On April 1, 2013, Whitney Lang and Eli Capri form a partnership. Lang agrees to invest $18,000 cash and merchandise inventory valued at $50,000. Capri invests certain business assets at valuations agreed upon, transfers business liabilities, and contributes sufficient cash to bring his total capital to $120,000. Details regarding the book values of the business assets and liabilities, and the agreed valuations, follow:
Capri’s Ledger
Balance
Agreed-Upon
Balance
Accounts Receivable $45,700 $43,400
Allowance for Doubtful Accounts 3,200 3,500
Merchandise Inventory 31,500 28,900
Equipment 89,500 63,400 Accumulated Depreciation—Equipment 19,000
Accounts Payable 23,400 23,400
Notes Payable (current) 15,000 15,000
The partnership agreement includes the following provisions regarding the division of net income: interest of 10% on original investments, salary allowances of $36,000 (Lang) and $22,000 (Capri), and the remainder equally.
Instructions
1. Journalize the entries to record the investments of Lang and Capri in the partnership accounts.
2. Prepare a balance sheet as of April 1, 2013, the date of formation of the partnership of Lang and Capri.
3. After adjustments and the closing of revenue and expense accounts at March 31, 2014, the end of the first full year of operations, the income summary account has a credit balance of $118,000, and the drawing accounts have debit balances of $40,000 (Lang) and $30,000 (Capri). Journalize the entries to close the income summary account and the drawing accounts at March 31, 2014.
Answer:
1. Apr. 1 Cash 18,000
Merchandise Inventory 50,000
Whitney Lang, Capital 68,000
1 Cash 26,200
Accounts Receivable 43,400
Merchandise Inventory 28,900
Equipment 63,400
Allowance for Doubtful Accounts 3,500
Accounts Payable 23,400
Notes Payable 15,000
Eli Capri, Capital 120,000
2. LANG AND CAPRI
Balance Sheet
April 1, 2013
Assets
Current assets:
Cash $ 44,200
Accounts receivable $43,400
Less allowance for doubtful accounts 3,500 39,900
Merchandise inventory 78,900
Total current assets $163,000
Plant assets:
Equipment 63,400
Total assets $226,400
Liabilities
Current liabilities:
Accounts payable $ 23,400
Notes payable 15,000
Total liabilities $ 38,400
Partners’ Equity
Whitney Lang, capital $ 68,000
Eli Capri, capital 120,000
Total partners’ equity 188,000
Total liabilities and partners’ equity $226,400
3. Mar. 31 Income Summary 118,000
Whitney Lang, Capital* 63,400
Eli Capri, Capital* 54,600
31 Whitney Lang, Capital 40,000
Eli Capri, Capital 30,000
Whitney Lang, Drawing 40,000
Eli Capri, Drawing 30,000
* Computations:
Lang Capri Total
Interest allowance……………… $ 6,8001 $ 12,0002 $ 18,800
Salary allowance……………… 36,000 22,000 58,000
3 3
Remaining income (1:1)……… 20,600 20,600 41,200
Net income……………………… $63,400 $54,600 $118,000
1 10% × $68,000
2 10% × $120,000
3 ($118,000 – $18,800 – $58,000) × 1/2
Capri’s Ledger
Balance
Agreed-Upon
Balance
Accounts Receivable $45,700 $43,400
Allowance for Doubtful Accounts 3,200 3,500
Merchandise Inventory 31,500 28,900
Equipment 89,500 63,400 Accumulated Depreciation—Equipment 19,000
Accounts Payable 23,400 23,400
Notes Payable (current) 15,000 15,000
The partnership agreement includes the following provisions regarding the division of net income: interest of 10% on original investments, salary allowances of $36,000 (Lang) and $22,000 (Capri), and the remainder equally.
Instructions
1. Journalize the entries to record the investments of Lang and Capri in the partnership accounts.
2. Prepare a balance sheet as of April 1, 2013, the date of formation of the partnership of Lang and Capri.
3. After adjustments and the closing of revenue and expense accounts at March 31, 2014, the end of the first full year of operations, the income summary account has a credit balance of $118,000, and the drawing accounts have debit balances of $40,000 (Lang) and $30,000 (Capri). Journalize the entries to close the income summary account and the drawing accounts at March 31, 2014.
Answer:
1. Apr. 1 Cash 18,000
Merchandise Inventory 50,000
Whitney Lang, Capital 68,000
1 Cash 26,200
Accounts Receivable 43,400
Merchandise Inventory 28,900
Equipment 63,400
Allowance for Doubtful Accounts 3,500
Accounts Payable 23,400
Notes Payable 15,000
Eli Capri, Capital 120,000
2. LANG AND CAPRI
Balance Sheet
April 1, 2013
Assets
Current assets:
Cash $ 44,200
Accounts receivable $43,400
Less allowance for doubtful accounts 3,500 39,900
Merchandise inventory 78,900
Total current assets $163,000
Plant assets:
Equipment 63,400
Total assets $226,400
Liabilities
Current liabilities:
Accounts payable $ 23,400
Notes payable 15,000
Total liabilities $ 38,400
Partners’ Equity
Whitney Lang, capital $ 68,000
Eli Capri, capital 120,000
Total partners’ equity 188,000
Total liabilities and partners’ equity $226,400
3. Mar. 31 Income Summary 118,000
Whitney Lang, Capital* 63,400
Eli Capri, Capital* 54,600
31 Whitney Lang, Capital 40,000
Eli Capri, Capital 30,000
Whitney Lang, Drawing 40,000
Eli Capri, Drawing 30,000
* Computations:
Lang Capri Total
Interest allowance……………… $ 6,8001 $ 12,0002 $ 18,800
Salary allowance……………… 36,000 22,000 58,000
3 3
Remaining income (1:1)……… 20,600 20,600 41,200
Net income……………………… $63,400 $54,600 $118,000
1 10% × $68,000
2 10% × $120,000
3 ($118,000 – $18,800 – $58,000) × 1/2
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