Chapter 12, Problem 5AP

1.

To determine

Prepare journal entries to record Partner B’s February 1 withdrawal under each separate assumption.

Explanation of Solution

Partnership:

A partnership is an unincorporated form of business which is formed by an agreement, owned and managed mutually by two or more individuals, who invest their assets in the business and share the liabilities and profits among themselves.

a. Partner B sells interest to Person N for $160,000 after Person N is approved as a partner.

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Partner B, Capital	138,000
		Partner N, Capital		138,000
		(To record admission of partner N)

Table (1)

b. Partner B gives interest to a son-in-law, Person S, and Person S is approved as a partner.

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Partner B, Capital	138,000
		Partner S, Capital		138,000
		(To record admission of partner S)

Table (2)

c. Partner B is paid $ 138,000 in partnership cash for her equity.

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Partner B, Capital	138,000
		Cash		138,000
		(To record withdrawal of partner S with no bonus)

Table (3)

d. Partner B is paid $214,000 in partnership cash for her equity.

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Partner B, Capital	138,000
		Partner M, Capital (1)	28,500
		Partner L, Capital (2)	47,500
		Cash		214,000
		(To record withdrawal of partner B with bonus)

Table (4)

Working note:

Calculate the capital of Partner M:

$\begin{array}{c}\text{Partner}\text{M,Capital}\text{=}\left[\begin{array}{l}\left(\text{Cash}-\text{Partner}\text{B}\text{,}\text{Existing}\text{equity}\right)\text{×}\\ \text{sharing}\text{percentage}\text{of}\text{income}\text{and}\text{loss}\end{array}\right]\\ \text{=}\text{\$214,000}-\text{\$138,000×}\frac{\text{3}}{\text{8}}\\ \text{=}\text{\$28,500}\end{array}$ (1)

Calculate the capital of Partner L:

$\begin{array}{c}\text{Partner}\text{L,Capital}\text{=}\left[\begin{array}{l}\left(\text{Cash}-\text{Partner}\text{B}\text{,}\text{Existing}\text{equity}\right)\text{×}\\ \text{sharing}\text{percentage}\text{of}\text{income}\text{and}\text{loss}\end{array}\right]\\ \text{=}\text{\$214,000}-\text{\$138,000×}\frac{\text{5}}{\text{8}}\\ \text{=}\text{\$47,500}\end{array}$ (2)

e. Partner B is paid $30,000 in partnership cash plus equipment recorded on the partnership books at $70,000 less its accumulated depreciation of $23,200.

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Partner B, Capital	138,000
		Accumulated Depreciation- Equipment	23,200
		Partner M, Capital (3)		22,950
		Partner L, Capital (4)		38,250
		Equipment		70,000
		Cash		30,000
		(To record withdrawal of partner B  with bonus to old partners)

Table (5)

Working note:

Calculate the capital of Partner M:

$\begin{array}{c}\text{Partner}\text{M,Capital}\text{=}\left\{\begin{array}{l}\left[\begin{array}{l}\text{Partner}\text{B,Existing equity}-\\ \left(\begin{array}{l}\text{Equipment}-\text{Accumulated}\text{depreciation}\text{of}\text{equipment}\text{+}\\ \text{Cash}\text{by}\text{Partner}\text{B}\text{in}\text{partnership}\end{array}\right)\end{array}\right]\\ \text{×Sharing}\text{percentage}\text{of}\text{profit}\text{and}\text{losses}\end{array}\right\}\\ \text{=}\left[\text{\$138,000}-\left(\text{\$70,000}-\text{\$23,200+\$30,000}\right)\right]\text{×}\frac{\text{3}}{\text{8}}\\ \text{=}\text{\$22,950}\end{array}$ (3)

Calculate the capital of Partner L:

$\begin{array}{c}\text{Partner}\text{L,Capital}\text{=}\left\{\begin{array}{l}\left[\begin{array}{l}\text{Partner}\text{B,Existing}\text{ equity}-\\ \left(\begin{array}{l}\text{Equipment}-\text{Accumulated}\text{depreciation}\text{of}\text{equipment}\text{+}\\ \text{Cash}\text{byPartner}\text{B}\text{in}\text{partnership}\end{array}\right)\end{array}\right]\\ \text{×Sharing}\text{percentage}\text{of}\text{profit}\text{and}\text{losses}\end{array}\right\}\\ \text{=}\left[\text{\$138,000}-\left(\text{\$70,000}-\text{\$23,200+\$30,000}\right)\right]\text{×}\frac{\text{5}}{\text{8}}\\ \text{=}\text{\$38,250}\end{array}$ (4)

2.

To determine

Prepare journal entry to record Partner R entry into the partnership under each separate assumption.

