Chapter 12, Problem 5BPSB

To determine

Concept Introduction:

Partnership is a business entity in which two or more persons associate together to do a business. Basically, the persons join hands to achieve a common goal under one entity. The persons are known as partners. Partners invest capital in the business as per their predetermined ratio and profit and loss is distributed in pre-agreed profit sharing ratio. All the terms and conditions of partnership is incorporated in a written document which is known as partnership deed. The entity created under partnership is known as partnership firm.

In partnership firm, the new person can also join as a partner and and the existing partner can also leave the firm with mutual consent. When a person joins or leaves the partnership deed is amended and partner’s capital account is adjusted as per agreed terms and conditions.

Requirement-1:

To prepare:

In the question, there are three partners: Gibbs, Hook and Chan. Gibbs is retiring from the firm and we have to prepare journal entries for retirement of Gibbs under five scenarios as below:

1. Gibbs sells her partnership interest to Brady for 250,000 and brady is admitted in the firm as new partner.
2. Gibbs daughter in law Kannon is admitted into firm in place of Gibbs.
3. Gibbs get 606,000 in cash for her capital.
4. Gibbs get 350,000 in cash for her capital
5. Gibbs get 200,000 in cash and equipment which book value is 538,000 and accumulated depreciation is 336,000

Answer to Problem 5BPSB

Solution:

S.No	Particulars	Debit	Credit
a.	Gibbs Capital	606,000
	Brady Capital		606,000
	(Admission of Brady recorded)
b.	Gibbs Capital	606,000
	Kannon Capital		606,000
	(Admission of Kannon recorded)
c.	Gibbs Capital	606,000
	Cash account		606,000
	(Gibbs capital account settled and cash paid)
d.	Gibbs capital	606,000
	Cash account		350,000
	Hooks capital		51,200
	Chan capital		204,800
	(Gibbs capital account settled and balance amount credited to Hooks and Chan capital account)
e.	Gibbs capital	606,000
	Accumulated depreciation	336,000
	Cash account		200,000
	Hooks capital		40,800
	Chan capital		163,200
	Manufacturing equipment		538,000
	(Gibbs capital account settled through cash and equipment and balance amount credited to Hooks and Chan capital account)

Explanation of Solution

Explanation:

1. On retirement of an existing partner, the exiting partner account is debited and new partner account is credited. It is irrelevant that exiting partner is selling to incoming partner her/his interest at what consideration, if firm is paid nothing to the exiting partner. In our case, the firm has not anything to Gibbs so only exiting partner capital account will be debited and Chan capital account will be credited by $606,000.
2. The admission of daughter in law in place of Gibbs will be the same treatment as firm is not paying anything to Gibbs.
3. In case of full settlement to Gibbs of her capital account, Gibbs capital account will be debited and cash account will be credited by $606,000.
4. In this case, the firm has paid only $350,000 in cash in settlement of Gibbs capital account So, balance amount the balance partner account will be credited in their profit sharing ratio. The balance amount of 256,000 will be distributed in Gibbs and Chan capital account in their profit sharing ratio 1:4.
5. In this case, the firm has paid cash $200,000 and manufacturing equipment amounting $202,000 (538,000- 336,000) in settlement of Gibbs capital account So, balance amount the balance partner account will be credited in their profit sharing ratio. The balance amount of 204,000 will be distributed in Gibbs and Chan capital account in their profit sharing ratio 1:4.

To determine

Requirement-2:

To prepare:

We have to record journal entries if Mr. Chip is admitted into partnership firm with 20% equity and his investment is under three different scenarios:

1. If Chip investment is 300,000
2. If Chip investment is 196,000
3. If Chip investment is426,000

Answer to Problem 5BPSB

Solution:

S.No	Particulars	Debit	Credit
a.	Cash account	300,000
	Chip Capital		300,000
	(Admission of Chip recorded)
b.	Cash account	196,000
	Gibbs Capital	41,600
	Hooks Capital	8,320
	Chan Capital	33,280
	Chip Capital		279,200
	(Admission of Chip recorded and balance amount adjusted with existing partners capital)
b.	Cash account	426,000
	Gibbs Capital		50,400
	Hooks Capital		10,080
	Chan Capital		40,320
	Chip Capital		100,800
	(Admission of Chip recorded and excess amount adjusted with existing partners capital)

Explanation of Solution

Explanation:

1. The calculation of new partner Chip is as below:

Particulars	Amount
Gibbs capital	606,000
Hooks capital	148,000
Chan Capital	446,000
Total capital	1,200,000
Add: Chip investment	300,000
Total capital after Chip investment	1,500,000
Chip Capital share ratio	20%
Chip capital (1,500,000 *20%)	300,000

In this case, the share of Chip capital is 300,000 and investment made by Chip is also 300,000 so cash account will be debited and Chip account will be credited by 300,000.

2. The calculation of new partner Chip is as below:

Particulars	Amount
Gibbs capital	606,000
Hooks capital	148,000
Chan Capital	446,000
Total capital	1,200,000
Add: Chip investment	196,000
Total capital after Chip investment	1,396,000
Chip Capital share ratio	20%
Chip capital (1,396,000 *20%)	279,200
Amount to be adjusted (279,200- 196,000)	83,200

The balance amount will be adjusted in profit sharing ratio of existing partner as below:

Particulars	Amount
Balance amount to be adjusted	83,200
Gibbs capital (83,200 * 5/10)	41,600
Hooks capital (83,200* 1/10)	8,320
Chan Capital (83,200 * 4/10)	33,280

3. The calculation of new partner Chip is as below:

Particulars	Amount
Gibbs capital	606,000
Hooks capital	148,000
Chan Capital	446,000
Total capital	1,200,000
Add: Chip investment	426,000
Total capital after Chip investment	1,626,000
Chip Capital share ratio	20%
Chip capital (1,626,000 *20%)	325,200
Amount to be adjusted (426,000- 325,200)	100,800

The balance amount will be adjusted in profit sharing ratio of existing partner as below:

Particulars	Amount
Balance amount to be adjusted	100,800
Gibbs capital (100,800 * 5/10)	50,400
Hooks capital (100,800* 1/10)	10,800
Chan Capital (100,800 * 4/10)	40,320