Chapter 12, Problem 5BP

(1)

To determine

Prepare the journal entry if the equipment is sold at $650,000.

Explanation of Solution

(a) To record the sale of equipment.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	650,000
	Equipment		617,200
	Gain on sale of equipment		32,800
	(To record the sale of equipment and gain on sale of equipment)

Table (1)

• Cash is an asset account and it is increased. Therefore, debit cash with $650,000.
• Equipment is an asset account and it is decreased. Therefore, credit cash with $617,200.
• Gain on sale of equipment is a component of stockholders’ equity and it is increased. Therefore, credit gain on sale of equipment with $32,800.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Gain on sale of equipment	32,800
	L’s Capital $\left(\$32,800\times \frac{2}{5}\right)$		13,120
	R’s Capital $\left(\$32,800\times \frac{1}{5}\right)$		6,560
	T’s Capital $\left(\$32,800\times \frac{2}{5}\right)$		13,120
	(To record the allocation of gain on sale of equipment to the partners’ capital account)

Table (2)

• Gain on sale of equipment is a component of stockholders’ equity and it is decreased. Therefore, debit gain on sale of equipment with $32,800.
• L’s Capital is a capital account and it is increased. Therefore, credit L’s Capital with $13,120.
• R’s Capital is a capital account and it is increased. Therefore, credit R’s Capital with $6,560.
• T’s Capital is a capital account and it is increased. Therefore, credit T’s Capital with $13,120.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	342,600
	Cash		342,600
	(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 $342,600.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $342,600.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$300,400+\$13,120\right)$	313,520
	R’s Capital $\left(\$195,800+\$6,560\right)$	202,360
	T’s Capital $\left(\$127,000+\$13,120\right)$	140,120
	Cash (1)		656,000
	(To record the distribution of cash)

Table (4)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $313,250.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $202,360.
• T’s Capital is a capital account and it is decreased. Therefore, debit T’s Capital with $140,210.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $656,000.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\text{Total Cash}+\text{Sale of the inventory}-\text{Accounts payable}\right)\\ =\left(\$348,600+\$650,000-\$342,600\right)\\ =\$656,000\end{array}$ (1)

(2)

To determine

Prepare the journal entry if the equipment is sold at $530,000.

Explanation of Solution

(a) To record the sale of equipment.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	530,000
	Loss on sale equipment	87,200
	Equipment		617,200
	(To record the sale of equipment and loss on sale of equipment)

Table (5)

• Cash is an asset account and it is increased. Therefore, debit cash with $530,000.
• Equipment is an asset account and it is decreased. Therefore, credit cash with $617,200.
• Loss on sale of equipment is a component of stockholders’ equity and it is decreased. Therefore, debit loss on sale of equipment with $87,200.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$87,200\times \frac{2}{5}\right)$	34,880
	R’s Capital $\left(\$87,200\times \frac{1}{5}\right)$	17,440
	T’s Capital $\left(\$87,200\times \frac{2}{5}\right)$	34,880
	Loss on sale of equipment		87,200
	(To record the allocation of loss on sale of equipment to the partners’ capital account)

Table (6)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $34,880.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $17,440.
• T’s Capital is a capital account and it is decreased. Therefore, debit T’s Capital with $34,880.
• Loss on sale of equipment is a component of stockholders’ equity and it is increased. Therefore, credit loss on sale of equipment with $87,200.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	342,600
	Cash		342,600
	(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 $342,600.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $342,600.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$300,400-\$34,880\right)$	265,520
	R’s Capital $\left(\$195,800-\$17,440\right)$	178,360
	T’s Capital $\left(\$127,000-\$34,880\right)$	92,120
	Cash (2)		536,000
	(To record the distribution of cash)

Table (8)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $265,520.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $178,360.
• T’s Capital is a capital account and it is decreased. Therefore, debit T’s Capital with $92,120.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $536,000.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\text{Total Cash}+\text{Sale of the inventory}-\text{Accounts payable}\right)\\ =\left(\$348,600+\$530,000-\$342,600\right)\\ =\$536,000\end{array}$ (2)

(3)

To determine

Prepare the journal entry if the equipment is sold at $200,000 and partners with deficits pay their deficits in cash.

