Chapter 12, Problem 5AP

(1)

To determine

Prepare the journal entry if the inventory is sold at $600,000.

Explanation of Solution

(a) To record the sale of inventory.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	600,000
	Inventory		537,200
	Gain on sale of inventory		62,800
	(To record the sale of inventory and gain on sale of inventory)

Table (1)

• Cash is an asset account and it is increased. Therefore, debit cash with $600,000.
• Inventory is an asset account and it is decreased. Therefore, credit cash with $537,200.
• Gain on sale of inventory is a component of stockholders’ equity and it is increased. Therefore, credit gain on sale of inventory with $62,800.

(b) To record the allocation of gain on sale of inventory to the partners’ capital account.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Gain on sale of inventory	62,800
	K’s Capital $\left(\$62,800\times \frac{3}{6}\right)$		31,400
	C’s Capital $\left(\$62,800\times \frac{2}{6}\right)$		20,933
	M’s Capital $\left(\$62,800\times \frac{1}{6}\right)$		10,467
	(To record the allocation of gain on sale of inventory to the partners’ capital account)

Table (2)

• Gain on sale of inventory is a component of stockholders’ equity and it is decreased. Therefore, debit gain on sale of inventory with $62,800.
• K’s Capital is a capital account and it is increased. Therefore, credit K’s Capital with $31,400.
• C’s Capital is a capital account and it is increased. Therefore, credit C’s Capital with $20,933.
• M’s Capital is a capital account and it is increased. Therefore, credit M’s Capital with $10,467.

(c) To record the payment of liabilities at book value.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	245,500
	Cash		245,500
	(To record the payment of liabilities at book value)

Table (3)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $245,500.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $245,500.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	K’s Capital $\left(\$93,000+\$31,400\right)$	124,400
	C’s Capital $\left(\$212,500+\$20,933\right)$	233,433
	M’s Capital $\left(\$167,000+\$10,467\right)$	177,467
	Cash (1)		535,300
	(To record the distribution of cash)

Table (4)

• K’s Capital is a capital account and it is decreased. Therefore, debit K’s Capital with $31,400.
• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $20,933.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $10,467.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $535,300.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\text{Total Cash}+\text{Sale of the inventory}-\text{Accounts payable}\right)\\ =\left(\$180,800+\$600,000-\$245,500\right)\\ =\$535,300\end{array}$ (1)

(2)

To determine

Prepare the journal entry if the inventory is sold at $500,000.

Explanation of Solution

(a) To record the sale of inventory.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	500,000
	Loss on sale inventory	37,200
	Inventory		537,200
	(To record the sale of inventory and loss on sale of inventory)

Table (5)

• Cash is an asset account and it is increased. Therefore, debit cash with $500,000.
• Inventory is an asset account and it is decreased. Therefore, credit cash with $537,200.
• Loss on sale of inventory is a component of stockholders’ equity and it is decreased. Therefore, debit loss on sale of inventory with $37,200.

(b) To record the allocation of loss on sale of inventory to the partners’ capital account.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	K’s Capital $\left(\$37,200\times \frac{3}{6}\right)$	18,600
	C’s Capital $\left(\$37,200\times \frac{2}{6}\right)$	12,400
	M’s Capital $\left(\$37,200\times \frac{1}{6}\right)$	6,200
	Loss on sale of inventory		37,200
	(To record the allocation of loss on sale of inventory to the partners’ capital account)

Table (6)

• K’s Capital is a capital account and it is decreased. Therefore, debit K’s Capital with $18,600.
• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $12,400.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $6,200.
• Loss on sale of inventory is a component of stockholders’ equity and it is increased. Therefore, credit loss on sale of inventory with $37,200.

(c) To record the payment of liabilities at book value.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	245,500
	Cash		245,500
	(To record the payment of liabilities at book value)

Table (7)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $245,500.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $245,500.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	K’s Capital $\left(\$93,000-\$18,600\right)$	74,400
	C’s Capital $\left(\$212,500-\$12,400\right)$	200,100
	M’s Capital $\left(\$167,000-\$6,200\right)$	160,800
	Cash (2)		435,500
	(To record the distribution of cash)

Table (8)

• K’s Capital is a capital account and it is decreased. Therefore, debit K’s Capital with $31,400.
• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $20,933.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $10,467.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $435,500.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\text{Total Cash}+\text{Sale of the inventory}-\text{Accounts payable}\right)\\ =\left(\$180,800+\$500,000-\$245,500\right)\\ =\$435,300\end{array}$ (2)

(3)

To determine

Prepare the journal entry if the inventory is sold at $320,000 and partners with deficits pay their deficits in cash.

Explanation of Solution

(a) To record the sale of inventory.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	320,000
	Loss on sale inventory	217,200
	Inventory		537,200
	(To record the sale of inventory and loss on sale of inventory)

Table (9)

• Cash is an asset account and it is increased. Therefore, debit cash with $320,000.
• Inventory is an asset account and it is decreased. Therefore, credit cash with $537,200.
• Loss on sale of inventory is a component of stockholders’ equity and it is decreased. Therefore, debit loss on sale of inventory with $217,200.

