Question

Question 3                                                                                                                            13 marks

Reagan, Carter and Clinton are partners with capital account balances, and income / loss sharing provisions as follows:

• Reagan, $86,000; Carter, $44,000; and Clinton, $35,000
• Reagan, Carter and Clinton share income and losses on a 2:2:1 ratio, respectively.

Assumption 1

Prepare the journal entry to record the August 1st retirement of Clinton from the partnership under the following assumption:

1. Clinton is paid $50,000 in partnership cash for his equity.

Assumption 2

Assume that Clinton does not retire from the partnership. Instead Bush pays $ 60,000 in cash and is admitted to the partnership on August 1 with 20% of the new total capital. Prepare the journal entry to record the admission of Bush to the partnership.

Assumption 3

Assuming the original partnership is liquidated on August 1, complete the table below based on the following information:

1. The equipment is sold for $ 2,000 cash.
2. The gain or loss on the sale of the equipment is allocated to the partners on a ratio of 2:2:1. Remember, Gain or Loss on Disposal equals sale proceeds minus book value of equipment.
3. The accounts payable are paid.
4. The remaining cash is distributed to the partners per their capital account balances.

	Cash	Equip.	Acc. Dep’n.	Accounts Payable	Reagan Capital	Carter Capital	Clinton Capital
Aug 1 Balances	167,000	32,000	22,000	12,000	86,000	44,000	35,000
Equipment Sold*
A/P Paid
Bal. Before Final Distribution
Cash Distribution
Final Balance

*Allocate the gain or loss on the sale of equipment to the partners’ capital on this line.

GENERAL JOURNAL                                Page 1
Date	Account titles and Explanation		Debit	Credit
Aug. 1

Answer 1

Credit Assumption 1: Retirement of Partner Journal Entries Date Accounts and Explanation Aug-01 Clinton, Capital Goodwill Cash (To record payment to Clinton on retirement) Debit $ 35,000 $ 15,000 50,000 Note: Clinton's Capital balance is $35,000 however, He is paid $50,000 excess payment of $15,000 made is on account of Goodwill.

Credit Assumption 2: Admission of Partner Journal Entries Date Accounts and Explanation Aug-01 Cash Bush, Capital (to record brought in capital by Bush) Debit $ 60,000 $ 60,000 $ 75,000 Aug-01 Goodwill Reagan, Capital Carter, Capital Clinton, Capital (To allocate Goodwill to existing Partners) $ $ $ 30,000 30,000 15,000 $ $ 60,000 300,000 Note: Capital brought in by Bush towards 20% of Capital Therefore total value of Partnership (60000/20%) Total Paid in Capital (86000+44000+35000+60000) Goodwill (300000-225000) $ 225,000 $ 75,000

Goodwill of the firm will be allocated to existing partners in their profit sharing ratio Share of Goodwill Reagan $ 30,000 (75000*2/5) Carter $ 30,000 (75000*2/5) Clinton $ 15,000 (75000*1/5) Total $ 75,000 Assumption 3: Liquidation of Partnership Cash Equipment Acc. Dep'n Accounts Payable Reagan Carter Clinton Capital Capital Capital Aug 1 Balance $ 167,000 $32,000 $ 22,000 $ 12,000 $ 86,000 $ 44,000 $ 35,000 Equipment Sold $ 2,000 $ (32,000) $ (22,000) $ $ (3,200) $ (3,200) $ (1,600) A/P Paid $ (12,000) $ $ $ (12,000) $ $ $ Bal Before Final Distribution $ 157,000 $ $ $ $ 82,800 $ 40,800 $ 33,400 Cash Distribution $ (157,000) $ $ $ $ (82,800) $ (40,800) $ (33,400) Final Balance $ $ $ $ $ $

Note: Calculation of loss on sale of equipment Cost of equipment $ 32,000 Less: Accumulated Depn $ 22,000 Book Value of Asset $ 10,000 Sale Proceeds $ 2,000 Loss on sale of equipment 8,000 (to be allocated between partners at their Profit sharing ratio) $