Chapter 19, Problem 1COP

1.

To determine

Journalize the transactions.

Explanation of Solution

Partnership: This is the form of business entity 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.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Record the journal entry:

Date	Account titles and Explanation	Debit	Credit
January 5	Accounts Receivable/Person C	$500
	Allowance for Doubtful Accounts		$500
	(Reinstated accounts receivable written off in the previous period)
January 5	Cash	$500
	Accounts Receivable/Person C		$500
	(Collection on account)
January 14	Computer System	$3,000
	Notes Payable		$3,000
	(Issued 3-month, 6% note to Computer Systems for a new computer system Z)
February 15	Notes Receivable	$2,500
	Sales		$2,500
	(Accepted 6-month, 7% note from Carol Reynolds for merchandise)
March 11	Cash	$5,000
	Morgan Hartley, Capital		$5,000
	(Owner made additional investment)
April 1	Depreciation Expense—Store Equipment	$15
	Accumulated Depreciation—Store Equipment $\left(\text{\$675 – \$75}\right)\text{/10 = \$60 per year }\times \text{ ¼ = \$15}$		$15
	(Depreciation to date on discarded cash register)
April 1	Accumulated Depreciation—Store Equipment	$495
	Loss on Discarded Store Equipment	$180
	Store Equipment		$675
	(Discarded cash register at a $180 loss)
April 12	Cash	$5,000
	Notes Payable		$5,000
	(Issued note to Dean Bank for a 75-day loan at 10% interest)
April 14	Interest Expense  ($\text{\$3,000 }\times \text{6\% }\times \text{3/12 = \$45}$)	$45
	Notes Payable (old)	$3,000
	Notes Payable (new)		$2,500
	Cash		$545
	(Paid interest and part of principal on old note and issued a new note carrying 8% interest for 30 days)
May 1	Allowance for Doubtful Accounts	$1,200
	Accounts Receivable/Brenda Husband		$1,200
	(Wrote off uncollectible account)
May 14	Interest Expense  ($\$2,500\times 8\%\times 30/360=\$16.67$)	$16.67
	Notes Payable	$2,500
	Cash		$2,516.67
	(Paid note at maturity to Computer systems Z)
May 25	Repairs Expense	$7,500
	Cash		$7,500
	(Maintenance on van)
June 1	Notes Receivable	$1,700
	Accounts Receivable/Person H		$1,700
	(Received 120-day, 8% note to settle account)
June 20	Accounts Receivable/Brenda Husband	$1,200
	Allowance for Doubtful Accounts		$1,200
	(Reinstated account receivable)
June 20	Cash	$1,200
	Accounts Receivable/Brenda Husband		$1,200
	(Collection on account)
June 22	Addition	$30,000
	Cash		$30,000
	(Added an addition to the building)
June 26	Notes Payable	$5,000
	Interest Expense $\left(\text{ \$5,000 }\times \text{ 10\% }\times \text{ 75/360 = \$104}\text{.17}\right)$	$104.17
	Cash		$5,104.17
	(Paid note to Dean Bank with interest at maturity)
July 1	Cash ($\$1,745.33–\$52.36=\$1,692.97$)	$1,692.97
	Interest Expense	$7.03
	Notes Receivable		$1,700
	(Discounted Person H’s note receivable at 12% at  Bank M)
