Accounting for Partnerships

CHAPTER 19 677

3. Prepare a schedule showing the division of net income to the partners as it would appear on the
income statement for 2013.
4. Prepare a statement of partners’ equities showing the changes that took place in the partners’
capital accounts during 2013.
Analyze: By what percentage did Sim’s capital account increase in the fiscal year 2013?

Accounting for revaluation of assets and liabilities of a
partnership, investment of a new partner, and withdrawal of a
partner.
The balance sheet of Thomas Pharmacy after the revenue, expense, and partners’ drawing accounts
have been closed on December 31, 2013, follows:
Thomas Pharmacy

Balance Sheet
December 31, 2013
Assets
Cash
Accounts Receivable
Merchandise Inventory
Equipment
Allowance for Depredation—Equipment
Building
Allowance for Depredation—Building
Land
Total Assets
,.

82 4.00 00
16 0 0 0 00
4 2 0 0 0 0 00
164
96
400
320

d 6 . 0 00
d Co 00
oTo 00

Liabilities and Partners’ Equity
Liabilities
Accounts Payable
Taxes Payable
Total Liabilities _
Partners’ Equity
Larry Thomas, Capitol
Hazel Thomas, Capital _
Isiah Thomas, Capital
Total Partners’ Equity
Total Liabilities and Partners’ Equity

68 0 0 0 00

0 0.0 00
80 000 oo -40 d0 o oo .
706 4 0 0 00

404 ioo 00 .
22 i 0 00
426 4 0 0 00

16010 . 00 00
60 060 00
60000 00
280 00 0
706 4 0 0 00

On that date, Larry Thomas, Hazel Thomas, and Isiah Thomas agree to admit Kathryn Thomas to
the partnership. The partnership agreement provides that, in case of dissolution of the partnership, all
assets and liabilities should be revalued. Profits and losses are shared in the ratio of 50:25:25, to
Larry, Hazel, and Isiah, respectively. The agreed upon values of the assets are as follows:

Accounts receivable
Merchandise inventory
Equipment

$ 14,800
398,400
68,000

Building
Land

$124,000
88,000

All liabilities are properly recorded.

INSTRUCTIONS
1. Prepare the general journal entries to record revaluation of the assets.
2. Prepare the general journal entry (or entries) to record Kathryn Thomas’s investment of
$120,000, assuming that she is to receive capital equal to the amount invested.

Problem 19.5A
Objectives 6, 8, 9

678 CHAPTER 19

Accounting for Partnerships

3. Prepare the general journal entry (or entries) to record Kathryn Thomas’s investment of
$120,000, assuming that she is to receive one-fifth of the capital of the partnership.
4. Prepare the general journal entry (or entries) to record Kathryn Thomas’s investment of
$120,000, assuming that she is to receive one-third of the capital of the partnership.
5. Assume that after the revaluation had been recorded, the existing partners and Kathryn Thomas
decided that their previous agreement should be canceled and that Kathryn Thomas should not
become a partner. Instead, the partners agreed that Hazel Thomas would withdraw from the
partnership and be paid cash by the partnership.
a. Prepare the general journal entry to record the payment to Hazel Thomas if she is paid an
amount equal to her capital account balance after the revaluation.
b. Prepare the general journal entry to record the payment to Hazel Thomas if she is paid an
amount equal to $12,000 less than her capital account balance after revaluation.
c. Prepare the general journal entry to record the payment to Hazel Thomas if she is paid an
amount equal to $9,600 more than her capital account balance after revaluation.
Analyze: Assume that only items 1 and 3 have been recorded in the records of the partnership.
What is the balance of Isiah Thomas’s capital account at January 1, 2014?

Problem 19.6A
Objectives 7, 8

Is Accounting for sale of a partnership interest and investment of a
new partner.
David Masters and Luis Anton, attorneys, operate a law practice. They would like to expand the
expertise of their firm. In anticipation of this, they have agreed to admit June Cho to the partnership
on January 1, 2013. The capital account balances on January 1, 2013, after revaluation of assets, are
Masters, $180,000, and Anton, $140,000. Net income or net loss is shared equally.
INSTRUCTIONS
Prepare the entries in general journal form to record the admission of Cho to the partnership on January
1, 2013, under each of the following independent conditions:
1.
2.
3.
4.

