Question

After the tangible assets have been adjusted to current market prices, the capital accounts of Brad Paulson and Drew Webster have balances of $48,250 and $55,900, respectively. Austin Neel is to be admitted to the partnership, contributing $32,770 cash to the partnership, for which he is to receive an ownership equity of $37,520. All partners share equally in income.

	Required:
A.	On December 31, journalize the entry to record the admission of Neel, who is to receive a bonus of $4,750. Refer to the Chart of Accounts for exact wording of account titles.
B.	What are the capital balances of each partner after the admission of the new partner?
C.	Why are tangible assets adjusted to current market prices, prior to admitting a new partner?

CHART OF ACCOUNTS
Paulson, Webster, and Neel
General Ledger
ASSETS 110 Cash 111 Petty Cash 112 Accounts Receivable 113 Allowance for Doubtful Accounts 114 Interest Receivable 115 Notes Receivable 116 Inventory 117 Office Supplies 118 Store Supplies 119 Prepaid Insurance 120 Land 123 Equipment 124 Accumulated Depreciation-Equipment 129 Asset Revaluations 133 Patent LIABILITIES 210 Accounts Payable 211 Salaries Payable 213 Sales Tax Payable 214 Interest Payable 215 Notes Payable EQUITY 310 Brad Paulson, Capital 311 Brad Paulson, Drawing 312 Drew Webster, Capital 313 Drew Webster, Drawing 314 Austin Neel, Capital 315 Austin Neel, Drawing	REVENUE 410 Sales 610 Interest Revenue

A. On December 31, journalize the entry to record the admission of Neel, who is to receive a bonus of $4,750. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4

B. What are the capital balances of each partner after the admission of the new partner?

Partner	Balance
Brad Paulson
Drew Webster
Austin Neel

C. Why are tangible assets adjusted to current market prices, prior to admitting a new partner?

Tangible assets should be adjusted to current market prices so that the new partner   any gains or losses from changes in market prices prior to being admitted. For example, if the market price of land doubled prior to admitting new partners,     should realize the increase in the value of the land in their capital accounts prior to the new partners’ admission. Otherwise,     would share in the increase in the market value of the land.

Answer 1

A. Journal entry for admission of Austin Neel

Dec 31st. Cash A/c Dr 32770

Brad Paulson, Capital A/c. Dr. 2375

Drew Webster, Capital A/c Dr. 2375

To Austin Neel, Capital A/c 37520

B.Capital Balance of1)Brad=48250- 2375 (4750*1/2)=$45875

2)Drew=55900- 2375(4750*1/2)=$53525

Note: It is assumed that the profit sharing ratio before admission of Austin is also 1:1. The bonus of Austin will have to be born by the old partners in their profit sharing ratio prior to admission of Austin

C.Tangible assets are adjusted to the current market prices, prior to admitting a new partner so that the gains or losses just before the admission of the new partner, are shared among the old partners. On revaluation of assets and liabilities, any loss or gain arising will be given to the old partners. The new partner is only eligible for the loss or gain arising after his admission.