Chapter 12, Problem 4PA

1.

To determine

Record journal entries as of June 30.

Answer to Problem 4PA

Partnership: It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio.

The journal entries as of June 30 is as follows:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
June	30	Asset Revaluations	$2,900
		Accounts Receivable		$2,500
		Allowance for Doubtful Accounts (1)		$400
		(To record the loss on revaluation of assets.)
	30	Merchandise Inventory	$4,600
		Asset Revaluations (2)		$4,600
		(To record the profit on revaluation of merchandise inventory.)
	30	Accumulated Depreciation—Equipment	$43,100
		Equipment (3)		$24,800
		Asset Revaluations		$18,300
		(To record the profit on revaluation of equipment.)
	30	Asset Revaluations (Revaluation profit) (4)	$20,000
		M, Capital (1/2)		$10,000
		H, Capital (1/2)		$10,000
		(To record the division of revaluation profit between Partner M and H.)

Table (1)

Explanation of Solution

Working Note 1:

Calculation of Allowances for Doubtful Accounts –

Allowance for doubtful debt is to be increased to 5% of the remaining account.

$\begin{array}{c}\text{New}\text{Balance}\text{=}\left[\left(\text{\$42,500}\text{-}\text{\$2,500}\right)\text{×}\frac{\text{5}}{\text{100}}\right]\\ \text{=}\text{\$2,000}\end{array}$

Old Balance = $1,600

$\begin{array}{c}\text{Amount}\text{Increased}\text{=}\left(\text{\$2,000}\text{-}\text{\$1,600}\right)\\ \text{=}\text{\$400}\end{array}$

Working Note 2:

Calculation of Merchandise Inventory-

Book value of Merchandise Inventory = $72,000

Revalued Merchandise Inventory = $76,600

$\begin{array}{c}\text{Amount}\text{Increased}\text{=}\left(\text{\$76,600}\text{-}\text{\$72,000}\right)\\ \text{=}\text{\$4,600}\end{array}$

Working Note 3:

Calculation of Equipment-

Book value of Merchandise Inventory = $180,500

Revalued Merchandise Inventory = $155,700

$\begin{array}{c}\text{Amount}\text{decreased}\text{=}\left(\text{\$155,700}\text{-}\text{\$180,500}\right)\\ \text{=}\text{-\$24,800}\end{array}$

Working Note 4:

Calculation of Revaluation Profit –

$\begin{array}{c}\text{Revaluation}\text{Profit}\text{=}\left(\text{\$18,300+}\text{\$4,600}\text{-}\text{\$2,900}\right)\\ \text{=}\text{\$20,000}\end{array}$

2.

To determine

Record the additional journal entries for the entrance of partner A into the Partnership. 

Explanation of Solution

The additional journal entries for the entrance of partner A into the Partnership is as follows:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
July	1	H, Capital	$70,000
		A, Capital		$70,000
		(To record the purchase of $70,000 of ownership interest of partner H, by partner A.)
	1	Cash	$45,000
		A, Capital		$45,000
		(To record the cash brought by partner A to the partnership firm.)

Table (2)

3.

To determine

Prepare balance sheet for the new partnership as of July 1, 20Y7.

Answer to Problem 4PA

The balance sheet for the new partnership as of July 1, 20Y7 is as follows.

M, H, and A
Balance Sheet
July 1, 20Y7
Assets
Current assets:
Cash (5)		$53,000
Accounts receivable	$40,000
Less allowance for doubtful accounts	-$2,000	$38,000
Merchandise inventory		$76,600
Prepaid insurance		$3,000
Total current assets			$170,600
Property, plant, and equipment:
Equipment			$155,700
Total assets			$326,300
Liabilities
Current liabilities:
Accounts payable		$21,300
Notes payable		$35,000
Total liabilities			$56,300
Partners’ Equity
M, capital (6)		$130,000
H, capital  (7)		$25,000
A, capital		$115,000
Total partners’ equity			$270,000
Total liabilities and partners’ equity			$326,300

Table (2)

Explanation of Solution

Working Note 5:

Calculation of Cash Balance –

$\begin{array}{c}\text{Cash}\text{Balance}\text{=}\left(\text{\$8,000+}\text{\$45,000}\right)\\ \text{=}\text{\$53,000}\end{array}$

Working Note 6:

Calculation of Capital Balance of M–

$\begin{array}{c}\text{Capital}\text{Balance}\text{=}\left(\begin{array}{l}\text{Beginning}\\ \text{balance}\end{array}\right)\text{+}\left(\begin{array}{l}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{Share}\text{of}\\ \text{revaluation}\text{profit}\end{array}\right)\\ \text{=}\text{\$120,000}\text{+}\text{\$10,000}\\ \text{=\$130,000}\end{array}$

Working Note 7:

Calculation of Capital Balance of H–

$\begin{array}{c}\text{Capital}\text{Balance}\text{=}\left(\begin{array}{l}\text{Beginning}\\ \text{balance}\end{array}\right)\text{+}\left(\begin{array}{l}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{Share}\text{of}\\ \text{revaluation}\text{profit}\end{array}\right)\text{-}\left(\begin{array}{l}\text{Share}\\ \text{Transfer}\end{array}\right)\\ \text{=}\text{\$85,000}\text{+}\text{\$10,000}\text{-}\text{\$70,000}\\ \text{=\$25,000}\end{array}$