Masters sells one-half of his interest in the partnership to Cho for $128,000 cash.
Masters sells one-half of his interest in the partnership to Cho for $84,000 cash.
Cho invests $120,000 in the business for a 25 percent interest in the partnership.
Cho invests $124,000 in the business for a 30 percent interest in the partnership.

Analyze: Based only on item 3, what percentage of total equity does each partner own?

Problem Set B
Problem 19.113
Objective 3

Is Accounting for the formation of a partnership.
Horace Brock operates the Brock Broadcast Company. His postclosing trial balance on December
31, 2013, is as follows:
Brock Broadcast Company
Postclosing Trial Balance
December 31, 2013
ACCOUNT NAME

Cash
Accounts Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Fixtures and Store Equipment
Accumulated Depredation
Accounts Payable
Horace Brock, Capital
Totals

DEBIT

CREDIT

12 4 . 0 -0 00 12 000 00
2 4 . D 0 00
90 o’ orb 00
120 o 6.0 00

234 4 0 0 00

80
4
148
234

O’O’ o
ddO 00
iiD70 00
4:0 0 00

Accounting for Partnerships
James:

Cash, $12,000; Merchandise inventory, $24,000; Equipment, $76,000;
Accounts payable, $10,000.

Joan:

CHAPTER 19 673

Furniture, $24,000; Cash, $36,000.

James is to own two-thirds of the capital, and Joan is to own one-third of the capital, but they will
split profits and losses equally. Prepare a balance sheet for the partnership just after the assets and
liabilities have been transferred to it.
Computing and recording allocation of net income with salaries
and interest allowed.

•

Exercise 19.4
Objective 4

Jackie Chanda and Janet Jones are partners who share profits and losses in the following manner. Chanda receives a salary of $96,000, and Jones receives a salary of $140,000. These
amounts were paid to the partners and charged to their drawing accounts. Both partners also
receive 10 percent interest on their capital balances at the beginning of the year. The balance of
any remaining profits or losses is divided equally. The beginning capital accounts for 2013
were Chanda, $408,000, and Jones, $508,000. At the end of the year, the partnership had a net
income of $288,000.
Compute the amount of net income or loss to be allocated to each partner.
Computing and recording allocation of net income with
interest allowed.

•

Exercise 19.5
Objective 4

Reagan and Carter are partners. Their partnership agreement provides that, in dividing profits,
each is to be allocated interest at 10 percent of her beginning capital balance. The balance of net
income or loss after the interest allowances is to be split in the ratio of 60:40 to Reagan and
Carter, respectively. The beginning capital balances were Reagan, $120,000 and Carter, $24,000.
Net income for the year was $240,000. Compute the amount of net income to be allocated to each
partner.

Exercise 19.6

Computing and recording division of net income, with
salaries allowed.

Objective 4

Raymond Zeidan and Abe Foras are partners who share profits and losses in the ratio of 60 and 40
percent, respectively. Their partnership agreement provides that each will be paid a yearly salary of
$84,000. The salaries were paid to the partners during 2013 and were charged to the partners’ drawing accounts. The Income Summary account has a credit balance of $330,800 after revenue and
expense accounts are closed at the end of the year. What amount of net income or net loss will be
allocated to each?

Exercise 19.7

Computing and recording division of net loss, with no partnership
agreement on method of allocation.

Objective 4

After revenue and expense accounts of The Quick Stop were closed on December 31, 2013, Income
Summary contained a credit balance of $96,000. The drawing accounts of the two partners, Gabe
Monte and Bob Ferguson, showed debit balances of $70,000 and $174,000, respectively. Profits and
losses are to be shared equally. Record the general journal entries to close the Income Summary
account and the partners’ drawing accounts.
Computing and recording division of net income based on
fixed ratio.