July 8	Accounts Receivable/Person K	$4,250
	Sales		$4,250
	(Sale on account)
July 10	Purchases	$15,000
	Accounts Payable/Distributing D		$15,000
	(Purchased merchandise on account, terms 3/20, n/30)
July 18	Cash	$4,165
	Sales Discounts	$85
	Accounts Receivable/Person K		$4,250
	(Payment received on account with 2% discount taken)
July 30	Accounts Payable/Distributing D	$15,000
	Purchases Discounts		$450
	Cash		$14,550
	( Paid account payable taking 3% discount)
August 1	Accumulated Depreciation—Van	$500
	Cash		$500
	(Replaced exhaust system on van)
August 15	Cash	$2,577.50
	Collection Expense	$10
	Interest Revenue  ($\text{\$2,500 ×7\%× 6/12 = \$87}\text{.50}$)		$87.50
	Notes Receivable		$2,500
	(Received payment of note with interest less collection fee)
August 22	Allowance for Doubtful Accounts	$750
	Accounts Receivable/Person S		$750
	(Wrote off uncollectible account)
September 1	Automobile (new)	$40,000
	Accumulated Depreciation—Automobile	$19,000
	Automobile (old)		$23,000
	Cash		$34,500
	Gain on Trade-in		$1,500
	( Purchased new car worth $40,000 for $34,500 cash plus old car)
September 9	Notes Receivable	$2,000
	Accounts Receivable/Person T		$2,000
	(Received 60-day, 7.5% note to settle account)
September 15	Purchases	$3,500
	Accounts Payable/Dennis Designs		$3,500
	(Purchased merchandise on account, terms n/30)
September 29	Accounts Receivable/Person H  ($\text{\$1,745}\text{.33 + \$50}$)	$1,795.33
	Cash		$1,795.33
	(Paid Marshall Bank for dishonored note plus $50 fee)
October 15	Accounts Payable/Dennis Designs	$3,500
	Notes Payable		$3,500
	(Issued 90-day, 8% note to settle account)
October 20	Cash	$9,625
	Discount on Notes Payable ($\text{\$10,000 ×7}\text{.5\% ×180/360 = \$375}$)	$375
	Notes Payable		$10,000
	(Issued 180-day, non-interest-bearing note to Person O Savings Association discounted at 7.5%)
October 31	Cash	$125
	Sales		$125
	(Cash sale)
November 1	Notes Receivable	$500
	Accounts Receivable/Person L		$500
	(Received 30-day, 5% note to settle account)
November 8	Accounts Receivable/Person T	$2,025
	Interest Revenue		$25
	Notes Receivable		$2,000
	(Note receivable dishonored, transferred to account receivable)
November 30	Cash	$1,823.16
	Interest Revenue ($\text{\$1,795}\text{.33 }\times \text{ 9\% }\times \text{62/360 = \$27}\text{.83}$ )		$27.83
	Accounts Receivable/Person H		$1,795.33
	(Collected dishonored note with interest for 62 days at 9%)
December 1	Cash	$2.08
	Notes Receivable (new note)	$500
	Notes Receivable (old note)		$500
	Interest Revenue		$2.08
	(Received new 45-day, 8% note plus interest on original note)
December 14	Landscaping	$2,000
	Cash		$2,000
	(Landscaped lot)
December 31	Cash	$100
	Accumulated Depreciation—Fixtures	$300
	Loss on Sale of Fixtures	$100
	Fixtures		$500
	(Sold fixtures at a $100 loss)

