31 Arnold, Capital Cash To Record the Withdrawal of Arnold who Receives Cash Equal to His Equity
POST REF.
PAGE DEBIT
CREDIT
6 0 0 0 0 00 6 0 0 0 0 00
b.
Arnold withdraws taking cash of $32,000 and truck #2 (debit Accumulated
Amortization and credit Truck). GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Arnold, Capital Accumulated Amortization Cash Truck #2 To Record the Withdrawal of Arnold who Receives Cash and truck #2 for his Equity
c.
PAGE DEBIT
6 0 0 0 0 00 7 0 0 0 00 3 2 0 0 0 00 3 5 0 0 0 00
Arnold withdraws taking cash of $51,000 GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX June 31 Arnold, Capital Cash Cole Yamaguchi To Record the Withdrawal of Arnold who Receives Cash less than to his Equity
d.
CREDIT
PAGE DEBIT
CREDIT
6 0 0 0 0 00 5 1 0 0 0 00 6 0 0 0 00 3 0 0 0 00
Arnold withdraws taking cash of $25,000 and a $44,000 note given by the
partnership. GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Arnold, Capital Cole, Capital Yamaguchi, Capital Cash Notes payable To Record the Withdrawal of Arnold who Receives Cash and note for his Equity
POST REF.
PAGE DEBIT
CREDIT
6 0 0 0 0 00 6 0 0 0 00 3 0 0 0 00 2 5 0 0 0 00 4 4 0 0 0 00
- The remaining partners share the additional equity given to Arnold as a loss to them.
e.
Arnold withdraws taking cash of $25,000, a $20,000 note, and truck #1. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX June 31 Arnold, Capital Accumulated Amortization Cash Notes Payable Truck #1 To Record the Withdrawal of Arnold who Receives Cash, note and truck #1 for his Equity
PAGE DEBIT
CREDIT
6 0 0 0 0 00 1 0 0 0 0 00 2 5 0 0 0 00 2 0 0 0 0 00 2 5 0 0 0 00
PROBLEM 14.5 Garcia, Keller, and Henley are partners who share profits and losses in a 3:1:2 ratios. Their capital account balances are $60,000, $25,000, and $35,000, respectively. Watts is to be admitted to the firm on March 31, 20XX with a one-fourth interest.
Instructions Prepare the general journal entries to record the following unrelated assumptions. Omit explanations.
Equity of the present owners: Garcia Keller Henley Total
a.
$ 60,000 25,000 35,000 $120,000
Watts is to be admitted by investing cash of $40,000. GENERAL JOURNAL
DATE
DESCRIPTION
POST REF.
PAGE DEBIT
CREDIT
20XX March 31 Cash
Watts, Capital To Record the Addition of Watts as a Partner with a One-Fourth Interest
4 0 0 0 0 00 4 0 0 0 0 00
b.
Watts is to be admitted by investing cash of $30,000. GENERAL JOURNAL
DATE
PAGE
POST REF.
DESCRIPTION
DEBIT
CREDIT
20XX March 31 Cash
3 7 5 0 0 00
Watts, Capital To Record the Addition of Watts as a Partner with a One-Fourth Interest
c.
3 7 5 0 0 00
Watts is to be admitted by investing cash of $50,000. GENERAL JOURNAL
DATE
DESCRIPTION
POST REF.
PAGE DEBIT
CREDIT
20XX March 31 Cash
4 2 5 0 0 00
Watts, Capital To Record the Addition of Watts as a Partner with a One-Fourth Interest
4 2 5 0 0 00
PROBLEM 14.6 Bentley, Colby, and Musharaf plan to liquidate their partnership. They share profits and losses on a 3:2:1 ratio. At the time of liquidation, the partnership balance sheet appears as follows: Bentley, Colby, and Musharaf Balance Sheet June 30, 20XX Liabilities and Owners’ Equity
Assets Cash Other Assets
Total Assets
$
2 3 0 0 0 00 1 1 5 0 0 0 00
Liabilities Accounts Payable
Owners’ Equity Bentley, Capital Colby, Capital Musharaf, Capital Total Liabilities and $ 1 3 8 0 0 0 00 Owner’s Equity
$
4 8 0 0 000 3 6 0 0 000 2 4 0 0 000
3 0 0 0 0 00
1 0 8 0 0 0 00 $ 1 3 8 0 0 0 00
Prepare the general journal entries, without explanations, to record (1) the sale of the other assets; (2) the distribution of the loss or gain on realization; (3) the payment to the creditors; and (4) the final distribution of cash. Each of the following are unrelated assumptions. a.
The other assets are sold for $115,000.
(1) the sale of the other assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Cash Other Assets To Record the Sale of Other Assets
PAGE DEBIT
CREDIT
1 1 5 0 0 0 00 1 1 5 0 0 0 00
(2) the distribution of the loss or gain on realization -No gain or loss earned because the original amount of the other asset is $115,000 which is equal to the amount sold. (3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
CREDIT
3 0 0 0 0 00 3 0 0 0 0 00
(4) the final distribution of cash GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Bently, Capital Colby, Capital Musharaf, Capital Cash To Record the Closing of the Partnership Books
POST REF.
Page DEBIT
CREDIT
4 8 0 0 0 00 3 6 0 0 0 00 2 4 0 0 0 00 1 0 8 0 0 0 00
b.
The other assets are sold for $79,000. (1) the sale of the other assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Cash Loss or Gain on Realization Other Assets To Record the Sale of Other Assets
PAGE DEBIT
CREDIT
7 9 0 0 0 00 3 6 0 0 0 00 1 1 5 0 0 0 00
(2) the distribution of the loss or gain on realization
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Bentley, Capital Colby, Capital Musharaf, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
Page DEBIT
CREDIT
1 8 0 0 0 00 1 2 0 0 0 00 6 0 0 0 00 3 6 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Accounts Payable Cash To Record Payment to the Creditors
POST REF.
PAGE DEBIT
CREDIT
3 0 0 0 0 00 3 0 0 0 0 00
(4) the final distribution of cash GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Bently, Capital Colby, Capital Musharaf, Capital Cash To Record the Closing of the Partnership Books
c.
Page DEBIT
CREDIT
3 0 0 0 0 00 2 4 0 0 0 00 1 8 0 0 0 00 7 2 0 0 0 00
The other assets are sold for $55,000.
