Chapter Review
12-7hProblems: Series B
Entries and balance sheet for partnership
OBJ. 2
On April 1, 20Y1, Whitney Lang and Eli Capri form a partnership. Lang agrees to invest $18,000 cash and merchandise inventory valued at $50,000. Capri invests certain business assets at valuations agreed upon, transfers business liabilities, and contributes sufficient cash to bring his total capital to $120,000. Details regarding the book values of the business assets and liabilities, and the agreed valuations, follow:
The partnership agreement includes the following provisions regarding the division of net income: interest of 10% on original investments, salary allowances of $36,000 (Lang) and $22,000 (Capri), and the remainder equally.
Instructions
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Journalize the entries to record the investments of Lang and Capri in the partnership accounts.
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Prepare a balance sheet as of April 1, 20Y1, the date of formation of the partnership of Lang and Capri.
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After adjustments at March 31, 20Y2, the end of the first full year of operations, the revenues were $598,000 and expenses were $480,000, for a net income of $118,000. The drawing accounts have debit balances of $40,000 (Lang) and $30,000 (Capri). Journalize the entries to close the revenues and expenses and the drawing accounts at March 31, 20Y2.
AnswerCheck Figure: Lang net income, $63,400
Dividing partnership income
OBJ. 2
Dylan Howell and Demond Nickles have decided to form a partnership. They have agreed that Howell is to invest $50,000 and that Nickles is to invest $75,000. Howell is to devote full time to the business, and Nickles is to devote one-half time. The following plans for the division of income are being considered:
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Equal division
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In the ratio of original investments
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In the ratio of time devoted to the business
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Interest of 10% on original investments and the remainder in the ratio of 3:2
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Interest of 10% on original investments, salary allowances of $38,000 to Howell and $19,000 to Nickles, and the remainder equally
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Plan (e), except that Howell is also to be allowed a bonus equal to 20% of the amount by which net income exceeds the total salary allowances
Instructions
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For each plan, determine the division of the net income under each of the following assumptions: (1) net income of $420,000 and (2) net income of $150,000. Present the data in tabular form, using the following columnar headings:
$420,000 $150,000 Plan Howell Nickles Howell Nickles Answerf. Howell net income, $254,550
Financial statements for partnerships
OBJ. 2, 5
The ledger of Camila Ramirez and Ping Xue, attorneys-at-law, contains the following accounts and balances after adjustments have been recorded on December 31, 20Y2:
The balance in Xue’s capital account includes an additional investment of $20,000 made on May 5, 20Y2.
Instructions
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Prepare an income statement for 20Y2, indicating the division of net income. The partnership agreement provides for salary allowances of $50,000 to Ramirez and $65,000 to Xue, allowances of 12% on each partner’s capital balance at the beginning of the fiscal year, and equal division of the remaining net income or net loss.
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Prepare a statement of partnership equity for 20Y2.
AnswerCheck Figure: Dec. 31 capital—Xue, $179,100
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Prepare a balance sheet as of the end of 20Y2.
Admitting new partner
OBJ. 3
Brian Caldwell and Adriana Estrada have operated a successful firm for many years, sharing net income and net losses equally. Kris Mays is to be admitted to the partnership on September 1 of the current year, in accordance with the following agreement:
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Assets and liabilities of the old partnership are to be valued at their book values as of August 31, except for the following:
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Accounts receivable amounting to $1,500 are to be written off, and the allowance for doubtful accounts is to be increased to 5% of the remaining accounts.
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Merchandise inventory is to be valued at $46,800.
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Equipment is to be valued at $64,500.
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Mays is to purchase $26,000 of the ownership interest of Estrada for $30,000 cash and to contribute $32,000 cash to the partnership for a total ownership equity of $58,000.
The post-closing trial balance of Caldwell and Estrada as of August 31 follows:
Instructions
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Journalize the entries as of August 31 to record the revaluations, using a temporary account entitled Asset Revaluations. Debits and credits to the asset revaluations account are losses and gains from revaluation, respectively. The balance in the accumulated depreciation account is to be eliminated. After journalizing the revaluations, close the balance of the asset revaluations account to the capital accounts of Brian Caldwell and Adriana Estrada.
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Journalize the additional entries to record Mays’ entrance to the partnership on September 1, 20Y9.
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Present a balance sheet for the new partnership as of September 1, 20Y9.
AnswerCheck Figure: Total assets, $173,900
Statement of partnership liquidation
OBJ. 4
After the accounts are closed on April 10, prior to liquidating the partnership, the capital accounts of Zach Fairchild, Austin Lowes, and Amber Howard are $42,000, $7,500, and $36,500, respectively. Cash and noncash assets total $23,500 and $84,500, respectively. Amounts owed to creditors total $22,000. The partners share income and losses in the ratio of 1:1:2. Between April 10 and April 30, the noncash assets are sold for $48,500, the partner with the capital deficiency pays the deficiency to the partnership, and the liabilities are paid.
Instructions
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Prepare a statement of partnership liquidation, indicating (a) the sale of assets and division of loss, (b) the payment of liabilities, (c) the receipt of the deficiency (from the appropriate partner), and (d) the distribution of cash.
AnswerCheck Figure: 1d. Fairchild, $33,000
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Assume that the partner with the capital deficiency declares bankruptcy and is unable to pay the deficiency. Journalize the entries to (a) allocate the partner’s deficiency and (b) distribute the remaining cash.
Statement of partnership liquidation
OBJ. 4
On August 3, the firm of Chapelle, Rock, and Pryor decided to liquidate its partnership. The partners have capital balances of $14,000, $102,000, and $86,000, respectively. The cash balance is $65,000, the book values of noncash assets total $167,000, and liabilities total $30,000. The partners share income and losses in the ratio of 1:2:2.
Instructions
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Prepare a statement of partnership liquidation, covering the period August 3–29, for each of the following independent assumptions:
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All of the noncash assets are sold for $217,000 in cash, the creditors are paid, and the remaining cash is distributed to the partners.
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All of the noncash assets are sold for $72,000 in cash, the creditors are paid, the partner with the debit capital balance pays the amount owed to the firm, and the remaining cash is distributed to the partners.
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Assume that the partner with the capital deficiency in part (b) declares bankruptcy and is unable to pay the deficiency. Journalize the entries to (a) allocate the partner’s deficiency and (b) distribute the remaining cash.