Table (1)

Note: July 1’s discount: $\$1,745.33\times 12\%\times 90/360=\$52.36$

Ascertain the estimated ending inventory:

Company TM
Estimated Ending Inventory
June 30
Particulars	Cost	Retail
Inventory, start of period	$92,250	$120,000
Net purchases during period	$70,000	$95,000
Goods available for sale	$161,250	$215,000
Less net sales for period		$125,000
Inventory, end of period, at retail		$90,000
Ratio of cost-to-retail prices of goods available for sale $\left(\$161,250÷\$215,000\right)$		75%
Inventory, end of period, at estimated cost (75% of $90,000)	$67,500

Table (2)

2.

To determine

Prepare the adjusting entries.

Explanation of Solution

Adjustment entries:

Adjusting entries are those entries which are made at the end of the year to update all the balances in the financial statements to show the true financial information and to maintain the records according to accrual basis principle.

Record the adjusting entries:

Date	Account titles and Explanation		Debit	Credit
December 31	Accrued Interest Receivable		$3.33
	Interest Revenue			$3.33
	(Person N note receivable, reversible entry)
	$\left(\$500\times 8\%\times 30÷360\right)$
December 31	Interest Expense ($\$3,500\times 8\%\times 77/360$)		$59.89
	Accrued Interest Payable			$59.89
	(Person D note payable, reversible entry)
December 31	Interest Expense ($\text{\$10,000 × 7}\text{.5\% ×72/360}$)		$150
	Discount on Notes Payable			$150
	(Person O note payable, not reversible entry)
December 31	Depreciation Expense—Computer System		$1,500
	Accumulated Depreciation—Computer System			$1,500
	(Take full-year depreciation, in service before 15th.  $\left(\$3,000\times 50\%\right)$ )
December 31	Depreciation Expense—Automobile $\left(\text{7,000 miles ×\$0}\text{.375 per mile}\right)$		$2625
	Accumulated Depreciation—Automobile			$2625
December 31	Depreciation Expense—Addition $\left(\text{\$30,000 – \$2,000}\right)\text{/20 × 6/12}$		$700
	Accumulated Depreciation—Addition			$700
	(Take 6 months depreciation, in service After 15th)
December 31		Depreciation Expense—Landscaping ($\text{\$2,000 ×5/15 ×1/12}$)	$55.56
		Accumulated Depreciation—Landscaping		$55.56
		(Take 1 month of depreciation)
December 31		Patent Amortization $\text{(\$25,000/10 years)}$	$2,500
		Patent		$2,500
December 31		Bad Debt Expense $\left(\text{\$48,940}\times \text{3\% – \$375 credit balance}\right)$	$1,093
		Allowance for Doubtful Accounts		$1,093
December 31		Income Summary	$91,250
		Merchandise Inventory		$91,250
December 31		Merchandise Inventory	$102,000
		Income Summary		$102,000
December 31		Loss on Write-Down of Inventory ($\text{Cost \$102,000 – \$100,500 Market}$)	$1,500
		Merchandise Inventory		$1,500

Table (3)

3 (a)

To determine

Prepare the partial income statement by showing the allocation of net income.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement. In partnership, the division is often recorded in the lower portion of the income statement.

Partial income statement is prepared as follows:

Company TM
Income Statement (Partial)
For Year Ended December 31
Net income			$84,000
Allocation of net income:	Partner J	Partner M	Total
Salary allowances	$20,000	$15,000	$35,000
Interest allowances	$6,000	$4,000	$10,000
Remaining income	$23,400	$15,600	$39,000
Allocation of net income	$49,400	$34,600	$84,000

Table (4)

3 (b)

To determine

Prepare statement of partners’ equity.

Explanation of Solution

Statement of partners’ equity is prepared as follows:

Company T
Statement of Partners’ Equity
For Year Ended December 31
	Partner J	Partner M	Total
Capital, January 1, 20-1	$60,000	$40,000	$100,000
Additional investments during the year		$5,000	5,000
	$  60,000	$45,000	$105,000
Net income for the year	49,400	$34,600	$84,000
	$109,400	$79,600	$189,000
Withdrawals (salaries and interest)	($26,000)	($19,000)	($45,000)
Capital, December 31	$83,400	$60,600	$144,000

Table (5)

4 (a)

To determine

Prepare closing entries to close income summary to the capital account.

Explanation of Solution

Record the closing entries:

Date	Account titles and Explanation	Debit	Credit
December 31	Income Summary	$84,000
	Person J, Capital		$49,400
	Person M, Capital		$34,600

Table (6)

4 (b)

To determine

Prepare closing entries to close drawing accounts to the capital account.

Explanation of Solution

Record the journal entries:

Date	Account titles and Explanation	Debit	Credit
December 31	Person J, Capital	$26,000
	Person J, Drawing		$26,000
December 31	Person M, Capital	$19,000
	Person M, Drawing		$19,000

Table (7)

5.

To determine

Record the reversing entries

Explanation of Solution

Prepare the journal entry:

Date	Account titles and Explanation	Debit	Credit
January 1	Interest Revenue	$3.33
	Accrued Interest Receivable		$3.33
January 1	Accrued Interest Payable	$59.89
	Interest Expense		$59.89

Table (8)

6.

To determine

Journalize the transactions.

Explanation of Solution

Record the journal entry:

Date	Account titles and Explanation	Debit	Credit
January 13	Interest Expense ($\text{\$3,500 ×8\% × 90/360 = \$70}$)	$70
	Notes Payable	$3,500
	Cash		$3,570
	(Paid note to Dennis Designs at maturity adjustment reversed, no need to split to accrual account)
January 15	Cash	$505
	Interest Revenue ($\text{\$500 × 8\% ×45/360 = \$5}$)		$5
	Notes Receivable		$500
	(Received payment on note from Person L, adjustment reversed, no need to split to accrual account)
April 18	Notes Payable	$10,000
	Interest Expense ($\text{\$10,000 × 7}\text{.5\% ×108/360 this year = \$225}$)	$225
	Discount on Notes Payable		$225
	Cash		$10,000
	(Paid discounted note at maturity to Person O Savings Association discount;  prior period discount adjusted but  not reversible so only record discount for this period)

Table (9)