(1) the sale of the other assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Cash Loss or Gain on Realization Other Assets To Record the Sale of Other Assets
PAGE DEBIT
CREDIT
5 5 0 0 0 00 6 0 0 0 0 00 1 1 5 0 0 0 00
(2) the distribution of the loss or gain on realization GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Bentley, Capital Colby, Capital Musharaf, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
POST REF.
Page DEBIT
CREDIT
3 0 0 0 0 00 2 0 0 0 0 00 1 0 0 0 0 00 6 0 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
CREDIT
3 0 0 0 0 00 3 0 0 0 0 00
(4) the final distribution of cash GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Bently, Capital Colby, Capital Musharaf, Capital Cash To Record the Closing of the Partnership Books
Page DEBIT
CREDIT
1 8 0 0 0 00 1 6 0 0 0 00 1 4 0 0 0 00 4 8 0 0 0 00
PROBLEM 14.7 Irby, Jalisco, and Whitehorse are partners in a video rental business, sharing profits and losses in a 2:1:1 ratio. Business has decreased due to the number of other rental stores in their area. They decide it would be best to liquidate. Their December 31, 20XX balance sheet information is as follows. Balance Sheet Information Balance Sheet Information Cash Video Inventory Accounts Payable Irby, Capital Jalisco, Capital Whitehorse, Capital
$15,000 75,000 25,000 25,000 20,000 20,000
Instructions
Prepare the general journal entries, without explanations, to show: (1) the sale of the noncash assets; (2) the distribution of the losses or gains; (3) the payment to the creditors; and (4) the final distribution of cash under each of the following independent assumptions.
a.
The video inventory is sold for $63,000.
(1) the sale of the noncash assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
PAGE DEBIT
CREDIT
6 3 0 0 0 00 1 2 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
Page DEBIT
CREDIT
6 0 0 0 00 3 0 0 0 00 3 0 0 0 00 1 2 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
POST REF.
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
(4) the final distribution of cash under each of the following independent assumptions. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
b.
Page DEBIT
CREDIT
1 9 0 0 0 00 1 7 0 0 0 00 1 7 0 0 0 00 5 3 0 0 0 00
The video inventory is sold for $25,000
(1) the sale of the noncash assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
PAGE DEBIT
CREDIT
2 5 0 0 0 00 5 0 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
POST REF.
Page DEBIT
CREDIT
2 5 0 0 0 00 1 2 5 0 0 00 1 2 5 0 0 00 5 0 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
(4) the final distribution of cash under each of the following independent assumptions. GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
POST REF.
Page DEBIT
CREDIT
0 00 7 5 0 0 00 7 5 0 0 00 1 5 0 0 0 00
c.
The video inventory is sold for $20,000 and the partner with the deficit can and
does pay from personal assets. (1) the sale of the noncash assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
PAGE DEBIT
CREDIT
2 0 0 0 0 00 5 5 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts in a 2:1:1 ratio
Page DEBIT
CREDIT
2 7 5 0 0 00 1 3 7 5 0 00 1 3 7 5 0 00 5 5 0 0 0 00
*Calculation of division of loss: Irby
2/4 × $55,000 = $27,500
Jalisco
1/4 × $55,000 = $13,750
Whitehorse
1/4 × $55,000 = $13,750
(3) the payment to the creditors
GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
POST REF.
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
4.
Distribute the remaining cash according to the equities of the partners.
a.
Payment of cash by Irby GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Irby, Capital To Record the Cash Contribution of Irby to Cover His Liability
b.
PAGE DEBIT
2 5 0 0 00 2 5 0 0 00
Distribute remaining cash. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
d.
CREDIT
Page DEBIT
CREDIT
6 2 5 0 00 6 2 5 0 00 1 2 5 0 0 00
The same assumption as c above, except the partner with the deficit cannot pay.
(1) the sale of the noncash assets GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
POST REF.
PAGE DEBIT
CREDIT
2 0 0 0 0 00 5 5 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains *Calculation of division of loss: Irby
2/4 × $55,000 = $27,500
Jalisco
1/4 × $55,000 = $13,750
Whitehorse
1/4 × $55,000 = $13,750 GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts in a 2:1:1 ratio
Page DEBIT
CREDIT
2 7 5 0 0 00 1 3 7 5 0 00 1 3 7 5 0 00 5 5 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
2 5 0 0 0 00 2 5 0 0 0 00
4.
Distribute the remaining cash according to the equities of the partners.
a.
Distribute the $2,500 loss. GENERAL JOURNAL
DATE
CREDIT
DESCRIPTION
20XX Dec. 31 Jalisco, Capital Whitehorse, Capital Irby, Capital To Record Irby’s Liability as a Loss to the Remaining Partners
POST REF.
Page DEBIT
CREDIT
1 2 5 0 00 1 2 5 0 00 2 5 0 0 00
*Calculation of division of loss: Jalisco
1/2 × $2,500 = $1,250
Whitehorse
1/2 × $2,500 = $1,250
b.
Distribute remaining cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX Dec. 31 Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
POST REF.
Page DEBIT
CREDIT
5 0 0 0 00 5 0 0 0 00 1 0 0 0 0 00
partnership deficit profit-loss ratio realization unlimited liability
Fill in the blank with the correct word or term from the list.
1. The total process of going out of business is LIQUIDATION . 2. A/an PARTNERSHIP is an association of two or more competent persons who agree to do business as co-owners for profit. 3. The ability of each partner, acting as an agent of the business, to enter into and bind it to contracts within the apparent scope of the business is MUTUAL AGENCY 4. REALIZATION is the conversion of noncash assets to cash. 5. The method used by the partners to divide profits or losses in the PROFIT-LOSS RATIO . 6. A/an DEFICIT is an abnormal balance in a capital account. 7. The principle that each partner is personally liable for the debts of the business is called UNLIMITED LIABILITY. 8. ACCOUNT FORM BALANCE SHEET shows the three major categories—assets, liabilities, and owner’s equity—in a horizontal manner.
