Question

On 1 September 2018, Graham and Pawan formed a partnership, and agreed to have the financial year end to be 31 December. Graham contributed a Building and Land. The building had a carrying amount of $100,000 and fair value of $150 000, and the land had a $120,000 carrying amount and $200,000 fair value. The building and land had a mortgage of $90 000, both partners agreed for the mortgage to be taken over by the partnership.

Pawan contributed his business in which both partners agreed to use the following values as listed below.

	Carrying amount				Fair value
Cash at bank Marketable securities Accounts receivable Inventory Equipment Accumulated depreciation Accounts payable	$	20 000 24 000 45 000 75 600 200 000 120 000 16 000			$	20 000 32 800 42 000 75 000 100 200 0 16 000

They agreed to share profits and losses in the ratio of 1:2 for Pawan and Graham, and to have equal capital balances of $300 000. Regarding the accounting record, they agreed to use the allowance method in managing estimated uncollectible accounts receivable.

On 1 January 2019, Joshua joined the partnership and requested to alter the existing profit and loss distribution agreement. They agreed that each partner is allowed an interest of 5% on ending capital balances before drawings, and 10% interest per annum is charged on any drawings they made. Since all partners are active in looking after the business, each partner is given a salary allowance. Pawan is given $7 500, Graham $ 4 500, Joshua 4 000 and the remainder of the profit or loss is shared equally. At 31 December 2019, the accounting records showed the net income for 2019 was $46 000, and the balance of capital and drawing of each partner is as shown below. It should be noted that the all drawings were made in expectation of profits.

	Pawan	Graham	Joshua
Capital	$350,000	$320,000	$300,000
Drawing	$40,000	$15,000	$30,000
Withdrew on	(1 January 2019)	(1 March 2019)	(1 August 2019)

Required (ignore GST and narrations):

a) Prepare the journal entries to record the formation of the partnership on 1 September 2018.
b) Prepare a profit distribution table to show the net profit distributed to the three partners at 31 December 2019.

Answer 1

Journal Entries

Formation Entries - 1st September 2018

Particulars	Dr	Cr
Building	150000
Land	200000
Mortgage on Building & Land		90000
Graham's Capital		260000

(Being Graham's capital booked into partnership account)

Particulars	Dr	Cr
Cash	20000
Marketable Securities	32800
Inventories	75000
Accounts Receivable	45000
Equipment	100200
Allowance for Doubtful debts		3000
Accounts Payable		16000
Pawan Capital		254000

(Being Pawan's capital booked into partnership account)

Capital Introduced:

Particulars	Dr	Cr
Cash	86000
Graham's Capital		40000
Pawan's Capital		46000

(Being additional capital booked by Pawan & Graham to have equal balnces 300,000)

Particulars	Dr	Cr
Cash	300000
Joshua's Capital		300000

(Being Pawan's capital booked into partnership account)

Additional Investment made during the year

Particulars	Dr	Cr
Cash	125000
Graham's Capital		35000
Pawan's Capital		90000

(Being additional investment made during the year)

Particulars	Dr	Cr
Pawan's Capital	40000
Graham's Capital	15000
Joshua's Capital	30000
Cash		85000

(Being Drawings made by Partners booked into account)

Profit Distribution table:

	Pawan	Graham	Joshua
Net Income as on 31st December				46000
Add: Drawings (Drawn Expected out of profits)				85000
Less: Salary Allowance	7500	4500	4000	16000
Add: Interest on Drawings	4000	1250	1250	6500
Less: Interest on Capital	15000	15000	15000	45000
Net Profit to be distributable				76500
Equal Distribution	25,500	25,500	25,500	76500
Pawan to pay back (Out of Drawings)	(14,500
Graham's to receive		10,500
Jousha to pay back (Out of Drawings)			(4,500)

Working Notes:

Interest on Drawing:

Pawan's Drawing	40000	1st Jan 2019	12 months	(40000*10%*12/12) = 4000
Graham's Drawing	15000	1st March 2019	10 months	(15000*10%*10/12) = 1250
Joshua's Drawing	30000	1st August 2019	5 months	(30000*10%*5/12) = 1250

Interest on Capital

Particulars	Balance before Withdrawal (assuming additions made after drawings)	Interest
Pawan's Drawing	300000	15000
Graham's Drawing	300000	15000
Joshua's Drawing	300000	15000