The net income for the new partnership known as The Super Store for the year ended December
31, 2013, was $24,000. The partners, Dan Chase and Chris Torres, share profits in the ratio of 60
and 40 percent, respectively. Record the general journal entry (or entries) to close the Income
Summary account.

•

Exercise 19.8
Objective 4

Accounting for Partnerships

674 CHAPTER 19

Exercise 19.9

► Computing the division of net income of a partnership.
The partnership agreement of Mary Ayers and Neil Stewart does not indicate how the profits and
losses will be shared. Before dividing the net income, Ayers’s capital account balance was
$320,000, and Stewart’s capital balance was $80,000. The net income of their firm for the year that
just ended was $188,000. How much income will be allocated to Ayers and how much to Stewart?

Objective 4

Exercise 19.10

►

Objective 6

Recording revaluation of assets prior to dissolution of a
partnership.
Howard Johnson and Neil Wilner are partners who share profits and losses in the ratio of 60:40,
respectively. On December 31, 2013, they decide that Wilner will sell one-half of his interest to Ben
Reed. At that time, the balances of the capital accounts are $250,000 for Johnson and $350,000 for
Wilner. The partners agree that before the new partner is admitted, certain assets should be revalued.
These assets include merchandise inventory carried at $205,600 revalued at $201,800, and a building with a book value of $130,000 revalued at $225,000.

1. Record the revaluations in the general journal.
2. What will the capital balances of the two existing partners be after the revaluation is made?
Exercise 19.11 10- Recording sale of a part interest.
Objective 7
James Walker and Phillip Turner are partners who share profits and losses in the ratio of 60 and 40
percent, respectively. The balances of their capital accounts on December 31, 2012, are Walker,
$200,000 and Turner, $220,000. With Turner’s agreement, Walker sells one-half of his interest in
the partnership to Gloria Cox for $150,000 on January 1, 2013. What will the capital account balances for each of the three partners be after this sale?
Exercise 19.12

►

Objective 9

Recording withdrawal of a partner.
Wells, Harris, and Masten are partners, sharing profits and losses in the ratio of 30, 40, and 30
percent, respectively. Their partnership agreement provides that if one of them withdraws from the
partnership, the assets and liabilities are to be revalued, the gain or loss allocated to the partners,
and the retiring partner paid the balance of his account. Masten withdraws from the partnership
on December 31, 2013. The capital account balances before recording revaluation are Wells,
$115,000; Harris, $125,000; and Masten, $110,000. The effect of the revaluation is to increase
Merchandise Inventory by $21,000 and the Building account balance by $10,000. How much
cash will be paid to Masten?

PROBLEMS
Problem Set A
Problem 19.1A

►

Objective 3

excel

Grew
“”‘

wnriect

ACCOUNTING

Accounting for formation of a partnership.
Stan Otis operates a store that sells computer software. Otis has agreed to enter into a partnership with Reginald Pittman, effective January 1, 2013. The new firm will be called Contemporary Computing. Otis is to transfer all assets and liabilities of his firm to the partnership at the
values agreed on. Pittman will invest cash that is equal to 80 percent of Otis’s investment after
revaluation. The accounts shown on Otis’s books and the agreed-on value of assets and liabilities are shown below.
INSTRUCTIONS
1. Prepare the general journal entries to record the following transactions in the books of the
partnership on January 1, 2013:

Accounting for Partnerships

Shown in
Otis’s Records

Value
Agreed to
by Partners

$ 40,000

$ 40,000

112,000

109,000

350,000

365,000
75,000

Balances

Assets Transferred
Cash
Accounts Receivable
Allowance for Doubtful Accounts

$ 116,000
4,000

Merchandise Inventory
Furniture and Equipment
Accumulated Depreciation

CHAPTER 19 675

120,000
50,000

70,000

Total Assets
Liabilities and Owner’s Equity Transferred
Accounts Payable

$572,000

$589 : 000

60,000

60,000

Stan Otis, Capital

$512,000

$529,000

a. Receipt of Otis’s investment of assets and liabilities.
b. Receipt of Pittman’s investment of cash.
2. Prepare a balance sheet for the partnership as of the beginning of its operations on January 1, 2013.
Analyze: Based on the balance sheet you have prepared, what percentage (to the nearest 1/10 of

1%) of total equity is owned by Stan Otis?