Match the words and terms on the left with the definitions on the right. h 9. Account form balance sheet a. the method used by the partners to divide profits or losses d 10. deficit b. each partner is personally liable for the debts of the business f 11. liquidation c. an association of two or more competent persons who agree to do business as co-owners for profit G 12. Mutual agency d. an abnormal balance in a capital account C 13. Partnership e. the conversion of noncash assets to cash A 14. Profit-loss ratio f. the total process of going out of business e 15. Realization g. the ability of each partner, acting as an agent of the business, to enter into and bind it to contracts within the apparent scope of the partnership b 16. Unlimited liability h. the format of a balance sheet that shows the assets, liabilities, and owners’ equity in a horizontal manner
EXERCISES EXERCISE 14.1 Morton and Long plan to enter into a law partnership, investing $30,000 and $20,000, respectively. They have agreed on everything but how to divide the profits. Calculate each partner’s share of the profit under each of the following independent assumptions. a. If the first year’s net income is $50,000 and they cannot agree, how should the profits be divided? GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Income Summary Morton, Capital Long, Capital To Close Income Summary to Capital
Page DEBIT
CREDIT
5 0 0 0 0 00 2 5 0 0 0 00 2 5 0 0 0 00
-Since Morton and Long cannot agree how the profits should be divided then it should be divided equally. As the law states that if there’s no contract, profits must divide equally. So Morton and Long will receive 25,000 each.
b. If the partners agree to share net income according to their investment ratio, how should the $50,000 be divided? Profits to be Divided
Ratio Morton
30,000 50,000
20,000 50,000 Total to be allocated Long
=
3 5
×
=
2 5
×
Total Allocated
$50,000
=
$30,000
$50,000
=
$20,000 $50,000
-In dividing the net income based on their investment ratio, the denominator is the total amount invested of the partners which is $50,000 and the numerator is the individual investment of each partners. And when the fractions are already determined, these will be multiplied to the net income which is $50,000. So Morton will receive $30,000 net income while Long will have $20,000.
c. If the owners agree to share net income by granting 10 percent interest on their original investments, giving salary allowances of $10,000 each, and dividing the remainder equally, how should the $50,000 be divided? Share to Morton
Share to Long
Total
Total Amount to Be Divided Allocated as Interest: Morton (10% × $30,000) Long (10%× $20,000) Total Interest Balance Salary Allowances Balance Remainder divided to 2
$50,000
10,000
10,000
$12,500
$12,500
-5,000 $45,000 -20,000 25,000 25,000
Totals
$25,500
$24,500
0
$ 3,000 $ 2.000
-After multiplying the interest of 10% to their individual investments, the salary allowance of $10,000 will be added. And since there’s a remainder amounting to $25,000, this will be divided equally, which is $12,500 each. As a result, Morton will receive $25,500 and Long will receive $24,500.
EXERCISE 14.2 Assume Morton and Long from Exercise 14.1 use method c to divide profits and net income is $20,000. How should the income be divided? Share to Morton
Share to Long
Total Amount to Be Divided Allocated as Interest: Morton (10% × $30,000) Long (10%× $20,000) Total Interest Balance Salary Allowances Balance Remainder divided to 2
10,000
10,000
$(2,500)
$(2,500)
Totals
$10,500
$9,500
Total $20,000
$ 3,000 $ 2.000 -5,000 $15,000 -20,000 $(5,000) 5,000 0
-The sum of their total interest and total salaries is $25,000 since the income is only $20,000 this will result to a negative deficit amount which is $5,000; and this will be divided equally to the both of them which are 2,500 each. Moreover, this deficit will be subtracted in the calculation rather than added.
EXERCISE 14.3 After a number of years, Long, from Exercise 14.1, decided to go with a large law firm and wishes to sell his interest to Brown. Long’s equity at this time is $35,000. Morton agrees to take Brown as a partner, and Long sells his interest to Brown for $40,000. Prepare the general journal entry on December 31, 20XX to record the sale of Long’s interest to Brown. GENERAL JOURNAL DATE
PAGE
POST REF.
DESCRIPTION
20XX Dec. 31 Long, Capital Brown, Capital To Record the Transfer of Long’s Equity in the Partnership to Brown
DEBIT
CREDIT
3 5 0 0 0 00 3 5 0 0 0 00
-The payment of $40,000 by brown to long is a personal transaction between them. Thus, this will not affect the partnership records. So the $35,000 will only be recorded since this is the balance amount of capital of Long.
EXERCISE 14.4 Smith, White, and Saint are partners owning the Book Nook. The equities of the partners are $60,000, $50,000, and $40,000, respectively. They share profits and losses equally. White wishes to retire on May 31, 20XX. Prepare the general journal entries to record White’s retirement under each independent assumption.
a.
White is paid $50,000 in partnership cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX May. 31 White, Capital Cash To Record the Withdrawal of White who Receives Cash Equal to His Equity
POST REF.
PAGE DEBIT
CREDIT
5 0 0 0 0 00 5 0 0 0 0 00
-Since white is paid equal to his equity which is $50,000 his withdrawal will not jeopardize the firm’s cash position.
b.
White is paid $40,000 in partnership cash. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX May. 31 White, Capital Cash Smith, Capital Saint, Capital To Record the Withdrawal of White who Receives Cash Less Than His Equity
Page DEBIT
CREDIT
5 0 0 0 0 00 4 0 0 0 0 00 5 0 0 0 00 5 0 0 0 00
- In this situation, white is paid less than to his equity; as a result, the remaining $10,000 equity of white will be transferred equally to the capital accounts of the remaining partners. c.
White is paid $55,000 in partnership cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX May. 31 White, Capital Smith, Capital Saint, Capital Cash To Record the Withdrawal of White Who Receives Cash more than his equity
POST REF.
Page DEBIT
CREDIT
5 0 0 0 0 00 2 5 0 0 00 2 5 0 0 00 5 5 0 0 0 00 1
-Considering that white is paid more than to his equity, the remaining partners share the additional equity given to Abdullah as a loss to them. EXERCISE 14.5 Hall and Mason share profits and losses equally and have capital balances of $60,000 and $40,000, respectively. Taylor is to be admitted on January 2, 20XX, and is to receive a one-third interest in the firm. Prepare the general journal entries to record the addition of Taylor as a partner under the following unrelated circumstances.
a.
