Question

Q1. Two partnerships of A & B and C&D began business on Jan 1^st2017; each partnership owns one retail appliance store. The two partnerships agree to combine as of April 1^st2017 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 openinginventory 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^stMarch 2017, an unrecorded merchandise purchase of $1,500 by A&B was discovered. The merchandise had been sold by 31^stMarch 2017.
7. The 31^stMarch 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 Prepare a schedule computing the cash contributed or withdrawn by each partner to bring the initial capital balances into the profit and los sharing ratio.

2. Debra and Merina sell electronic equipment and supplies through their partnership. They wish to expand their computer lines and decide to admit Wayne to the partnership. Debra’s capital is $200,000, Merina’s capital is $160,000, and they share income in a ratio of 3:2, respectively.      

Required:

  Record Wayne’s admission for each of the following independent situations:

   a. Wayne directly purchases half of Merina’s investment in the partnership.   

   b. Wayne invests the amount needed to give him a one-third interest in the capital of the partnership if no goodwill or bonus is recorded.

  c. Wayne invests $110,000 for a one-fourth interest if Goodwill is to be recorded.   

3. Taif city levied property taxes totaling $750,000.  Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $725,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year.  All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 6/30/X8 ($11,000) is expected to be collected within 60 days. Pass Journal entries.

Answer 1

Balance Sheet (ABCD Discount Stores)( in $)
Capital Account		4,43,000.00	Account receivable	4,67,000.00
A	88,600.00
B	1,32,900.00		Cash	47,000.00
C	66,450.00
D	1,55,050.00		Inventory	2,76,150.00
Allowance for Doubt Ful Debt		36,000.00
			Building & Equipment	1,93,200.00
Account Payable		3,00,000.00	Less:- Accumulated Depreciation	85,000.00
Note Payable		2,20,000.00	Net	1,08,200.00
			Revaluation Reserve	1,00,650.00
Total		9,99,000.00	Total	9,99,000.00

ABCD Discount Stores

Capital Introduction into Business
Cash	17500
To C Capital Account		1450
To D Capital Account		16050
Capital Withdrawn from Business
A Capital Account	6400
B Capital Account	11100
To Cash		17500
Sundry Receivable	17000
To Allowance for Doubtful Account		17000
(Allowance Created)
Revaluation Reserve	17850
To Inventory		17850
( Revalue the Inventory)
Revaluation Reserve	82800
To Building & Equipment		82800
(Revalue Depreciable Assets)
Balance Sheet ( 2nd Partnership Firm)(in $)
Capital Account		4,80,000.00
Debra	2,00,000.00
Merina	80,000.00		Cash	4,80,000.00
Wayne	2,00,000.00
D
Total		480000.00	Total	480000.00
2nd Parternship Firm- Journal Entries
Merina Capital Account	80000
To Wayne Capital Account		80000
(Capital Introduction in Business- Directly)
Cash	120000
To Wayne Capital Account		120000
(Amount invest in lieu of Goodwill)