Explanation of Solution

(a) To record the sale of equipment.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	200,000
	Loss on sale equipment	417,200
	Equipment		617,200
	(To record the sale of equipment and loss on sale of equipment)

Table (9)

• Cash is an asset account and it is increased. Therefore, debit cash with $200,000.
• Equipment is an asset account and it is decreased. Therefore, credit cash with $617,200.
• Loss on sale of equipment is a component of stockholders’ equity and it is decreased. Therefore, debit loss on sale of equipment with $417,200.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$417,200\times \frac{2}{5}\right)$	166,880
	R’s Capital $\left(\$417,200\times \frac{1}{5}\right)$	83,440
	T’s Capital $\left(\$417,200\times \frac{2}{5}\right)$	166,880
	Loss on sale of equipment		417,200
	(To record the allocation of loss on sale of equipment to the partners’ capital account)

Table (10)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $166,880.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $83,440.
• T’s Capital is a capital account and it is decreased. Therefore, debit T’s Capital with $166,880.
• Loss on sale of equipment is a component of stockholders’ equity and it is increased. Therefore, credit loss on sale of equipment with $417,200.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	39,880
	T’s Capital $\left(\$127,000-\$166,880\right)$		39,880
	(To record the payment of cash by Partner T to compensate the deficit)

Table (11)

• Cash is an asset account and it is increased. Therefore, debit cash with $39,880.
• T’s Capital is a capital account and it is increased. Therefore, credit T’s Capital with $39,800.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	342,600
	Cash		342,600
	(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 $342,600.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $342,600.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$300,400-\$166,800\right)$	133,520
	R’s Capital $\left(\$195,800-\$83,440\right)$	112,360
	Cash (3)		245,880
	(To record the distribution of cash)

Table (13)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $133,520.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $112,360.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $245,880.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\begin{array}{l}\text{Total Cash}+\text{Sale of the inventory}+\\ \text{Additional capital contributed by Partner T}-\\ \text{Accounts payable}\end{array}\right)\\ =\left(\$348,600+\$200,000+\$39,880-\$342,600\right)\\ =\$245,880\end{array}$ (3)

(4)

To determine

Prepare the journal entry if the equipment is sold at $150,000 and partners with deficits do not pay their deficits.

Explanation of Solution

(a) To record the sale of equipment.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cash	150,000
	Loss on sale equipment	467,200
	Equipment		617,200
	(To record the sale of equipment and loss on sale of equipment)

Table (14)

• Cash is an asset account and it is increased. Therefore, debit cash with $150,000.
• Equipment is an asset account and it is decreased. Therefore, credit cash with $617,200.
• Loss on sale of equipment is a component of stockholders’ equity and it is decreased. Therefore, debit loss on sale of equipment with $487,200.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$467,200\times \frac{2}{5}\right)$	186,880
	R’s Capital $\left(\$467,200\times \frac{1}{5}\right)$	93,400
	T’s Capital $\left(\$467,200\times \frac{2}{5}\right)$	186,880
	Loss on sale of equipment		467,200
	(To record the allocation of loss on sale of equipment to the partners’ capital account)

Table (15)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $186,880.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $93,400.
• T’s Capital is a capital account and it is decreased. Therefore, debit T’s Capital with $186,880.
• Loss on sale of equipment is a component of stockholders’ equity and it is increased. Therefore, credit loss on sale of equipment with $467,200.

To record the cash paid by Partner L and Partner R to compensate the deficit of Partner T:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$59,880\times \frac{2}{3}\right)$	39,920
	R’s Capital $\left(\$59,880\times \frac{1}{3}\right)$	19,960
	T’s Capital $\left(\$127,000-\$186,880\right)$		59,880
	(To record the payment of cash by Partner L and R to compensate the deficit of Partner T)

Table (16)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $39,920.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $19,960.
• T’s Capital is a capital account and it is increased. Therefore, credit T’s Capital with $59,960.

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

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts payable	342,600
	Cash		342,600
	(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 $342,600.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $342,600.

(d) To record the distribution of cash:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	L’s Capital $\left(\$300,400-\$186,880-\$39,920\right)$	73,600
	R’s Capital $\left(\$195,800-\$93,440-\$19,960\right)$	82,400
	Cash (4)		156,000
	(To record the distribution of cash)

Table (18)

• L’s Capital is a capital account and it is decreased. Therefore, debit L’s Capital with $73,600.
• R’s Capital is a capital account and it is decreased. Therefore, debit R’s Capital with $82,400.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $156,000.

Working note:

Calculate the amount of cash for distribution:

$\begin{array}{c}\text{Cash for distribution}=\left(\text{Total Cash}+\text{Sale of the inventory}-\text{Accounts payable}\right)\\ =\left(\$348,600+\$150,000-\$342,600\right)\\ =\$156,000\end{array}$ (4)