Taylor invests $50,000. Equities of the present partners Add investment of new partner Total equities of the new partnership Equity of Taylor (1/3 × $150,000 = $50,000)
$100,000 50,000 150,000 $ 50,000
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Jan. 2 Cash Taylor, Capital To Record the Addition of Taylor as Partner with a One-third Interest
Page DEBIT
CREDIT
5 0 0 0 0 00 5 0 0 0 0 00
-After Taylor’s investment of $50,000 and the total equity will be $150,000, one- third of $150,000 is 50,000, the equity of the new partner. b.
Taylor invests $62,000. Equities of the present partners Add investment of new partner Total equities of the new partnership Equity of Taylor (1/3 × $162,000 = $54,000)
$100,000 62,000 162,000 $ 54,000
GENERAL JOURNAL DATE
DESCRIPTION
20XX Jan. 2 Cash Taylor, Capital Hall, Capital Mason, Capital To Record the Addition of Knight as Partner with a One-Fifth Interest
POST REF.
Page DEBIT
CREDIT
6 2 0 0 0 00 5 4 0 0 0 00 4 0 0 0 00 4 0 0 0 00
-After Taylor’s investment of $62,000 and the total equity is $162,000, one- third of $162,000 is 54,000, which is his equity. There is $8,000 difference between the cash given by Taylor ($62,000) and his equity ($54,000). The bonus of $8,000 will be divided equally and the capital accounts of the present partners will each be increased by $4,000.
c.
Taylor invests $47,000. Equities of the present partners Add investment of new partner Total equities of the new partnership Equity of Taylor (1/3 × $147,000 = $49,000)
$100,000 47,000 147,000 $ 49,000
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Jan. 2
Cash Hall, Capital Mason, Capital Taylor, Capital To Record the Addition of Taylor as a Partner with a One-Third Interest
Page DEBIT
CREDIT
4 7 0 0 0 00 1 0 0 0 00 1 0 0 0 00 4 9 0 0 0 00
-There is $2,000 difference between the $47,000 cash invested by Taylor and the equity of $49,000 he received. The $2,000 is a bonus to Taylor. This bonus must be shared equally by the present partners as a reduction in their capital accounts which is $1,000 each.
EXERCISE 14.6 Martin, Pearson, and Henderson are partners sharing profits and losses in a 2:1:1 ratio. Their capital balances are $30,000, $25,000, and $20,000, respectively. Because of an economic turndown, they have decided to liquidate. After all assets are sold and the creditors paid, $43,000 cash remains in the business chequing account. a.
Determine the amount of their losses by using the accounting equation.
Assets= Liabilities + Owners’ Equity Owners’ Equity-Assets = Liabilities ($30,000+$25,000+$20,000) - $43,000 = Liabilities 75,000 - $43,000= $32,000 - We can determine the amount of the total loss of the partners by using the accounting equation which is Assets= Liabilities + Owners equity, since the capital balances of the partners are $30,000, $25,000 and $20,000 then the total capitals is $75, 000 and the asset remaining is $43,000, we will subtract the total capital balances $75,000 to the remaining asset which is $43,000. Hence, the loss will be $32,000.
b.
Using the profit-loss ratio, determine the amount of loss to be distributed to each
partner, and determine their new capital balances.
Martin Pearson Henderson
2/4 or 1/2 1/4 1/4
Loss to be Divided
Fraction Martin Pearson Henderson Total
½ ¼ ¼
× × ×
$32,000 $32,000 $32,000
Total Allocated = = =
$16,000 8,000 8,000 $32,000
-The sharing of losses will be divided based on the ratio which is 2:1:1, in determining the fraction from the ratio, add 2+1+1= 4. Then, 6 becomes the denominator of the fraction and the numerator will be the individual numbers in the ratio. Hence, Martin will have a fraction of 2/4 or 1/2 , and both Pearson and Henderson is 1/4. Their individual fractions will be multiplied to the loss amounting to $34,000. After these calculations, Martin will have a total loss of $16,000, while Pearson and Henderson have an individual loss of $8,000 each. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Martin, Capital Pearson, Capital Henderson, Capital Loss or gain on realization To record the closing of the loss to the partners’ capital accounts on a 2:1:1 ratio
c.
Page DEBIT
CREDIT
$ 1 6 0 0 0 00 8 0 0 0 00 8 0 0 0 00 $ 3 2 0 0 0 00
Determine the amount of cash each partner will receive in the final distribution.
Individual Loss
Capital balances Martin Pearson Henderson Total
$30,000 $25,000 $20,000
-
$16,000 $8,000 $8,000
Cash that will received = = =
$14,000 17,000 12,000 $43,000
-Since the individual losses of the partners are already determined, we can now calculate for the cash that they will be received by deducting their capital balances to their individual losses. Martin will receive cash amounting to $14,000, while Pearson will receive $17,000 and Henderson will receive $8,000. The total of cash that they will receive is $43,000.
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Martin, Capital Pearson, Capital Henderson, Capital Cash To record the closing of the partnership book
Page DEBIT
CREDIT
$ 1 4 0 0 0 00 1 7 0 0 0 00 1 2 0 0 0 00 $ 4 3 0 0 0 00
EXERCISE 14.7 Baker, Marshall, and Perryman share profits and losses equally and begin their business with investments of $20,000, $15,000, and $8,000, respectively. They have been unprofitable in their business venture and decide they must liquidate. After all the assets are sold and all debts paid, $16,000 cash remains in the business chequing account. a.
Determine the amount of their losses by using the accounting equation.
Assets= Liabilities + Owners’ Equity Owners’ Equity-Assets = Liabilities ($20,000+$15,000+$8,000) - $16,000 = Liabilities 43,000 - $16,000= 27,000 - We can determine the amount of the total loss of the partners by using the accounting equation which is Assets= Liabilities + Owners equity, since the capital balances of the partners are $20,000, $15,000 and $8,000 then the total capitals is $43, 000 and the asset remaining is $16,000, we will subtract the total capital balances $43,000 to the remaining asset which is $16,000. Hence, the loss will be $27,000.
b.
Using the profit-loss ratio, determine the amount of loss allocated to each
partner, and determine their new capital balances.
Loss to be Divided
Fraction Baker Marshall Perryman Total
1/3 1/3 1/3
× × ×
$27,000 $27,000 $27,000
Total Allocated = = =
$9,000 9,000 9,000 $27,000
-Baker, Marshall and Perryman share profits and losses equally. The loss amounting to $27,000 is divided by three which results to $9,000 equal losses to each partner.
