Question

in the early part of 2018, the partners of Hugh, Jacobs, and Thomas sought assistance from a local accountant. They had begun a new business in 2017 but had never used an accountant's services Hugh and Jacobs began the partnership by contributing $100,000 and $50,000 in cash, respectively. Hugh was to work occasionally at the business, and Jacobs was to be employed full-time. They decided that year-end profits and losses should be assigned as follows: • Each partner was to be allocated 10 percent interest computed on the beginning capital balances for the period. • A compensation allowance of $5,000 was to go to Hugh with a $19,000 amount assigned to Jacobs • Any remaining income would be split on a 4:6 basis to Hugh and Jacobs, respectively. In 2017, revenues totaled $125,000, and expenses were $93,000 (not including the partners' compensation allowance). Hugh withdrew cash of $6,000 during the year, and Jacobs took out $11,000. In addition, the business paid $8,500 for repairs made to Hugh's home and charged it to repair expense. On January 1, 2018, the partnership sold a 30 percent interest to Thomas for $80,000 cash. This money was contributed to the business with the bonus method used for accounting purposes. c. What journal entries should the partnership have recorded on December 31, 2017? d. What journal entry should the partnership have recorded on January 1, 2018? < Prev 16 of 16 !!! Next >

Answer 1

Solution

1.

journal entries should the partnership have recorded on December 31, 2017

Hugh, drawings	$8,500
Repair expense		$8,500
(To reclassify payment made to repair personal residence)
Hugh, capital [6000+8500]	$14,500
Jacobs, capital	$11,000
Hugh, drawings(7000+6500)		$14,500
Jacobs , drawing		$11,000
(To close drawings account)
Revenues	$125,000
Expenses(99000-6500)		$84,500
Income summary		$40,500
(To close Revenue and Expenses)
Income summary	$40,500
Hugh, capital		$17,400
Jacobs, capital		$23,100
(To close net income to partners capital)

Allocation of income:

	Hugh	Jacobs
Interest (10% on beginning capital)	10,000	5,000
Salary allowance	8,000	19,000
	18000	24000
Remaining income(40,500-18000-24000= -1,500)	(600) (40%×1500)	(900) (60%×1500)
Profit allocation	17,400	23,100

2.

journal entry should the partnership have recorded on January 1, 2018:

Cash	$80,000
Thomas, capital(30% of total capital)		$73500
Hugh, capital		$2,600
Jacobs, capital		3900

Beginning capital	150000
Add: Net income	40500
Less: Drawings	25500
Capital prior to admission	165000
Thomas capital	80,000
Total capital	245,000
30% of Capital	73500
Excess paid by Thomas Capital	6500
Excess allocated to Hugh	2600
Excess allocated to Jacob	3900