Chapter 19, Problem 5CE

To determine

Prepare the journal entry to record the sale of inventory for $600,000 and the allocation of the gain or loss.

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.

Prepare the journal entry:

Date	Account titles and Explanation	Debit	Credit
January 1	Cash	$600,000
	Inventory		$400,000
	Gain on sale of assets		$200,000
	(To record sale of inventory)

Table (1)

• Cash is an asset and it is increased. Therefore, debit cash account by $600,000.
• Inventory is an asset and it is decreased. Therefore, credit inventory account by $400,000.
• Gain on sale of assets is a component of partners’ equity and it is increased. Therefore, credit gain on sale of assets account by $200,000.

Date	Account titles and Explanation	Debit	Credit
January 1	Gain on sale of assets	$200,000
	Partner P, Capital		(1) $60,000
	Partner JM, Capital		(2) $60,000
	Partner JS, Capital		(3) $40,000
	Partner M, Capital		(4) $40,000
	(To record allocation of gain)

Table (2)

• Gain on sale of assets is a component of partners’ equity and it is decreased. Therefore, debit gain on sale of assets account by $200,000.
• Partner P, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner P account by $60,000.
• Partner JM, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner JM account by $60,000.
• Partner JS, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner JS account by $40,000.
• Partner M, Capital is a component of partners’ equity and it is increased. Therefore, debit Partner M account by $40,000.

Working notes:

(1) Calculate the share of gain on sale of assets for Partner D:

$\begin{array}{c}\begin{array}{l}\text{Share}\text{of}\text{gain}\text{on}\text{sale}\text{of}\\ \text{assets}\text{for}\text{Partner}\text{D}\end{array}\}\text{=}\left(\begin{array}{l}\text{Gain}\text{on}\text{sale}\text{of}\text{inventory}\text{×}\\ \text{Percentage}\text{of}\text{share}\text{in}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$200,000×}\frac{\text{30}}{\text{100}}\\ \text{=}\text{\$60,000}\end{array}$

(2) Calculate the share of gain on sale of assets for Partner JM:

$\begin{array}{c}\begin{array}{l}\text{Share}\text{of}\text{gain}\text{on}\text{sale}\text{of}\\ \text{assets}\text{for}\text{Partner}\text{JM}\end{array}\}\text{=}\left(\begin{array}{l}\text{Gain}\text{on}\text{sale}\text{of}\text{inventory}\text{×}\\ \text{Percentage}\text{of}\text{share}\text{in}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$200,000×}\frac{\text{30}}{\text{100}}\\ \text{=}\text{\$60,000}\end{array}$

(3) Calculate the share of gain on sale of assets for Partner JS:

$\begin{array}{c}\begin{array}{l}\text{Share}\text{of}\text{gain}\text{on}\text{sale}\text{of}\\ \text{assets}\text{for}\text{Partner}\text{JS}\end{array}\}\text{=}\left(\begin{array}{l}\text{Gain}\text{on}\text{sale}\text{of}\text{inventory}\text{×}\\ \text{Percentage}\text{of}\text{share}\text{in}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$200,000×}\frac{\text{20}}{\text{100}}\\ \text{=}\text{\$40,000}\end{array}$

(4) Calculate the share of gain on sale of assets for Partner M:

$\begin{array}{c}\begin{array}{l}\text{Share}\text{of}\text{gain}\text{on}\text{sale}\text{of}\\ \text{assets}\text{for}\text{Partner}\text{M}\end{array}\}\text{=}\left(\begin{array}{l}\text{Gain}\text{on}\text{sale}\text{of}\text{inventory}\text{×}\\ \text{Percentage}\text{of}\text{share}\text{in}\text{profit}\text{and}\text{losses}\end{array}\right)\\ \text{=}\text{\$200,000×}\frac{\text{20}}{\text{100}}\\ \text{=}\text{\$40,000}\end{array}$