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Baker, Capital Marshall, Capital Perryman, Capital Loss or gain on realization To record the closing of the loss to Partners’ Capital accounts
c.
Page DEBIT
CREDIT
$ 9 0 0 0 00 9 0 0 0 00 9 0 0 0 00 $ 2 7 0 0 0 00
Calculate the amount of cash, if any, each partner will receive under the different
assumptions below. (1)
Perryman has personal assets and pays the amount she owes to the partnership. a. Payment of cash by Perryman. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Perryman, Capital To Record the Cash Contribution of Perryman to Cover His Liability
PAGE DEBIT
CREDIT
1 0 0 0 00 1 0 0 0 00
-Since the capital balance of Perryman is $8,000 which is less than to the amount of his loss which is $9,000 he is liable to the partnership for his deficit amounting to $1,000.
b.
Distribute remaining cash. GENERAL JOURNAL
DATE
DESCRIPTION
POST REF.
20XX Dec. 31 Baker, Capital Marshall, Capital Cash To Record the Closing of the Partnership Books
Page DEBIT
CREDIT
8 5 0 0 00 8 5 0 0 00 1 7 0 0 0 00
- Since the remaining cash amounting to $16,000 is increased by $1,000 which is equals to a total of $17,000, this will be divided equally by Baker and Marshall.
(2)
Perryman has no personal assets and does not pay the amount she owes to the
partnership. a.
Payment of cash by Perryman. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Baker, Capital Marshall, Capital Cash To Record Perryman’s liability as a loss to The remaining partners
Page DEBIT
CREDIT
5 0 0 00 5 0 0 00 1 0 0 0 00
-Because Perryman has no personal and cannot pay the amount of $1,000 she owes to the partnership, because of unlimited liability Baker and Marshall must share this additional loss equally. b.
Distribute remaining cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX Dec. 31 Baker, Capital Marshall, Capital Perryman, Capital To Record the closing of the partnership books
POST REF.
Page DEBIT
CREDIT
8 0 0 0 00 8 0 0 0 00 1 6 0 0 0 00
PROBLEMS PROBLEM 14.1 Jones, Brady, and Bell formed a partnership making investments of $40,000, $60,000, and $80,000, respectively. They believe the net income from their business for the first year will be $81,000. They are considering several alternative methods for sharing this expected profit, which are: (1) divide the profits equally; (2) divide the profits according to their investment ratio; (3) divide the profits by giving an interest allowance of 10 per- cent on original investments, granting $10,000 salary allowance to each partner, and dividing any remainder equally. Round to the nearest dollar where required.
In st r uc t io n s
a. Prepare a schedule showing distribution of net income under methods 1, 2, and 3. It should have the following headings.
Share to Jones
Share to Brady
Share to Bell
Divided by 3
27,000
27,000
27,000
-81,000
Totals
$27,000
$27,000
$27,000
0
Plan
Calculations
EQUALLY
Total Amount to be divided
INVESTMENT RATIO
(
Brady
(
Bell
$81,000
18,000
-18,000
27,000
(
Totals
Paying interest on investment and salary allowance
$81,000
Total Amount to be divided Jones
Total Allocated
$18,000
$27,000
-27,000
36,000
-36,000
$36,000
0
Total Amount to be divided
$81,000
Allocated as interest: Jones (10% x $40,000)
$4,000
Brady (10% x $60,000)
$6,000
Bell (10% x $80,000)
$8,000
Total Interest
-18,000
Balance
$63,000
Salary Allowance
10,000
10,000
10,000
Balance
-30,000 33,000
Remainder divided by 3
11,000
11,000
11,000
Totals
$25,000
$27,000
$29,000
-33,000 0
b. Using method 3 above, prepare a partial income statement showing the allocation of net income to the partners (see income statement on page 384 for example). Jones. Brady and bell, Accountants Income Statement For Year Ended December 31, 20XX Net Income
$ 8 1 0 0 0 00
Allocation of Net Income to the Partners: Jones Interest at 10% (.1 × $40,000) Salary Allowance 1/3 of Remaining Net Income Total
$
4 0 0 0 00 1 0 0 0 0 00 1 1 0 0 0 00 $ 2 5 0 0 0 00
Brady Interest at 10% (.1 × $60,000) Salary Allowance 1/3 of Remaining Net Income Total
$
6 0 0 0 00 1 0 0 0 0 00 1 1 0 0 0 00 $ 2 7 0 0 0 00
Bell Interest at 10% (.1 × $80,000) Salary Allowance 1/3 of Remaining Net Income Total
$
8 0 0 0 00 1 0 0 0 0 00 1 1 0 0 0 00 $ 2 9 0 0 0 00
Net Income Allowed
$ 8 1 0 0 0 00
c. Journalize the closing of the Income Summary account on December 31, 20XX using the information from b above. GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Income Summary Jones, Capital Brady, Capital Bell, Capital To Record the Closing of the Income Summary to Capital
POST REF.
Page DEBIT
CREDIT
8 1 0 0 0 00 2 5 0 0 0 00 2 7 0 0 0 00 2 9 0 0 0 00
PROBLEM 14.2 Abner, Black, and Cobb share profits and losses equally and have capital balances of $60,000, $50,000, and $50,000, respectively. Cobb wishes to sell his interest and leave the business on July 31 of this year. Cobb is to sell his interest to Williams with the approval of Abner and Black. Instructions Prepare the general journal entries, without explanations, to record the following independent assumptions. a.
Cobb sells his interest to Williams for $50,000. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX July 31 Cobb, Capital Williams, Capital To Record the Transfer of Cobb’s Equity in the Partnership to Williams
b.
PAGE DEBIT
5 0 0 0 0 00 5 0 0 0 0 00
Cobb sells his interest to Williams for $40,000. GENERAL JOURNAL
DATE
CREDIT
DESCRIPTION
20XX July 31 Cobb, Capital Williams, Capital To Record the Transfer of Cobb’s Equity in the Partnership to Williams
POST REF.
PAGE DEBIT
CREDIT
5 0 0 0 0 00 5 0 0 0 0 00
-The $40,000 Williams paid Cobb was a personal transaction between the two and does not affect the partnership records. The $50,000 equity of Cobb is transferred to Williams.
c.