Problem 19.2A

Accounting for formation of a partnership.

James Bryant operates a small shop that sells fishing equipment. His postclosing trial balance on
December 31, 2013, is shown below.
Bryant plans to enter into a partnership with Camille Willis, effective January 1, 2014. Profits
and losses will be shared equally. Bryant is to transfer all assets and liabilities of his store to the
partnership after revaluation as agreed. Willis will invest cash equal to Bryant’s investment after
revaluation. The agreed values are Accounts Receivable (net) $13,500; Merchandise Inventory,
$48,900; and Furniture and Equipment, $11,300. The partnership will operate as Bryant and
Willis Angler’s Outpost.

Bryant’s Tackle Center
Postclosing Trial Balance
December 31, 2013
ACCOUNT NAME

Cash
Accounts Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Furniture and Equipment

DEBIT

1 5 0 0 00
44 0 0 0 00
28 1 0 0 00
22 0 0 0 00

Accumulated Depreciation
Accounts Payable

3 0 0 0 00
64 2 5 0 00

Capital
Totals

CREDIT

3 7 5 0 00
14 9 0 0 00

90 7 5 0 00

90 7 5 0 00

Objective 3

excel

Accounting for Partnerships

676 CHAPTER 19

INSTRUCTIONS
1. In general journal form, prepare the entries to record:
a. The receipt of Bryant’s investment of assets and liabilities by the partnership.
b. The receipt of Willis’s investment of cash.
2. Prepare a balance sheet for Bryant and Willis Angler’s Outpost just after the investments.

Analyze: By what net amount were the net assets of Bryant’s Tackle Center adjusted before they
were transferred to the partnership?
Problem 19.3A

►

Objective 4

Computing and recording the division of net income or loss
between partners.

Angie Castillo and Ashlee Williams own The Blossom Flower Shop. The partnership agreement
provides that Castillo can withdraw $4,000 a month and Williams $3,500 a month in anticipation of
profits. The withdrawals, which are not considered to be salaries, were made each month. Net
income and net losses are to be allocated 60 percent to Castillo and 40 percent to Williams. For the
year ended December 31, 2013, the partnership earned a net income of $140,000.
INSTRUCTIONS
1. Prepare general journal entries to:
a. Close the Income Summary account.
b. Close the partners’ drawing accounts.
2. Assume that there was a net loss of $40,000 for the year instead of a profit of $140,000. Give
the general journal entries to:
a. Close the Income Summary account.
b. Close the partners’ drawing accounts.

Analyze: Assume the business earned net income of $140,000. If 2013 was the first year of operation, what balance should be reflected for the Angie Castillo, Capital account at the end of the year
if Castillo’s beginning capital was $100,000?
Problem 19.4A

►

Objectives 4, 5

eXce1

Computing and recording the division of net income or
loss between partners; preparing a statement of partners’
equities.

Larry Sims and Larry Thomas own Larry’s Antiques. Their partnership agreement provides for
annual salary allowances of $90,000 for Sims and $80,000 for Thomas, and interest of 10 percent
on each partner’s invested capital at the beginning of the year. The remainder of the net income or
loss is to be distributed 40 percent to Sims and 60 percent to Thomas. The partners withdraw their
salary allowances monthly. On January 1, 2013, the capital account balances were Sims, $400,000,
and Thomas, $360,000. On December 15, 2013, Thomas made a permanent withdrawal of
$100,000. The net income for 2013 was $320,000.
INSTRUCTIONS
1. Prepare the general journal entry on December 15, 2013, to record the permanent withdrawal
by Thomas.
2. Prepare the general journal entries on December 31, 2013, to:
a. Record the salary allowances for the year.
b. Record the interest allowances for the year.
c. Record the division of the balance of net income.
d. Close the drawing accounts into the capital accounts, assuming that Sims and Thomas have
withdrawn their full salary allowances.