Question

1.   

Jim Steele and John Rich operate separate auto repair shops as proprietorships. On January 1, 2019, they decide to combine their separate businesses to form Steele Rich Auto Repair, a partnership. Information from their separate balance sheets is presented below:

                                                                                                                                   Steele Auto Repair                Rich Auto Repair

           Cash................................................................................           $  5,000                       $10,000

           Accounts receivable.........................................................                8,000                             5,000

           Allowance for doubtful accounts......................................                1,000                                  500

           Accounts payable.............................................................                3,000                             6,000

           Notes payable..................................................................                        —                             5,000

           Salaries payable...............................................................                1,000                                  500

           Equipment......................................................................             12,000                          26,000

           Accumulated depreciation—equipment...........................                2,000                             4,000

It is agreed that the expected realizable value of Steele's accounts receivable is $5,000 and Rich's receivables is $4,000. The fair value of Steele's equipment is $15,000 and Rich's equipment is $24,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Rich's balance sheet that he will pay himself.

Instructions

Prepare the journal entries necessary to record the formation of the partnership.

2.

LOUD & PROUD MUSIC

Adjusted Trial Balance

December 31, 2021

                                                                                                                                                                                     Debit                   Credit

Current assets............................................................................................... $ 125,000

Property, plant, and equipment......................................................................... 30,000

Current liabilities.........................................................................................................         $ 20,000

Long-term debt............................................................................................................             85,000

Loud, capital................................................................................................................             50,000

Loud, drawings.................................................................................................. 20,000

Proud, capital..............................................................................................................             75,000

Proud, drawings................................................................................................ 15,000

Sales revenue................................................................................................................          370,000

Operating expenses ......................................................................................     410,000                             

                                                                                                                                                                               $ 600,000     $ 600,000

The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows:

1.      A salary allowance of $ 40,000 to Loud and $ 50,000 to Proud.

2.      The remainder is to be divided equally.

Instructions

a)       Prepare a schedule that shows the division of profit/loss to each partner.

b)      Prepare the closing entries for the division of profit/loss and for the drawings accounts at December 31, 2021.

3.

Bob Spade and Ken Lundy have formed the partnership Art World, and have capital balances of $ 120,000 and $ 105,000, respectively on January 1, 2021. On June 1, 2021, Lundy invested an additional $ 20,000. Also, during the year, Spade withdrew $ 16,000 and Lundy withdrew $ 22,000. Sales for the year amounted to $ 850,000 and expenses were $ 520,000. After taking salary allowances of $ 60,000 and $ 90,000, respectively, Spade and Lundy share any remaining profit and losses on a 40% and 60% ratio, respectively.

Instructions

a)       Prepare a schedule that shows the division of profit to each partner.

b)       Prepare the closing entries at December 31, 2021, for the Art World partnership.

c)       Prepare a statement of partners' equity for 2021.

4.

At September 30, 2021, C. Saber and J. Wong, the two partners of City Landscaping, had capital account balances of $ 25,000 each. D. Walker joined the partnership on September 30, 2021 and received a 1/3 interest in the partnership in exchange for a capital contribution of $ 40,000.

For the year ended September 30, 2022, City Landscaping had profit of $ 126,000, which is allocated equally to the three partners. Withdrawals during the year were $ 18,000 each by Saber and Wong, and $ 14,000 by Walker.

Instructions

a)       Record the transaction on September 30, 2021 admitting Walker into the partnership.

b)      Calculate the balance of each partner’s capital account after the transaction.

Answer 1

1) Journal entries at the time of partnership formation(in $)

   Cash. a/c Dr 5000

Accounts receivable a/c Dr 5000

Equipment a/c Dr 15000

To Allowance for doubtful debts a/c 1000

To salaries payable a/c 1000

To Accumulated depreciation on equipment a/c 2000

To accounts payable a/c 3000

To Steele's Capital a/c     18000

  

  Cash. a/c Dr 5000(10000-5000 Notes Payable)

Accounts receivable a/c Dr 4000

Equipment a/c Dr 24000

To Allowance for doubtful debts a/c 500

To salaries payable a/c 500

To Accumulated depreciation on equipment a/c 4000

To accounts payable a/c 6000

To Rich's Capital a/c 22000

2)Division of Profit/loss between the partners(in $)

Sales revenue 370000

Less Operating Expenses 410000

Less Salary allowance

L-40000

P-50000 90000

Total Net Loss (130000) to be divided equally

So Each will receive Loud Proud

Net Loss (65000) $ (65000) $

Journal entries(in $)

Loud's capital a/c Dr 65000

Proud's capital a/c Dr 65000

To Profit/loss from income statement a/c 130000

Salary allowance a/c Dr 90000

To Loud's capital a/c 40000

To Proud's capital a/c 50000

Loud's capital a/c Dr 20000

Proud's capital a/c Dr 15000

To Drawings a/c 350

3) Sales 850000

Less Operating expense 520000

Less Salary allowance 150000

Net Profit 180000$

a) Division of profit to each partners (in $)

Particulars Spade 40% Lundy 60%

Net profit (180000) 72000 108000

Salary allowance 60000 90000

b) Closing entries(in $)

Profit from income statement a/c Dr 180000

To spade's capital a/c 72000

To Lundy's capital a/c 108000

Salary allowance a/c Dr 150000

To Spade's capital a/c 60000

To Lundy's capital a/c 90000

Spade's capital a/c Dr 16000

Lundy's capital a/c Dr 22000

To Drawings  a/c 38000

Cash a/c Dr 20000

To Lundy's capital a/c 20000

c) Partners equity

Particulars Spade Lundy

Opening capital balance 120000 105000

Add Additional capital invested - 20000

Add Profit 72000 108000

Add Salary allowance 60000 90000

Less Drawings 16000 22000

Total 236000 $ 301000 $

4) Journal entry at the time of admission of new partner( in $)

Cash a/c Dr 40000

To Walker's capital a/c 40000

b) Capital account balances at year end of every partner

Particulars Saber Wrong Walker

Capital a/c opening balance 25000 25000 40000

Add Profits allocated equally 42000 42000 42000

Less Drawings 18000 18000 14000

Total 49000 $ 49000 $ 68000 $