Cobb decides to stay in the partnership but sell one-half of his interest to
Williams for $30,000. (Hint: What is the value of half of Cobb’s capital account?) GENERAL JOURNAL DATE
DESCRIPTION
20XX July 31 Cobb, Capital Williams, Capital To Record the Transfer of Cobb’s Equity in the Partnership to Williams
POST REF.
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
-The $30,000 Williams paid Cobb was a personal transaction between the two and does not affect the partnership records. The one-half of his equity which is $25,000 is transferred to Williams’ capital account.
d.
If Williams is admitted as a new partner, must a new partnership agreement be
written? Why? -Partnership agreement because it spells out the rules and regulations of the business. Written agreement avoids internal conflicts in the partnership because this outlines the procedure on how to allocate the profits and losses, procedure for admitting new partners and procedure governing a partner who wishes to withdraw from the business. Moreover, this written partnership agreement will be your guide or direction on every decision –making processes.
PROBLEM 14.3 Coleman and Simmons are partners and own the ABC Gift Shop. They formed their partnership on January 2, 20XX, with investments of $50,000 and $25,000. Simmons invested an additional $5,000 on July 7. They share profits giving 10 percent interest allowance on beginning investments and dividing the remainder on a 2:1 ratio. Following is their trial balance before closing.
Coleman and Simmons Trial Balance December 31, 20XX Cash Accounts Receivable Merchandise Inventory Equipment Accumulated Amortization: Equipment Accounts Payable Coleman, Drawing Simmons, Drawing Coleman, Capital Simmons, Capital Sales Operating Expenses
$
1 9 5 6 0 2 0
0 0 0 0
0 0 0 0
0 0 0 0
00 00 00 00 $
1 0 0 0 0 00 1 0 0 0 0 00
1 0 0 0 0 00 1 0 0 0 0 00 5 0 0 0 0 00 3 0 0 0 0 00 1 0 0 0 0 0 00 7 6 0 0 0 00 $ 2 0 0 0 0 0 00 $ 2 0 0 0 0 0 00
a. Prepare the general journal entries, without explanations, to record the closing of all the nominal accounts (revenue and expense) using the Income Summary account. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Sales Income summary To Record the Closing of the Sales to income summary
Page DEBIT
1 0 0 0 0 0 00 1 0 0 0 0 0 00
GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Income summary Operating Expenses To Record the Closing of the expenses to income summary
CREDIT
POST REF.
Page DEBIT
CREDIT
7 6 0 0 0 00 7 6 0 0 0 00
b. Prepare a schedule showing the distribution of net income to the partners. It should have the following headings. Calculations Total amounts to be divided Allocated as Interest: Coleman (10% x $50,000) Simmons (10% x $25,000) Total Interest Balance Remainder divided by 2:1 ratio Totals
Share to Coleman
Share to Simmons
Total Allocated
$24,000 $5,000 $2,500 -7,500 $16,500 11,000
5,500
$16,000
$8,000
-16,500 0
c. Prepare the general journal entries to record the closing of the Income Summary account to the capital accounts, and close the drawing accounts to the capital accounts. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Income summary Coleman, Capital Simmons, Capital To Record the Closing of the income summary to capital account
Page DEBIT
2 4 0 0 0 00 1 6 0 0 0 00 8 0 0 0 00
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Coleman, Capital Coleman, Drawing To Record the Closing of the drawing to the capital account
Page DEBIT
DATE
DESCRIPTION
CREDIT
1 0 0 0 0 00 1 0 0 0 0 00
GENERAL JOURNAL
20XX Dec. 31 Simmons, Capital Coleman, Drawing To Record the Closing of the drawing to the capital account
CREDIT
POST REF.
Page DEBIT
CREDIT
1 0 0 0 0 00 1 0 0 0 0 00
d. Prepare the partnership income statement showing the allocation of net income. Coleman and Simmons, Accountants Income Statement For Year Ended December 31, 20XX Sales Operating Expenses Net Income
$ 1 0 0 0 0 0 00 7 6 0 0 0 00 $ 2 4 0 0 0 00
Allocation of Net Income to the Partners: Coleman Interest at 10% (.1 × $50,000) 2/3 of Remaining Net Income Total
$
5 0 0 0 00 1 1 0 0 0 00 $ 1 6 0 0 0 00
Simmons Interest at 10% (.1 × $25,000) 1/3 of Remaining Net Income Total
$
2 5 0 0 00 5 5 0 0 00 $
Net Income Allowed
$ 2 4 0 0 0 00
e. Prepare the statement of owners’ equity.
Capital, January 2 Add: Additional Invest. Add: Net Income Subtotals Deduct: Withdrawals Capital, December 31
8 0 0 0 00
Coleman 5 00 00 0 116 0 0 0 66 0 00 10 0 00 5 60 00
00 00 00 00 00 00
Simmons 2 5 0 0 0 00 5 0 0 0 00 8 0 0 0 00 3 8 0 0 0 00 1 0 0 0 0 00 2 8 0 0 0 00
Total 7 5 0 0 0 00 5 0 0 0 00 24 10 4 20 84
0 0 0 0
0 0 00 0 0 00 0 0 00 0 0 00
f. Prepare a balance sheet.
Coleman and Simmons, Accountants Balance Sheet December 31, 20XX Assets Cash Accounts Receivable Merchandise Inventory Equipment Less: Accumulated Amortization: Equipment Total Assets
$ 1 9 5 6 0 2 0 - 1 0
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
00 00 00 00 00 $ 9 4 0 0 0 00
Liabilities Accounts Payable
$ 1 0 0 0 0 00 Owners’ Equity
Coleman, Capital Simmons, Capital Total Liabilities and Owner’s Equity
$ 5 6 0 0 0 00 2 8 0 0 0 00 $ 9 4 0 0 0 00
PROBLEM 14.4 Arnold, Cole, and Yamaguchi are partners, owning Pizza Plus and sharing profits and losses in a 3:2:1 ratio. The balance sheet, presented in account form format for this business, is as follows.
Arnold wishes to withdraw from the firm. Cole and Yamaguchi agree. Prepare the general journal entries, without explanations, to record the June 30 withdrawal of Arnold under the following independent assumptions. a.