Explanation of Solution

Record journal entry for the entry of Partner R into the partnership if Partner R invests (a) $200,000:

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Cash	200,000
		Partner R, Capital (5)		200,000
		(To record admission of partner R)

Table (6)

Working note:

Calculate the Capital of Partner R:

$\begin{array}{c}\text{Partner}\text{R,Capital}\text{=}\left[\begin{array}{l}\text{Equities}\text{of}\text{existing Partners}\text{+}\\ \text{Investment}\text{made}\text{by}\text{Partner}\text{R}\text{×}\\ \text{Percentage}\text{of}\text{partnership}\text{equity}\end{array}\right]\\ \text{=}\text{\$600,000+\$200,000×25\%}\\ \text{=\$200,000}\end{array}$ (5)

Note: Equities of existing partners ($600,000) = $\$168,000+\$138,000+\$294,000$

Record journal entry for the entry of Partner R into the partnership if Partner R invests (b) $145,000:

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Cash	145,000
		Partner M, Capital (7)	12,375
		Partner B, Capital (8)	8,250
		Partner L, Capital (9)	20,625
		Partner R, Capital (6)		186,250
		(To record admission and bonus of partner R)

Table (7)

Working note:

Calculate the capital of Partner R:

$\begin{array}{c}\text{Partner}\text{R,Capital}\text{=}\left[\left(\begin{array}{l}\text{Equities}\text{of}\text{existing}\text{Partners}\text{+}\\ \text{Investment}\text{made}\text{by}\text{Partner}\text{R}\end{array}\right)\text{×Percentage}\text{of}\text{equity}\right]\\ \text{=\$600,000}\text{+\$145,000×25\%}\\ \text{=\$186,250}\end{array}$ (6)

Calculate the bonus given by Partner M to Partner R:

$\begin{array}{c}\begin{array}{l}\text{Bonus}\text{from}\\ \text{Partner}\text{M,capital}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{bonus}\text{×}\text{sharing}\text{percentage}\\ \text{of}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$41,250 (10)×}\frac{\text{3}}{\text{10}}\\ \text{=}\text{\$12,375}\end{array}$ (7)

Calculate the bonus given by Partner B to Partner R:

$\begin{array}{c}\begin{array}{l}\text{Bonus}\text{from}\\ \text{Partner}\text{B,capital}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{bonus}\text{×}\text{sharing}\text{percentage}\\ \text{of}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$41,250(10)}\text{×}\frac{2}{\text{10}}\\ \text{=}\text{\$8,250}\end{array}$ (8)

Calculate the bonus given by Partner L to Partner R:

$\begin{array}{c}\begin{array}{l}\text{Bonus}\text{from}\\ \text{Partner}\text{L,capital}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{bonus}\text{×}\text{sharing}\text{percentage}\\ \text{of}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$41,250 (10)}\text{×}\frac{\text{5}}{\text{10}}\\ \text{=}\text{\$20,625}\end{array}$ (9)

Calculate the total bonus given to Partner R:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{bonus}\\ \text{given}\text{to}\text{partner}\text{R}\end{array}\}\text{=Partner}\text{R, Capital}-\text{Cash}\\ \text{=}\text{\$186,250}-\text{\$145,000}\\ \text{=\$41,250}\end{array}$ (10)

Record journal entry for the entry of Partner R into the partnership if Partner R invests (c) $262,000:

Date		Account Title and Explanation	Debit ($)	Credit ($)
February 1		Cash	262,000
		Partner M, Capital (12)		13,950
		Partner B, Capital (13)		9,300
		Partner L, Capital (14)		23,250
		Partner R, Capital (11)		215,500
		(To record admission and bonus to old partners)

Table (8)

Working notes:

Calculate the capital of Partner R:

$\begin{array}{c}\text{Partner}\text{R,Capital}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Equities}\text{of}\text{existing}\text{Partners+}\\ \text{Investment}\text{made}\text{by}\text{Partner}\text{R}\end{array}\right)\\ \text{×Percentage}\text{of}\text{partnership}\text{equity}\end{array}\right]\\ \text{=\$600,000}\text{+\$262,000×25\%}\\ \text{=\$215,500}\end{array}$ (11)

Calculate the bonus given to Partner M:

$\begin{array}{c}\begin{array}{l}\text{Bonus}\text{to}\\ \text{Partner}\text{M}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{bonus}\text{×}\text{sharing}\text{percentage}\\ \text{of}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$46,500 (15)×}\frac{\text{3}}{\text{10}}\\ \text{=}\text{\$13,950}\end{array}$ (12)

Calculate the bonus given to Partner B:

$\begin{array}{c}\begin{array}{l}\text{Bonus}\text{to}\\ \text{Partner}\text{B}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{bonus}\text{×}\text{sharing}\text{percentage}\\ \text{of}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$46,500 (15)×}\frac{\text{2}}{\text{10}}\\ \text{=}\text{\$9,300}\end{array}$ (13)

Calculate the bonus given to Partner L:

$\begin{array}{c}\begin{array}{l}\text{Bonus to}\\ \text{Partner}\text{L}\end{array}\}\text{=}\left(\begin{array}{l}\text{Total}\text{bonus}\text{×}\text{sharing}\text{percentage}\\ \text{of}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$46,500 (15)}\text{×}\frac{\text{5}}{\text{10}}\\ \text{=}\text{\$23,250}\end{array}$ (14)

Calculate the total bonus given to Partners:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{bonus}\\ \text{given}\text{to}\text{partner}\end{array}\}\text{=}\left(\text{Cash}-\text{partner}\text{R, capital}\right)\\ \text{=}\text{\$262,000}-\text{\$215,500}\\ \text{=\$46,500}\end{array}$ (15)