Chapter 12, Problem 4PB

1.

To determine

Record the journal entries as of August 31.

Explanation of Solution

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 August 31 is as follows:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
Aug.	31	Asset Revaluations	$1,800
		Accounts Receivable		$1,500
		Allowance for Doubtful Accounts (1)		$300
		(To record the loss on revaluation of assets.)
	31	Merchandise Inventory	$4,300
		Asset Revaluations (2)		$4,300
		(To record the profit on revaluation of merchandise inventory.)
	31	Accumulated Depreciation—Equipment	$15,500
		Equipment  (3)		$3,000
		Asset Revaluations		$12,500
		(To record the profit on revaluation of equipment.)
	31	Asset Revaluations (Revaluation profit) (4)	$15,000
		C, Capital (1/2)		$7,500
		E, Capital (1/2)		$7,500
		(To record the division of revaluation profit between Partner C and E.)

 Table (1)

Working Notes:

(1)

Calculation of Allowances for Doubtful Accounts –

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

$\begin{array}{c}\text{New}\text{Balance}\text{=}\left[\left(\text{\$19,500}\text{-}\text{\$1,500}\right)\text{×}\frac{\text{5}}{\text{100}}\right]\\ \text{=}\text{\$900}\end{array}$

Old Balance = $600

$\begin{array}{c}\text{Amount}\text{Increased}\text{=}\left(\text{\$900}\text{-}\text{\$600}\right)\\ \text{=}\text{\$300}\end{array}$

(2)

Calculation of Merchandise Inventory-

Book value of Merchandise Inventory = $42,500

Revalued Merchandise Inventory = $46,800

$\begin{array}{c}\text{Amount}\text{Increased}\text{=}\left(\text{\$46,800}\text{-}\text{\$42,500}\right)\\ \text{=}\text{\$4,300}\end{array}$

(3)

Calculation of Equipment-

Book value of Merchandise Inventory = $64,500

Revalued Merchandise Inventory = $67,500

$\begin{array}{c}\text{Amount}\text{decreased}\text{=}\left(\text{\$64,500}\text{-}\text{\$67,500}\right)\\ \text{=}\text{-\$3000}\end{array}$

(4)

Calculation of Revaluation Profit –

$\begin{array}{c}\text{Revaluation}\text{Profit}\text{=}\left(\text{\$12,500+}\text{\$4,300}\text{-}\text{\$1,800}\right)\\ \text{=}\text{\$15,000}\end{array}$

2.

To determine

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

Explanation of Solution

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

Date		Account Titles and Explanation	Debit ($)	Credit ($)
Sep	1	E, Capital	$26,000
		M, Capital		$26,000
		(To record the purchase of 26,000 of ownership interest of partner E, by partner M.)
	1	Cash	$32,000
		M, Capital		$32,000
		(To record the cash brought by partner M to the partnership firm.)

Table (2)

3.

To determine

Prepare the balance sheet for the new partnership as of September 1, 2016.

Explanation of Solution

The balance sheet for the new partnership as of September 1, 2016 is as follows.

C, E, and M
Balance Sheet
September 1, 2016
Assets
Current assets:
Cash (5)		$44,300
Accounts receivable	$18,000
Less allowance for doubtful accounts	$900	$17,100
Merchandise inventory		$46,800
Prepaid insurance		$1,200
Total current assets			$109,400
Property, plant, and equipment:
Equipment			$64,500
Total assets			$173,900
Liabilities
Current liabilities:
Accounts payable		$8,900
Notes payable		$15,000
Total liabilities			$23,900
Partners’ Equity
C, capital (6)		$62,500
E, capital (7)		$29,500
M, capital		$58,000
Total partners’ equity			$150,000
Total liabilities and partners’ equity			$173,900

Table (3)

Working Notes:

(5)

Calculation of Cash Balance –

$\begin{array}{c}\text{Cash}\text{Balance}\text{=}\left(\text{\$12,300+}\text{\$32,000}\right)\\ \text{=}\text{\$44,300}\end{array}$

(6)

Calculation of Capital Balance of C –

$\begin{array}{c}\text{Capital}\text{Balance}\text{=}\left(\begin{array}{l}\text{Beginning}\\ \text{balance}\end{array}\right)\text{+}\left(\begin{array}{l}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{Share}\text{of}\\ \text{revaluation}\text{profit}\end{array}\right)\\ \text{=}\text{\$55,000}\text{+}\text{\$7,500}\\ \text{=\$62,500}\end{array}$

(7)

Calculation of Capital Balance of E–

$\begin{array}{c}\text{Capital}\text{Balance}\text{=}\left(\begin{array}{l}\text{Beginning}\\ \text{balance}\end{array}\right)\text{+}\left(\begin{array}{l}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{}\text{Share}\text{of}\\ \text{revaluation}\text{profit}\end{array}\right)\text{-}\left(\begin{array}{l}\text{Share}\\ \text{Transfer}\end{array}\right)\\ \text{=}\text{\$48,000}\text{+}\text{\$7,500}\text{-}\text{\$26,000}\\ \text{=\$29,500}\end{array}$