Arnold withdraws taking partnership cash of $60,000. GENERAL JOURNAL
DATE
DESCRIPTION
20XX June 31 Arnold, Capital Cash To Record the Withdrawal of Arnold who Receives Cash Equal to His Equity
POST REF.
PAGE DEBIT
CREDIT
6 0 0 0 0 00 6 0 0 0 0 00
b.
Arnold withdraws taking cash of $32,000 and truck #2 (debit Accumulated
Amortization and credit Truck). GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Arnold, Capital Accumulated Amortization Cash Truck #2 To Record the Withdrawal of Arnold who Receives Cash and truck #2 for his Equity
c.
PAGE DEBIT
6 0 0 0 0 00 7 0 0 0 00 3 2 0 0 0 00 3 5 0 0 0 00
Arnold withdraws taking cash of $51,000 GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX June 31 Arnold, Capital Cash Cole Yamaguchi To Record the Withdrawal of Arnold who Receives Cash less than to his Equity
d.
CREDIT
PAGE DEBIT
CREDIT
6 0 0 0 0 00 5 1 0 0 0 00 6 0 0 0 00 3 0 0 0 00
Arnold withdraws taking cash of $25,000 and a $44,000 note given by the
partnership. GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Arnold, Capital Cole, Capital Yamaguchi, Capital Cash Notes payable To Record the Withdrawal of Arnold who Receives Cash and note for his Equity
POST REF.
PAGE DEBIT
CREDIT
6 0 0 0 0 00 6 0 0 0 00 3 0 0 0 00 2 5 0 0 0 00 4 4 0 0 0 00
- The remaining partners share the additional equity given to Arnold as a loss to them.
e.
Arnold withdraws taking cash of $25,000, a $20,000 note, and truck #1. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX June 31 Arnold, Capital Accumulated Amortization Cash Notes Payable Truck #1 To Record the Withdrawal of Arnold who Receives Cash, note and truck #1 for his Equity
PAGE DEBIT
CREDIT
6 0 0 0 0 00 1 0 0 0 0 00 2 5 0 0 0 00 2 0 0 0 0 00 2 5 0 0 0 00
PROBLEM 14.5 Garcia, Keller, and Henley are partners who share profits and losses in a 3:1:2 ratios. Their capital account balances are $60,000, $25,000, and $35,000, respectively. Watts is to be admitted to the firm on March 31, 20XX with a one-fourth interest.
Instructions Prepare the general journal entries to record the following unrelated assumptions. Omit explanations.
Equity of the present owners: Garcia Keller Henley Total
a.
$ 60,000 25,000 35,000 $120,000
Watts is to be admitted by investing cash of $40,000. GENERAL JOURNAL
DATE
DESCRIPTION
POST REF.
PAGE DEBIT
CREDIT
20XX March 31 Cash
Watts, Capital To Record the Addition of Watts as a Partner with a One-Fourth Interest
4 0 0 0 0 00 4 0 0 0 0 00
b.
Watts is to be admitted by investing cash of $30,000. GENERAL JOURNAL
DATE
PAGE
POST REF.
DESCRIPTION
DEBIT
CREDIT
20XX March 31 Cash
3 7 5 0 0 00
Watts, Capital To Record the Addition of Watts as a Partner with a One-Fourth Interest
c.
3 7 5 0 0 00
Watts is to be admitted by investing cash of $50,000. GENERAL JOURNAL
DATE
DESCRIPTION
POST REF.
PAGE DEBIT
CREDIT
20XX March 31 Cash
4 2 5 0 0 00
Watts, Capital To Record the Addition of Watts as a Partner with a One-Fourth Interest
4 2 5 0 0 00
PROBLEM 14.6 Bentley, Colby, and Musharaf plan to liquidate their partnership. They share profits and losses on a 3:2:1 ratio. At the time of liquidation, the partnership balance sheet appears as follows: Bentley, Colby, and Musharaf Balance Sheet June 30, 20XX Liabilities and Owners’ Equity
Assets Cash Other Assets
Total Assets
$
2 3 0 0 0 00 1 1 5 0 0 0 00
Liabilities Accounts Payable
Owners’ Equity Bentley, Capital Colby, Capital Musharaf, Capital Total Liabilities and $ 1 3 8 0 0 0 00 Owner’s Equity
$
4 8 0 0 000 3 6 0 0 000 2 4 0 0 000
3 0 0 0 0 00
1 0 8 0 0 0 00 $ 1 3 8 0 0 0 00
Prepare the general journal entries, without explanations, to record (1) the sale of the other assets; (2) the distribution of the loss or gain on realization; (3) the payment to the creditors; and (4) the final distribution of cash. Each of the following are unrelated assumptions. a.
The other assets are sold for $115,000.
(1) the sale of the other assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Cash Other Assets To Record the Sale of Other Assets
PAGE DEBIT
CREDIT
1 1 5 0 0 0 00 1 1 5 0 0 0 00
(2) the distribution of the loss or gain on realization -No gain or loss earned because the original amount of the other asset is $115,000 which is equal to the amount sold. (3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
CREDIT
3 0 0 0 0 00 3 0 0 0 0 00
(4) the final distribution of cash GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Bently, Capital Colby, Capital Musharaf, Capital Cash To Record the Closing of the Partnership Books
POST REF.
Page DEBIT
CREDIT
4 8 0 0 0 00 3 6 0 0 0 00 2 4 0 0 0 00 1 0 8 0 0 0 00
b.
The other assets are sold for $79,000. (1) the sale of the other assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Cash Loss or Gain on Realization Other Assets To Record the Sale of Other Assets
PAGE DEBIT
CREDIT
7 9 0 0 0 00 3 6 0 0 0 00 1 1 5 0 0 0 00
(2) the distribution of the loss or gain on realization
GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Bentley, Capital Colby, Capital Musharaf, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
Page DEBIT
CREDIT
1 8 0 0 0 00 1 2 0 0 0 00 6 0 0 0 00 3 6 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Accounts Payable Cash To Record Payment to the Creditors
POST REF.
PAGE DEBIT
CREDIT
3 0 0 0 0 00 3 0 0 0 0 00
(4) the final distribution of cash GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Bently, Capital Colby, Capital Musharaf, Capital Cash To Record the Closing of the Partnership Books
c.
