Chapter 15, Problem 15.17P

a.

To determine

Introduction:

Partnership Accounting: A partnership has the flexibility to select specific accounting and recognition methods. If a partnership issues financial statements for external users it should use GAAP. At the formation of a partnership, it is necessary to value non-cash assets and should be treated as partnerships’ property. The partnership should clearly distinguish between capital contribution and loan made by partners. The partnership uses accrual accounting as most of the commercial enterprises.

Requirement 1

The entries recorded in formation of partnership.

Explanation of Solution

	Debit $	Credit $
Cash	110,000
Inventory	80,000
Land	130,000
Equipment	100,000
Mortgage payable		50,000
Installment note payable		20,000
J’s capital		220,000
O’s capital		130,00
(Received cash and noncash assets from partners on account of capital)
Inventory	30,000
Cash		24,000
Accounts payable		6,000
(Purchased inventory on cash and on account)
Mortgage payable	5,000
Interest expense	2,000
Cash		7,000
(Paid cash for mortgage installment and interest)
Accounts receivable	21,000
Cash	134,000
Sales		155,000
(Sold goods partly on cash partly on account)
Selling and general expenses	34,000
Cash		27,800
Accrued expenses payable		6,200
(Selling and general expenses incurred and paid partly)
Depreciation expense	6,000
Accumulated depreciation		6,000
(Depreciation for the year calculated)
J’s Drawings	10,400
O.s Drawings	10,400
Cash		20,800
(Partners withdraw cash from business)
Sales	155,000
Income summary		155,000
(Transferred sales revenue to income summary account)
Cost of goods sold	90,000
Inventory		90,000
(Cost of inventory available for sales recognized )
Income summary	134,000
Cost of goods sold		90,000
Selling and general expenses		34,000
Depreciation expenses		6,000
Interest expenses		4,000
(Closing entry for income summary account)
Income summary	21,000
J’s capital		10,500
O’s capital		10,500
(Remaining income shared to partners in profit sharing ratio)
J’s capital account	10,400
O’s capital account	10,400
J’s drawing		10,400
O’s drawings		10,400
(Partners drawings transferred to capital account)

1. Partners contribution cash and noncash asset to the partnership:

J’s capital account

Cash	$60,000
Inventory	80,000
Equipment	100,000
Less: Installment notes payable by J	(20,000)
Total	$220,000

O’s capital

Cash	$50,000
Land	130,000
Mortgage payable by O	(50,000)
Total	$130,000

Partners drawing $200 per week

$10,400 ( $\$200\times 52weeks$ )

Cost of goods sold:

  $\begin{array}{c}\text{Cost of Goods Sold}=\text{Beginning Inventory}+\text{Purchases}-\text{Closing Inventory}\\ \text{=\$80,000+\$30,000-\$20,000}\\ \text{=\$90,000}\end{array}$

Schedule for Allocation of partnerships net income:

	J $	O $	Total $
Profit percentage	60%	40%	100%
Beginning capital balance	220,000	130,000	350,000
Net Income			21,000
Interest on beginning capital balance 3%	6,600	3,900	(10,500)
			10,500
Salaries	12,000	12,000	(24,000)
			(13,500)
Residual deficit	(8,100)	(5,400)	13,500
Total	10,500	10,500	0

b.

To determine

Introduction:

Partnership Accounting: A partnership has the flexibility to select specific accounting and recognition methods. If a partnership issues financial statements for external users it should use GAAP. At the formation of a partnership, it is necessary to value non-cash assets and should be treated as partnerships’ property. The partnership should clearly distinguish between capital contribution and loan made by partners. The partnership uses accrual accounting as most of the commercial enterprises.

Requirement 2

The income statement for J and O’s partnership for December 31, 20X7

Answer to Problem 15.17P

Net income $21,000

Explanation of Solution

J and O Partnership

Income Statement

For the year ended December 31, 20X7

	$	$
Sales		155,000
Less: Cost of goods sold:
Inventory January 1	80,000
Purchases	30,000
Less: ending inventory	(20,000)
Cost of goods sold		(90,000)
Gross profit		65,000
Less: Selling and General expenses	34,000
Depreciation expenses	6,000	(40,000)
Operating income		25,000
Non-operating expense − interest		(4,000)
Net income		21,000

c.

To determine

Introduction:

Partnership Accounting: A partnership has the flexibility to select specific accounting and recognition methods. If a partnership issues financial statements for external users it should use GAAP. At the formation of a partnership, it is necessary to value non-cash assets and should be treated as partnerships’ property. The partnership should clearly distinguish between capital contribution and loan made by partners. The partnership uses accrual accounting as most of the commercial enterprises.

Requirement 3

The preparation of balance sheet for J and O’s partnership for December 31, 20X7

Answer to Problem 15.17P

Balance sheet total $423,900

Explanation of Solution

J and O Partnership

Balance Sheet

For the year ended December 31, 20X7

	$	$
Assets
Cash		158,900
Accounts receivable		21,000
Inventory		20,000
Land		130,000
Equipment’s		94,000
Total Assets		423,900
Liabilities and capital
Accounts payable		6,000
Accrued expenses payable		6,200
Installment notes payable		16,500
Mortgage payable		45,000
Total liabilities		73,700
Capital:
J’s Capital	220,100
O’s Capital	130,100	350,200
Total liabilities and capital		423,900

d.

To determine

Introduction:

Partnership Accounting: A partnership has the flexibility to select specific accounting and recognition methods. If a partnership issues financial statements for external users it should use GAAP. At the formation of a partnership, it is necessary to value non-cash assets and should be treated as partnerships’ property. The partnership should clearly distinguish between capital contribution and loan made by partners. The partnership uses accrual accounting as most of the commercial enterprises.

Requirement 4

The entries for admission of H

Explanation of Solution

	Debit $	Credit $
Cash	99,800
J’s capital $\$9,800\times .60$		5,880
O’s capital $\$9,800\times .40$		3,920
H’s capital		90,000
(Received cash from H on account of capital )

Allocation of bonus to J and O

H’s investment in partnership	99,800	99,800
Prior partner’s capital	350,200
	450,000
H’s capital credit   $\$450,000\times .20$		(90,000)
Bonus allocated to J and O		9,800