Question

Two partnerships of A & B and C&D began business on Jan 1^st 2017; each partnership owns one retail appliance store. The two partnerships agree to combine as of April 1^st 2017 to form a new partnership, ABCD Discount Stores. The two businesses agreed upon the following points:

1. Profit and loss ratios.

	A	B	C	D
Old Business Ratios	40%	60%	30%	70%
New Business Ratios	20%	30%	15%	35%

2. Capital investments. The opening capital investments for the new partnership are to be in the same ratio as the profit and loss sharing ratios for the new partnership. If necessary, certain partners may have to contribute additional cash, and others may have to withdraw cash to bring the capital investments into the proper ratio.
3. Accounts receivable. The partners agreed to set the new partnership’s allowance for bad debts at 3% of the accounts receivable contributed by A&B and 12% of the accounts receivable contributed by C&D.
4. Inventory. The new partnership’s opening inventory is to be valued by the FIFO method. B&M used the FIFO method to value inventory (which approximates its current value), and A&J used the LIFO method. The LIFO inventory represents 85% of its FIFO value.
5. Property and equipment. The partners agree that the building’s current value is approximately 70% of the building’s historical cost, as recorded on each partnership’s books.
6. Unpaid liability. After each partnership’s books were closed on 31^st March 2017, an unrecorded merchandise purchase of $1,500 by A&B was discovered. The merchandise had been sold by 31^st March 2017.
7. The 31^st March 2017 post closing trial balances of the partnerships was as follow.

Account	A&B Balance – 31st March 2017		C&D Balance – 31st March 2017
Cash	25,000		22,000
Accounts Receivable	200,000		250,000
Allowance for doubtful accounts		4,000		15,000
Inventory	175,000		119,000
Building & Equipment	107,000		169,000
Accumulated Depreciation		24,000		61,000
Accounts Payable		140,000		160,000
Notes Payable		100,000		120,000
A’s Capital		95,000
B’s, Capital		144,000
C’s Capital				65,000
D’s Capital				139,000
Totals	507,000	507,000	560,000	560,000

Required:

1. Prepare the journal entries to record the initial capital contribution after considering the effect of this information. Use separate entries for each of the combining partnerships.
2. Prepare a schedule computing the cash contributed or withdrawn by each partner to bring the initial capital balances into the profit and los sharing ratio.

Answer 1