Page DEBIT
CREDIT
3 0 0 0 0 00 2 4 0 0 0 00 1 8 0 0 0 00 7 2 0 0 0 00
The other assets are sold for $55,000.
(1) the sale of the other assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Cash Loss or Gain on Realization Other Assets To Record the Sale of Other Assets
PAGE DEBIT
CREDIT
5 5 0 0 0 00 6 0 0 0 0 00 1 1 5 0 0 0 00
(2) the distribution of the loss or gain on realization GENERAL JOURNAL DATE
DESCRIPTION
20XX June 31 Bentley, Capital Colby, Capital Musharaf, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
POST REF.
Page DEBIT
CREDIT
3 0 0 0 0 00 2 0 0 0 0 00 1 0 0 0 0 00 6 0 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
CREDIT
3 0 0 0 0 00 3 0 0 0 0 00
(4) the final distribution of cash GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX June 31 Bently, Capital Colby, Capital Musharaf, Capital Cash To Record the Closing of the Partnership Books
Page DEBIT
CREDIT
1 8 0 0 0 00 1 6 0 0 0 00 1 4 0 0 0 00 4 8 0 0 0 00
PROBLEM 14.7 Irby, Jalisco, and Whitehorse are partners in a video rental business, sharing profits and losses in a 2:1:1 ratio. Business has decreased due to the number of other rental stores in their area. They decide it would be best to liquidate. Their December 31, 20XX balance sheet information is as follows. Balance Sheet Information Balance Sheet Information Cash Video Inventory Accounts Payable Irby, Capital Jalisco, Capital Whitehorse, Capital
$15,000 75,000 25,000 25,000 20,000 20,000
Instructions
Prepare the general journal entries, without explanations, to show: (1) the sale of the noncash assets; (2) the distribution of the losses or gains; (3) the payment to the creditors; and (4) the final distribution of cash under each of the following independent assumptions.
a.
The video inventory is sold for $63,000.
(1) the sale of the noncash assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
PAGE DEBIT
CREDIT
6 3 0 0 0 00 1 2 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
Page DEBIT
CREDIT
6 0 0 0 00 3 0 0 0 00 3 0 0 0 00 1 2 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
POST REF.
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
(4) the final distribution of cash under each of the following independent assumptions. GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
b.
Page DEBIT
CREDIT
1 9 0 0 0 00 1 7 0 0 0 00 1 7 0 0 0 00 5 3 0 0 0 00
The video inventory is sold for $25,000
(1) the sale of the noncash assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
PAGE DEBIT
CREDIT
2 5 0 0 0 00 5 0 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts
POST REF.
Page DEBIT
CREDIT
2 5 0 0 0 00 1 2 5 0 0 00 1 2 5 0 0 00 5 0 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
(4) the final distribution of cash under each of the following independent assumptions. GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
POST REF.
Page DEBIT
CREDIT
0 00 7 5 0 0 00 7 5 0 0 00 1 5 0 0 0 00
c.
The video inventory is sold for $20,000 and the partner with the deficit can and
does pay from personal assets. (1) the sale of the noncash assets GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
PAGE DEBIT
CREDIT
2 0 0 0 0 00 5 5 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts in a 2:1:1 ratio
Page DEBIT
CREDIT
2 7 5 0 0 00 1 3 7 5 0 00 1 3 7 5 0 00 5 5 0 0 0 00
*Calculation of division of loss: Irby
2/4 × $55,000 = $27,500
Jalisco
1/4 × $55,000 = $13,750
Whitehorse
1/4 × $55,000 = $13,750
(3) the payment to the creditors
GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
POST REF.
PAGE DEBIT
CREDIT
2 5 0 0 0 00 2 5 0 0 0 00
4.
Distribute the remaining cash according to the equities of the partners.
a.
Payment of cash by Irby GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Cash Irby, Capital To Record the Cash Contribution of Irby to Cover His Liability
b.
PAGE DEBIT
2 5 0 0 00 2 5 0 0 00
Distribute remaining cash. GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
d.
CREDIT
Page DEBIT
CREDIT
6 2 5 0 00 6 2 5 0 00 1 2 5 0 0 00
The same assumption as c above, except the partner with the deficit cannot pay.
(1) the sale of the noncash assets GENERAL JOURNAL DATE
DESCRIPTION
20XX Dec. 31 Cash Loss or Gain on Realization Video Inventory To Record the Sale of the video inventory
POST REF.
PAGE DEBIT
CREDIT
2 0 0 0 0 00 5 5 0 0 0 00 7 5 0 0 0 00
(2) the distribution of the losses or gains *Calculation of division of loss: Irby
2/4 × $55,000 = $27,500
Jalisco
1/4 × $55,000 = $13,750
Whitehorse
1/4 × $55,000 = $13,750 GENERAL JOURNAL
DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Irby, Capital Jalisco, Capital Whitehorse, Capital Loss or Gain on Realization To Record the Closing of the Loss to Partners’ Capital Accounts in a 2:1:1 ratio
Page DEBIT
CREDIT
2 7 5 0 0 00 1 3 7 5 0 00 1 3 7 5 0 00 5 5 0 0 0 00
(3) the payment to the creditors GENERAL JOURNAL DATE
POST REF.
DESCRIPTION
20XX Dec. 31 Accounts Payable Cash To Record Payment to the Creditors
PAGE DEBIT
2 5 0 0 0 00 2 5 0 0 0 00
4.
Distribute the remaining cash according to the equities of the partners.
a.
Distribute the $2,500 loss. GENERAL JOURNAL
DATE
CREDIT
DESCRIPTION
20XX Dec. 31 Jalisco, Capital Whitehorse, Capital Irby, Capital To Record Irby’s Liability as a Loss to the Remaining Partners
POST REF.
Page DEBIT
CREDIT
1 2 5 0 00 1 2 5 0 00 2 5 0 0 00
*Calculation of division of loss: Jalisco
1/2 × $2,500 = $1,250
Whitehorse
1/2 × $2,500 = $1,250
b.
Distribute remaining cash. GENERAL JOURNAL
DATE
DESCRIPTION
20XX Dec. 31 Jalisco, Capital Whitehorse, Capital Cash To Record the Closing of the Partnership Books
POST REF.
Page DEBIT
CREDIT
5 0 0 0 00 5 0 0 0 00 1 0 0 0 0 00
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