Question

On June 1, 2020, Jill Bow and Aisha Adams formed a partnership to open a gluten-free commercial bakery, contributing $281,000 cash and $362,000 of equipment, respectively. The partnership also assumed responsibility for a $41,000 note payable associated with the equipment. The partners agreed to share profits as follows: Bow is to receive an annual salary allowance of $151,000, both are to receive an annual interest allowance of 5% of their original capital investments, and any remaining profit or loss is to be shared 40/60 (to Bow and Adams, respectively). On November 20, 2020, Adams withdrew cash of $101,000. At year-end, May 31, 2021, the Income Summary account had a credit balance of $390,000. On June 1, 2021, Peter Williams invested $121,000 and was admitted to the partnership for a 20% interest in equity.

Answer 1

Part 1

No.	Date	Account titles and explanation	Debit	Credit
a	June 1, 2020	Cash	281000
		Equipment	362000
		J. Bow, Capital		281000
		A. Adams, Capital		321000
		Notes Payable		41000
		To record formation of partnership
b	November 20, 2020	A. Adams, Withdrawals	101000
		Cash		101000
		To record withdrawal by partner.
c	May 31, 2021	Income summary	390000
		J. Bow, Capital		206830
		A. Adams, Capital		183170
		To record closing of net income to capital
d	June 1, 2021	Cash	121000
		J. Bow, Capital (202400-121000)*20%	16280
		A. Adams, Capital (202400-121000)*80%	65120
		P. Williams, Capital (1012000*20%)		202400
		To record the admission of new partner

	J. Bow	A. Adams	Total
Net income			390000
Salary allowance:
Bow	151000
Interest allowances:
Bow (5% on $281000)	14050
Adams (5% on $321000)		16050
Total salaries and interest allocation	165050	16050	181100
Balance of income to be allocated			208900
Balance allocated 40/60:
Bow (20% × $208900)	41780
Adams (80% × $208900)		167120
Total allocated 40/60			(208900)
Balance of income			0
Shares of the partners	206830	183170	390000

Total equity prior to admission of new partner = (281000+206830)+(321000-101000+183170) = 891000

Total equity after admission of new partner = 891000+121000= 1012000

Part 2

J. Bow, Capital (281000+206830-16280)	$471550
A. Adams, Capital (321000-101000+183170-65120)	$338050
P. Williams, Capital	$133500