(b) To record the allocation of loss on sale of inventory to the partners’ capital account.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	K’s Capital $\left(\$217,200\times \frac{3}{6}\right)$	108,600
	C’s Capital $\left(\$217,200\times \frac{2}{6}\right)$	72,400
	M’s Capital $\left(\$217,200\times \frac{1}{6}\right)$	36,200
	Loss on sale of inventory		217,200
	(To record the allocation of loss on sale of inventory to the partners’ capital account)

Table (10)

• K’s Capital is a capital account and it is decreased. Therefore, debit K’s Capital with $108,600.
• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $72,400.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $36,200.
• Loss on sale of inventory is a component of stockholders’ equity and it is increased. Therefore, credit loss on sale of inventory with $217,200.

To record the cash paid by Partner K to compensate the deficit:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	15,600
	K’s Capital $\left(\$93,000-\$108,600\right)$		15,600
	(To record the payment of cash by Partner K to compensate the deficit)

Table (11)

• Cash is an asset account and it is increased. Therefore, debit cash with $15,600.
• K’s Capital is a capital account and it is increased. Therefore, credit K’s Capital with $15,600.

(c) To record the payment of liabilities at book value.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	245,500
	Cash		245,500
	(To record the payment of liabilities at book value)

Table (12)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $245,500.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $245,500.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	C’s Capital $\left(\$212,500-\$72,400\right)$	140,100
	M’s Capital $\left(\$167,000-\$36,200\right)$	130,800
	Cash (3)		270,900
	(To record the distribution of cash)

Table (13)

• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $140,100.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $130,800.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $270,900.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\begin{array}{l}\text{Total Cash}+\text{Sale of the inventory}+\\ \text{Additional capital contributed by Partner K}-\\ \text{Accounts payable}\end{array}\right)\\ =\left(\$180,800+\$320,000+\$15,600-\$245,500\right)\\ =\$270,900\end{array}$ (3)

(4)

To determine

Prepare the journal entry if the inventory is sold at $250,000 and partners with deficits do not pay their deficits.

Explanation of Solution

(a) To record the sale of inventory.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	250,000
	Loss on sale inventory	287,200
	Inventory		537,200
	(To record the sale of inventory and loss on sale of inventory)

Table (14)

• Cash is an asset account and it is increased. Therefore, debit cash with $250,000.
• Inventory is an asset account and it is decreased. Therefore, credit cash with $537,200.
• Loss on sale of inventory is a component of stockholders’ equity and it is decreased. Therefore, debit loss on sale of inventory with $287,200.

(b) To record the allocation of loss on sale of inventory to the partners’ capital account.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	K’s Capital $\left(\$287,200\times \frac{3}{6}\right)$	143,600
	C’s Capital $\left(\$287,200\times \frac{2}{6}\right)$	95,733
	M’s Capital $\left(\$287,200\times \frac{1}{6}\right)$	47,867
	Loss on sale of inventory		287,200
	(To record the allocation of loss on sale of inventory to the partners’ capital account)

Table (15)

• K’s Capital is a capital account and it is decreased. Therefore, debit K’s Capital with $143,600.
• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $95,733.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $47,867.
• Loss on sale of inventory is a component of stockholders’ equity and it is increased. Therefore, credit loss on sale of inventory with $287,200.

To record the cash paid by Partner C and Partner M to compensate the deficit of Partner K:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	C’s Capital $\left(\$50,600\times \frac{2}{3}\right)$	33,733
	M’s Capital $\left(\$50,600\times \frac{1}{3}\right)$	16,867
	K’s Capital $\left(\$93,000-\$143,600\right)$		50,600
	(To record the payment of cash by Partner C and M to compensate the deficit of Partner K)

Table (16)

• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $33,733.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $16,867.
• K’s Capital is a capital account and it is increased. Therefore, credit K’s Capital with $50,600.

(c) To record the payment of liabilities at book value.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	245,500
	Cash		245,500
	(To record the payment of liabilities at book value)

Table (17)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $245,500.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $245,500.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	C’s Capital $\left(\$212,500-\$95,733-\$33,733\right)$	83,034
	M’s Capital $\left(\$167,000-\$47,867-\$16,867\right)$	102,266
	Cash (4)		185,300
	(To record the distribution of cash)

Table (18)

• C’s Capital is a capital account and it is decreased. Therefore, debit C’s Capital with $83,034.
• M’s Capital is a capital account and it is decreased. Therefore, debit M’s Capital with $102,266.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $185,300.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\text{Total Cash}+\text{Sale of the inventory}-\text{Accounts payable}\right)\\ =\left(\$180,800+\$250,000-\$245,500\right)\\ =\$185,300\end{array}$ (4)