The CAB Partnership,although operating profitably, has had a cash flow problem. Unable to meet its current commitments, the firm borrowed $34,000 from a bank giving a long-term note. During a recent meeting, the partners decided to obtain additional cash by admitting a new partner to the firm. They feel that the firm is an attractive investment, but that proper management of their liquid assets will be required. Meyers agrees to invest cash in the firm if her chief accountant can review the accounting records of the partnership. The balance sheet for CAB Partnership as of December 31, 2008, is as follows: Assets Cash...............$ 8,000 Accounts Receivable........33,600 Inventory (at cost) ........35,750 Land..............27,000 Building (net of depreciation)....41,600 Equipment (net of depreciation) ...27,250 Total..............$173,200 Liabilities and Capital Accounts Payable...........$ 32,450 Other Current Liabilities........6,750 Long-Term Note (8% due 2008) ..34,000 Cox, Capital...........37,500 Andrews, Capital...........25,000 Bennet, Capital...........37,500 Total..............$173,200 The review of the accounts resulted in the accumulation of the following information: Approximately 5% of the accounts receivable are uncollectible. The old partnership had been using the direct write-off method of accounting for bad debts. Current replacement cost of the inventory is $41,250. The market value of the land based on a current appraisal is $65,000. The partners had been using an unreasonably long estimated life in establishing a depreciation policy for the building. On the basis of sound value (current replacement cost adjusted for use), the value of the building is $32,750. There are unrecorded accrued liabilities of $3,275. The partners agree to recognize the foregoing adjustments to the accounts. Cox, Andrews, and Bennet share profits 40:30:30. After the admission of Meyers, the new profit agreement of the uncertainty of the business, no goodwill is to be recognized before or after Meyers is admitted. Required: Prepare the necessary journal entries on the books of the old partnership to adjust the accounts. Record the admission of Meyers. is to be 30:20:30:20. Meyers is to receive a 25% capital interest in the partnership after she invests sufficient cash to increase the total capital interest to $150,000. Because Prepare a new balance sheet giving effect to the foregoing requirements.
Partnership Accounting
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings, admission of a new partner, etc.
Partner Admission and Withdrawal
A partnership is a kind of arrangement between two or more people whereby they agree to manage the business operations and share its profits and losses in an agreed ratio between them. The agreement that is drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, drawings of a partner, etc.
The CAB
Assets
Cash...............$ 8,000
Inventory (at cost) ........35,750
Land..............27,000
Building (net of
Equipment (net of depreciation) ...27,250
Total..............$173,200
Liabilities and Capital
Accounts Payable...........$ 32,450
Other Current Liabilities........6,750
Long-Term Note (8% due 2008) ..34,000
Cox, Capital...........37,500
Andrews, Capital...........25,000
Bennet, Capital...........37,500
Total..............$173,200
The review of the accounts resulted in the accumulation of the following information:
- Approximately 5% of the accounts receivable are uncollectible. The old partnership had been using the direct write-off method of accounting for
bad debts. - Current replacement cost of the inventory is $41,250.
- The market value of the land based on a current appraisal is $65,000.
- The partners had been using an unreasonably long estimated life in establishing a depreciation policy for the building. On the basis of sound value (current replacement cost adjusted for use), the value of the building is $32,750.
- There are unrecorded accrued liabilities of $3,275.
The partners agree to recognize the foregoing adjustments to the accounts. Cox, Andrews, and Bennet share profits 40:30:30. After the admission of Meyers, the new profit agreement of the uncertainty of the business, no
Required:
- Prepare the necessary
journal entries on the books of the old partnership
to adjust the accounts. - Record the admission of Meyers. is to be 30:20:30:20. Meyers is to receive a 25% capital interest in the partnership after she invests sufficient cash to increase the total capital interest to $150,000. Because
- Prepare a new balance sheet giving effect to the foregoing requirements.
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