Question

Julie Harris, William Gosse, and Regina Ryan started a partnership to provide mobile tax services. The partners’ capital account at the beginning of 2021 was Harris, $ 120,000; Gosse, $ 180,000; and Ryan, $ 90,000. The partnership agreement states that the partners will share profit equally.

On December 31, 2021, the partnership reported a loss of $ 21,000 for the year. During the year, Harris withdrew $ 80,000 and Gosse withdrew $ 140,000. Ryan did not make any withdrawals.

On January 1, 2022, the partners had a major disagreement as to the direction of the partnership and decided to liquidate the business. The December 31, 2021 balance sheet showed the following balances:

...... Cash.............................................................         $ 26,000

...... Machinery (net)............................................          169,000

...... Accounts payable..........................................             46,000

...... Partners’ capital...........................................          149,000

On January 1, 2022, the machinery was sold for proceeds of $ 133,000.

Instructions

Prepare the journal entry to record the following:

a)       The allocation of the loss to the partners on December 31, 2021.

b)      The closing of the drawings accounts on December 31, 2021.

c)       The liquidation of the partnership on January 1, 2022.

Answer 1

(a) Allocation of Loss to the partners as on 31st December, 2021:-

In the absence of any specific provision in the partnership deed with regard to sharing of Losses, losses will also be shared equally.

Hence Losses will be allocated as Follows:- $21000/3= $7000 each

Therefore Harris's share of Loss will be $7000

Gosse's share of Loss will be $7000

Ryan's share of Loss will be $7000

Journal Entry:-

Harris capital Account Debit 7000

Gosse Capital Account Debit 7000

Ryan Capital Account Debit 7000

To Loss Credit 21000

(Being Loss Transferred to Capital account)

(b) Closing Of Drawings account (Journal entry)

Harris Drawing account Debit 80000

To Cash Credit 80000

(Being amount withdrawn as drawings by Harris)

Gosse Drawing account Debit 140000

To Cash Credit 140000

(Being amount withdrawn as drawings by Gosse)

(c) Liquidation of Partnership firm:-

(i) Sale of Machinery at $133000:-

Cash Account Debit 133000

Loss on Sale of Machinery Account Debit 36000

To Machinery Account 169000

(Being Machinery sold at a loss)

Harris Capital account Debit 12000

Gosse Capital Account Debit 12000

Ryan Capital Account Debit 12000

To Loss on Sale of Machinery Credit 36000

(Being Loss on Sale of machinery transferred to Capital account of partners in equal share)

(ii) Accounts Payable account Debit 46000

To Cash Credit 46000

(Being Accounts payable paid by cash)

(iii) Cash Adjustment:-

Cash Account Debit 107000(see note below)

To Harris Capital account Credit 35667

To Gosse Capital Account Credit 35667

To Ryan Capital account Credit 35666

(Being Cash shortage incurred on liquidation being brought in by the partners equally)

Note:- Opening Cash 26000

Add:- Cash From Sale of Machinery 133000

Less:- Drawings of Harris 80000

Less :- Drawings of Gosse 140000

Less:- Accounts Payable paid 46000

Shortage of Cash 107000

To be brought in equally by all the partners